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Investor Relations

A sharp learning curve but unfazed

with Sumanta Kumar De, CEO & General Director, Rusmolco

There was never a doubt that operating in Russia would be an enormous challenge. From living in harsh winters, working with a new partner, getting the right people at the right places, to the varied technical challenges faced in the dairy farms and organising the team to focus on key deliverables, there were many obstacles, especially in the initial years. We are very pleased with what the team has been able to deliver and the rate of progress we see in all aspects at Rusmolco.

Today, Rusmolco is recognised as the benchmark for the Russian dairy industry in terms of how a large scale, modern dairy should be operated through strong management and processes. However, there is typically a long natural gestation period of seven to eight years before dairy farms deliver attractive returns. Dairies would also take a few years to stabilise feed production set-up, manpower training, animal life-cycle and acclimatisation. The task for dairies in Russia gets slightly more complicated, as unlike their American counterparts and elsewhere where all tasks can be outsourced and support infrastructure is widely available, we need to first learn and then manage everything ourselves, from feed preparation, reproduction and breeding, manure handling to engineering services and veterinary services.

However, this increased level of difficulty and gestation coupled with the size of investment also form the most natural barrier to entry for competition as well as the source of competitive advantage for businesses which can run efficiently and adapt to local conditions. As an early mover, we are well-placed over the next decade to become more profitable than the industry standard by being at the forefront of milk production in Russia today. This belief is also shared by the Chairman of the National Dairy Producers Union of Russia (Soyuzmoloko) Andrey Danilenko as Rusmolco has demonstrated that Russian dairies can reach the American standard of best-in-class productivity and cost efficiencies of 9,000 litres of milk per cow per year with reliable feed production and competitive operating costs.

Projects_undertaken_by_Rusmolco_in_Penza

Above: Projects undertaken by Rusmolco in Penza.

 

While the headline results speak for themselves, it has been a sharp learning curve for Olam. Although we are familiar with the country having been present in Russia since 2003, we were relatively new to dairy. The past three years have been a journey of key learnings and hard work as we took major steps that have made Rusmolco now stronger and more competitive today.

Strong local executive management team

A competent local, executive management team with strong dairy and agri technical expertise both at a local and international level is essential. Rusmolco continues to strengthen its team’s execution, management capabilities and industry knowledge and evolve with modern farming technology. Its relevance in an expanding farming environment has become notable.

Running Rusmolco’s operations is “complex” given its significant land bank and multiple projects, so it became apparent to us that our first major step needed to be organising ourselves into a manpower structure that effectively places the right people at the right positions. We also recognised that varied technical expertise is required for dairy farming and structured training programmes were necessary to ensure we embed global best practices. Seeking independent advice in breeding and nutrition management helped fast-tracked the process and enabled us to fill skill gaps and enhance the right skill sets.

Today, our management team is mostly comprised of local executives, including two COOs with a combined experience in the operating environment of over 45 years, and now heading the dairy and agri farming operations respectively. Over the past year our employee engagement levels have remained high with very low attrition, which is directly linked to an overall culture of empowerment and an ownership mindset that has been instilled within the team. These reflect Olam’s shared values across our operations in over 65 countries.

Focus on the “right things”

Central to Rusmolco’s organisation and strategy is a constant reminder to focus on the “right things”. That inevitably means having to consolidate, set priorities and define clear deliverables. This was our second major step. Examples of the areas we have focused on to optimise our dairy and agri operational models include the following.

Clearing the clutter to create room for improvement

We closed obsolete inefficient dairy farms so that our team could concentrate on the key projects at Arshinovka, Narovchat, Pioneer and Megafarm and ensure the projects are executed well.

Planning for the future: Build herd reproduction centres in Pioneer and Megafarm

This covers the entire technological chain of a cow’s life cycle. A key stage of its life cycle is executed through our reproduction centre, a first in Russia, which we inaugurated in August this year. The decision to build this centre for rearing young stock was taken a year ago. At that time, all Holstein-Friesian heifers were imported either from the Netherlands or the US. The delivery of these heifers would take between several days to several months (as it depends on the importer country) and on arrival they need to be quarantined for one month. In total it takes on average three months to get heifers to Russia and become part of the herd. Additionally, there are cost considerations as well as a high dependency factor on the epizootic situation in supplier countries and in some cases they do not adapt well to Russia’s conditions.

 

Cows_life_cycle

Click to expand

We decided on the advice of our dairy experts to invest in our own reproduction centre where the adaptation is natural, resulting in less stress on the animals and a reduction in cost of herd replacement by 35%. The ultimate goal is to home-rear pedigree heifers in good health, with better genetics, less stress and more acclimatised to Penza’s conditions. We also expect that in future this centre will not only produce heifers for Rusmolco’s needs but supply pedigree heifers to other dairies in Russia.

The reproduction centres are in Pioneer, a 2,200-heifer village where we raise heifers between six and 12 months’ old, and in Megafarm, a 3,300 heifer facility for ages between 13 and 24 months. This is a unique dairy operational unit with a narrow specialisation that ensures accurate weight gain, health and reproductive capacity. The centre raises only pedigree Holstein young stock, which are given feed produced with grains from our own fields in well-equipped barns where we can control the insemination process, closely observe the calves’ growth and reproductive conditions and speed up the potential genetic development of the herd. Initial results are well above the industry standard of 50% heifer births. At a combined 5,500 head, this is Europe’s largest and most modern herd reproduction facility.

Improving performance at existing dairy units and then scaling up

We have established a system with strong international specialists who work on technological aspects like nutrition, heath, milking protocols, hoof care, insemination, feed production and engineering. Some of the best professionals in the world in these subjects come and work on a regular basis at our farms training and then evaluating our own specialists. This has proven to be the most effective way to introduce new technology and modern practices to a young Russian workforce. On the other hand, our robust local management team instils discipline and protocols to ensure that the technology is correctly applied and adopted.

We expect fresh home-raised heifers to come into the milking herd by end-2016 in the Narovchat and Arshinovka dairy complexes, bringing in benefits of internal herd re-generation and genetic improvements. Arshinovka, which is a 4,600-cow dairy farm, has been fully populated since 2014 and achieved consistent production and reproductive performance. We are rapidly progressing through the natural phase of herd stabilisation. With the completion of the Arshinovka dairy farm, we are now starting project work on another modern 4,600-cow dairy complex in Pachelma region.

Putting logistics infrastructure in place for crop production

The lack of modern farming machinery, new technology and grain handling (storage and drying) capacity is an acute problem in Russian farming. Grain elevation facilities make it possible for crop producers to have better control over farm logistics and concentrate on quality of produce which improves operating margins.

In 2014, Rusmolco started construction of a 100,000 metric tonne capacity elevator with drying capacity of over 4,000 metric tonnes a day in Pachelma. We also completed another drying unit and grain storage base in Troisk with a capacity to dry up to 1,000 metric tonnes a day. Other important infrastructural projects underway are a multi-purpose seed plant with capacity of 10,000 metric tonnes per annum in Bashmakovo, which will produce optimal quality seeds for own use with an option to sell to others (as there are no other premium seed producers in this region); and an agri central base at Pachelma, which is logistically the most optimal point between our commercial farming operations, machinery fleet maintenance and storage of fertilisers, chemicals and spare parts.

Robust reviews and controls; strong project management

A robust review and control mechanism is critical in our business. One of our key success factors is that our management is based in Penza with direct 24/7 involvement in the operations. This means fast decision making with good contextual understanding of all nuances of the business.

We have also streamlined our dairy farm level control with technical managers based within the farms, reporting and controlling technical activities on a daily basis. There is a monthly review and reporting system for both dairy and agri farming operations where all key parameters in dairy farming, like health indicators, production, quality – fat and protein levels, bacteria counts, somatic cells, calf mortality rates and fresh cow performance, are tracked and reviewed with the farm specialists.

Key activities in agri farming like seeding, spraying, fertiliser application and harvesting are tracked and measured as well. Standard operating procedures are codified to facilitate the training of our field workforce on standardised practices.

As we expand our farms, strong project management is critical to avoiding delays and cost-overruns. Our team of construction specialists and project cost controllers, including our own technical construction controllers, are based on-site to track daily progress in all activities by the construction contractors.

More about the author: Sumanta Kumar

Sumanta Kumar De is Vice President of Olam International and General Director & CEO of Rusmolco. Sumanta has more than 15 years’ of industry experience and leads Rusmolco in strategic planning, operations and business management. Prior to joining Olam in 2005, he held positions in business development and brand management with Coca-Cola and Unilever in India. Sumanta started in Olam as a branch manager and was then promoted through several ranks to his current position. Before his role in Rusmolco, Sumanta headed Olam’s Indonesian business and was primarily responsible for its cocoa sourcing operations in Asia. He holds a post-graduate degree in Personnel Management and Industrial Relations from XLRI.