F o n t e r r a

The combination of San Lu’s distribution capabilitiesand our deep knowledge of all aspects of dairy make usoptimistic that we have a real winner in China.customer relationships. Manufacturing efficiencies, lowercosts to serve, simpler transactions and procurementsavings have all created a leaner operation.In the Fonterra Ingredients value add business asignificant step forward was made with the creationof DMV Fonterra Excipients, a joint venturebetween Fonterra and a major European dairycompany, Campina.In this move we have taken one of our productcategories and created a world class business, with thejoint venture becoming one of the largest providers ofdairy based excipients to the world market with plantsin New Zealand, Germany and Holland.The joint venture culminates a staged growth pathwhich began when Fonterra took its first steps withexcipients by making the pharmaceutical grade lactoseused as the carrier for active drug formulations intablet form.Next we invested in plant to manufacture inhalationgrade lactose, developing a very solid market positionin Australia and Asia. That was the key to the jointventure, because with Campina’s DMV subsidiary strongin Europe, combining our two operations enabled us tobecome a truly global supplier.Investments have also been made to strengthenFonterra’s manufacturing and supply chain capabilitiesincluding the $40 million upgrade of the Te Awamutusite, the $37 million rebuild of the Takaka site andupgrades of Soprole plants in South America.Meanwhile, service to farmers is stepping up to a newlevel with the RD1/Landmark joint venture linking 51RD1 rural retail stores in New Zealand and Landmark’s430 stores in Australia.Through the joint venture in New Zealand, Fonterra’sRD1 stores will introduce new services in finance,insurance, and real estate, and an expanded livestocksales service, drawing on Landmark’s expertise in theseareas. Products and services catering to the beef, sheepand cropping sectors will be introduced over time tocomplement RD1’s existing strengths in dairy. RD1 willalso gradually expand its network of stores, particularlyto cater to Fonterra suppliers in the South Island. InAustralia, Fonterra’s experience will be used to expandLandmark’s products and services to the dairy sectorin Victoria.DRIVING PRODUCTIVITYFonterra in 2005/06 has emerged as a much leaner,more cost effective business. It is enjoying the first fullyear’s results from the Jedi programme with $50 millionof benefits booked and more to come. Completedlast season, the programme streamlined how productis ordered, supplied and paid for and touched everypart of the Ingredients business from manufacturingto production forecasting inventory management andThis work has resulted in a number of efficiency gainsin the business, but we can never assume that all thework is done. There will always be opportunities toimprove how we work and we will always regard theprogramme as a first and very necessary step on theroad to ensuring Fonterra remains as efficient and costcompetitive as possible.Gains are also flowing through from OperationsJourney, a five year programme to lock down Fonterra’scompetitiveness as a manufacturer of low cost dairyproducts at scale. It has delivered cost savings, throughincreased first time grading performance, reduced yieldlosses and fostered a culture of “right first time” inFonterra Group Manufacturing.A “One Fonterra” programme has removed duplication,lowered costs and increased efficiencies. Where before,Fonterra Brands and Fonterra’s commodity businesseshad their own backroom support in areas such ashuman resources, communications, informationservices, procurement and finance, that’s all nowcombined as one team, reducing costs. All manufacturingactivities worldwide are coming under one FonterraGroup Manufacturing function along with supply chainfunctions and production and planning activities.What we are doing is getting streamlined functionsthat are more cost effective, deliver better service,enable faster responses and are having an impact onthe bottom line.EMPHASIS ON PEOPLEHaving made tough calls to structure Fonterra moreefficiently, the leadership team is now working hard topush empowerment across the business to give peoplethe ability to make decisions at the right time and atthe right level. My goal is a Fonterra culture based onpeople getting excited about being part of a strong,competitive and growing business.We’re very focused on being a clear winner in theglobal dairy trade. We will do that because of the ideasof our people and their efforts. We strongly encouragepeople to keep challenging the status quo, to thinkdifferently, and we reward them for independent andstrong thinking as well as great teamwork.Andrew FerrierCEOFONTERRA ANNUAL REPORT 200621