ADDING VALUE TO COMMODITIESJOHN SHASKEY22JOHN SHASKEY - MANAGING DIRECTOR FONTERRA INGREDIENTS>Can value add be used to describe commodities? No itcan’t, but where you sell commodities and the way yousell them can add value. Broadening the appreciationthat added value Ingredients is a combination ofproduct and service offerings to customers is achallenge that John Shaskey, Managing Director ofFonterra Ingredients, has been dealing with over thelast 12 months.He has spent a good part of the past season emphasisingthat the high value, but low volume specialty ingredientssold by Fonterra are just the tip of the value addiceberg. This has led to a restructuring of the businessmodel for commodities trading, with Fonterra GlobalTrade devoted to core commodities made and soldat the best price and Fonterra Ingredients devoted toadding value. It’s a significant shift in thinking, workingand culture.“It reflects total recognition of the fact that we cannotbe a successful entity as a whole by counting on ourcommodity business to deliver year after year. Wehave to have the added value businesses contributesignificantly more to payout performance and sharevalue appreciation for Fonterra to be on a soundfooting in the future.”Even as commodity sales values and volumes have hitrecords in the season, John Shaskey and his team havedug deep into the business, defining what value addreally means for the world’s largest dairy exporter.“We have always thought of our value add businessas being a very small part of our total business. But aswe have pulled the whole business apart to understandwhere we create value beyond the commodity value ofmilk we have formed a very clear view that in fact, in 40per cent of our ingredients business we add value.“In some cases, it is selling commodities in highvalue markets where specifications, service deliveryrequirements or customer relationships combine torealise a better price. Some of the value we add isthrough how we sell the product and the services weoffer such as distribution, technical support, workingwith customers around innovations, or creatingingredients with particular value for customers. Thereare a whole lot of ways we add value that we havenever fully appreciated in the past.”Global Trade, says John Shaskey, is all about having noillusions about what customers want and get.“They want the right commodity at the right price.That’s all they are interested in. To deliver we need acore commodities business that is as simple as it can bewith as few products as possible, long production runsin our sites and very straight forward sales processes.”In core commodities markets, primarily South East Asia,the Middle East and Latin America, the sales forcehas been scaled back to fit the needs of the business,driving down the cost to serve. In value add markets,such as the US, Japan, Korea and Europe, more peoplewith the skills and knowledge to work much closer tocustomers are being deployed.“They have a very clear mandate to get on and workwith customers, understand the innovation supportthey need, work on solutions for them and thencommercialise with the appropriate customers. Weunderstand markets where we have to have incrementalgrowth in infrastructure to support our value addedstrategy. Ultimately, the game is to build commoditymarkets into value add markets where there is abusiness case to justify that.”The value add team has made good progress inenhancing relationships with key global customersand working with them in a collaborative way in anumber of areas such as supply chain and new productdevelopment.“This is a very different culture to that needed in corecommodities and it really does position us as a realcompetitor with other value add food ingredientsorganisations. The value add business that exists todayis the foundation to build a much more significantand profitable business in the future. It provides theplatform for us to create a culture that will reallyaccelerate our growth through providing customerswith a range of value add offerings.”Having a core commodities and value add split alsomore closely aligns a significant chunk of Fonterra’scapabilities to its strategic goals to be the leadingglobal dairy product marketer, a developer of valuablecustomer partnerships, a specialty milk componentsinnovator and provider and the lowest cost supplier ofdairy products to global markets.The potential of the new structure has shown throughin the 2005/06 season. In key commodity sales hubssuch as South East Asia, the Middle East and Africa,strong sales growth was achieved, especially as oilexporting nations ramped up commodity imports tomeet higher demand. Fonterra’s higher commodityvolumes included over 500,000 MT of products sourcedin markets such as Australia, the US and South Americato meet customer demand.In the value add market of the US, the businessincreased sales revenues, with improved pricesachieved as sales volumes remained relatively stableyear-on-year.
IN CORE COMMODITIES MARKETS LIKE ASIA, we’re making the business as simple as it can be, while inthe US, Japan, Korea and Europe, more people with the skills and knowledge to work muchcloser to customers are being deployed. That’s how you add value in commodities.
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