The MILCO Story: How a software business analyst is transforming a state-owned dairy icon

An interview with Lasantha Wickramasinghe

Lasantha Wickramasinghe is the Executive Chairman at MILCO. A product of the Sri Lankan public education system, Wickramasinghe completed a Bachelors in Mathematics, a Master’s in Manufacturing Management, and reading for a PhD in International Economy, all from the University of Colombo.

Known as a business systems analyst and supply-chain guru, Wickramasinghe made a name for himself in the private sector before being appointed MILCO chairman in 2020. He worked for two years as a Production Planner at Haycarb PLC, and spent over 13 years as a Senior Business Analyst at software development company IFS.

As far as ideology is concerned, Wickramasinghe is a vocal proponent of development along the lines of a national economy, emphasizing the need to promote and protect local skills and resources. He has served as the secretary of the nationalist “Yuthukama” National Organization since it was founded in 2015, and was a fierce critic of agreements such as ETCA and MCC.

But now, as MILCO chairman, he sits unassumingly behind a large desk, his short beard and broad smile conveying youthful energy and dynamism you would associate with a start-up, rather than one of Sri Lanka’s grandest and oldest SOEs. 

The national significance of MILCO, and its brand Highland, is not lost on Wickramasinghe. “Our main advertisers are our consumers. That’s our marketing strategy,” Wickramasinghe proudly says. He explains that MILCO has built trust through a quality product, and spent more on procuring milk from farmers, paying staff well, maintaining quality control, and expanding research and development, than on advertising and marketing gimmicks.

It is a legacy he wishes to continue. “We are the only brand that gets scolded for not having enough products on store shelves,” Wickramanasinghe quips. The company’s main bottleneck for growth, he says, is on the supply side, needing to ramp up milk yields and production to catch up with existing demand from local consumers.

“We are in a growth stage, with a new plant planned for next year. Our existing production output can be doubled. The market is already there. Highland has the most demand, but it’s not a leader in market share. We have to expand and become the market leader,” he says.

Feeding Sri Lanka’s dairy requirement

In 1922, in a pamphlet titled “A Message to the Young Men of Ceylon”, anti-colonial activist and proponent of national economic development, Anagarika Dharmapala, lamented: 

“We allow our own cow to die of starvation in our own field and we are feeding the cow in distant Switzerland and Denmark whose milk and butter we use.”

Nearly 100 years after this call to national production, some things have changed, but much has not. Switzerland and Denmark may be out of the picture, but today 88.5% of the country’s concentrated milk imports come from New Zealand, with another 4.67% from the United States and 4.1% from Australia.

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Despite growing domestic production, Sri Lanka continues to be a net importer of dairy products. Between 2006 and 2020, the volume of dairy imports grew from about 70,000 tons to over 100,000 tons. Total expenditure on these imports stood at 334 million US dollars in 2020 – or 2% of the country’s entire import bill.

The reason for this is a drastic shortfall in supply compared to demand. Sri Lanka produced about 492 million litres of milk in 2020, compared to a requirement of 1.1 billion litres. The country produces only 42% of its milk requirement. While media reports and laymen often cite problems in cold storage and the quality of cows as a barrier to increasing local production, Wickremesinghe emphasizes that the main problem is lack of feed, echoing Dharmapala’s 100-year-old plea that our cows were starving.

Availability of locally produced milk is seasonal in Sri Lanka, though many consumers may not be aware of this. Between January to March, production is low and prices rise, but from April to December supply increases, pushing down prices for consumers. This seasonality is largely caused by the availability of grass for feed, according to Lasantha. Therefore, one of MILCO’s current objectives is to increase the availability of feed.

“The animal is now living with half its stomach empty. It doesn’t get as much food as it wants. When the animal is fed, the quantity and quality of milk increases,” Wickramasinghe explains.

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In order to do this, MILCO launched a pilot project in August to grow grass on 50 acres of land in every province in the country. Grass that is used in feed is not the regular “buffalo grass” that blankets most home gardens in Sri Lanka. Rather, it is varieties known as CO3 and CO4 which are commercially grown in countries like India, where they are processed, packaged and sold to dairy farmers.

Lasantha says that a commercial grass cultivator can make a handsome profit of 40,000 rupees a month, with minimum inputs and maintenance required. MILCO has already started a social media campaign to find private cultivators to purchase grass from, in effect creating a backward integrated supply chain for feed for the local dairy industry. MILCO’s task will be to purchase the grass and set up processing centres to chop and package the grass, and later sell them in 25 kg bags to farmers at a low cost.

Wickramasinghe hopes that providing commercial feed to the doorsteps of farmers will encourage young people to stay in the industry. “We have to make a grass industry. The dairy farmers’ main problem is grass. Tying a milking cow in place is one thing, but going out to cut grass or find grazing pasture is a challenge, so young people don’t like to do this work,” he said.

Along with making sure cattle are well fed, improving the quantity and quality of yield also requires a constant supply of fresh drinking water for milking cows. Indeed, with water comprising the significant component of milk, cattle need to be well hydrated especially overnight, before they are milked in the morning. Making farmers adopt such best practices requires education and incentives.

“We are going to choose the best 100 farmers and give them a gift. This is to bring them into best practices. The dairy farmers’ knowledge has to improve. Education modules are being made, which will be taken to farmers. 85 lakhs has been put aside for this project,” he said.

Farmers are the backbone of the supply chain

MILCO’s supply chain structure is based in part on the model of the globally recognized Indian dairy cooperative society Amul. Around 95-98% of MILCO’s milk is sourced from dairy farmers, with a small portion sourced from the National Livestock Development Board (usually only if there is a shortfall of supply).

“The strength of MILCO’s supply chains is Sri Lanka’s dairy farmers,” Wickramasinghe says. In 2020, the company collected 67 million litres of milk, compared to the total domestic production of 491 million litres – about 14 percent.

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There are about 2000 dairy farmer committees spread across the country. Though not legally recognized entities cooperatives, these committees are managed by the farmers themselves. Milk is collected every morning at the committee level, and then taken to one of 100 different chilling centres across the country. The property in these centres is owned by MILCO, but management is essentially farmer-led, with some support from MILCO for tasks such as accounting and auditing. 

Finally, bowsers carry fresh milk from chilling centres to four factories located in Ambewela, Digana, Polonnaruwa, and Narahenpita, where they are processed, packaged and stored in a chilling room before being distributed to retailers.

“We all know that milk goes bad quickly, but with MILCO’s model only a small amount gets spoiled, especially compared to what happens to local vegetables during transportation,” Wickramasinghe says.

Indeed, the aversion against “spilling milk”, i.e. allowing it to spoil or be wasted, is deeply rooted in Sri Lanka’s culture and social psyche. The relationship between farmer, cow and milk is sacrosanct in many agrarian societies. This is something that Wickramasinghe seems to understand well, as he pledges to never allow “milk to be spilled”.

MILCO essentially does not own a single farm or cow. Instead, it depends on about 30,000 dairy farmer families, most of whom are smallholders, to supply milk. In fact, 50% of the company’s revenue goes to dairy farmers as income from selling fresh milk. 

There are of course some limitations to the model. As mentioned earlier, dairy farmer committees are not registered entities like cooperatives. Therefore, they lack legal personhood to acquire loans, enter into agreements, or even go to court to settle a dispute. But Wickramasinghe plans to change this.

Plans are afoot to create a MILCO Farmer Foundation, with a Board of Directors comprising 10 Chairman from the dairy farmers’ federations, and 5 representatives from MILCO. This entity will act as an apex body above the federations. The board essentially institutionalizes the preexisting MILCO Dairy Farmer Fund, which has a board that decides on how to distribute benefits to dairy farmers.

This centralised unit, atop a decentralized supply chain, will help MILCO raise capital and encourage competition between subunits like federations and committees.

Improving management practices through communication

Alongside increasing production and institutionalising the existing supply chain, another task for Wickramasinghe is to improve management practices and communication among MILCO staff.

Wickramasinghe says that teamwork is low due to communication gaps at every level. Simply forwarding files from one office to another and meeting once a month was not an optimal system, he says. Therefore, he has set about to improve staff synergy and introduce a more agile management system, drawing from his private sector experience.

“Having intelligent people working alone doesn’t work. You have to combine those people within the framework of a plan,” he says.

Over a decade of experience in software development was where Wickramasinghe got his ideas for improving management. “Software development is an intangible, invisible thing. You would think transparency is low,” he says, “But planning and methodology in this industry is one of the best.”

He explains that in the previous management system, Human Resources personnel would unilaterally make decisions and convey them to factory managers without explanation. Factory managers in turn could not explain to staff why work patterns had to change. The end result was alienation and demotivation among the staff.

“We stopped sending circulars like that. We now have a meeting including the factory managers before sending a circular, so they know what to tell the workers.”

In addition, the company now operates on a monthly production plan with daily quotas. Demand and supply is forecasted based on previous trends, and targets are delivered to each factory. If targets cannot be met, a reason has to be submitted. These issues are discussed and resolved at the end of the month.

Wickramasinghe gives the example of a factory that was concerned about inadequate cool room storage capacity. “When we analysed it, we found that the problem was not a lack of space, but that the goods were not being distributed in time.” 

The distribution system of the company had been structured in such a way that production and storage units would distribute only within their region. Therefore, if there was a mismatch of demand and supply, cool rooms would pile up. The solution was to take those goods to other regions where there is excess demand.

“We are going for a zero finished goods concept where no goods can be kept in the factory. Our strategy is not to expand storage but to distribute, thereby increasing sales and giving consumers fresh products,” he says. Indeed, no money was spent on this change, and the simple decision has helped the company increase sales and free up cool room storage space. 

Other changes Wickramasinghe has implemented include ensuring that factory machinery operates 24 hours a day. “The idea that not running the machine is a kind of loss did not exist before. Machines must be made to run as much as possible to extract goods and revenue,” he says.

Finally, bonuses have also been tied to profitability, with 10% of profits going to staff as their bonus. Thereby incentivising better performance and efficient management yielding financial results.

Do private companies perform better?

The current financial outturn of many local state-owned enterprises has drawn public scrutiny for decades. Stories of corruption or mismanagement in SOEs make frequent appearances in the local news cycle. This in turn produces a much-heated debate, about whether SOEs are required at all. The received wisdom is that the private sector does better.

Wickramasinghe himself, despite coming from the public education system, has spent most of his career in the private sector. He points out that the idea that the private sector is naturally superior to the public sector is an assumption that does not tally with the historical experience of countries such as China, (91 companies out of the Forbes top 500 list consists of Chinese SOEs), or even Qatar (whose state-owned flag carrier Qatar Airways is a globally competitive brand).

SOEs need to adopt management practices from the private sector, and provide competitive wages and incentives, Wickramasinghe says. Both the government and SOEs managers have to change their mentality. “The idea that the government can’t do business is wrong. But there needs to be leadership and a policy framework,” Wickramasinghe says.

The MILCO story

The story of MILCO dates back to the establishment of the National Milk Board by the then Minister of Food and Agriculture Philip Gunawardena. A Marxist and a nationalist, Gunawardena was one of the main protagonists of the 1956 Revolution which made S.W.R.D. Bandaranaike Prime Minister.

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Serving as Minister of Food and Agriculture for just three years before his resignation, Gunawardena oversaw many innovations in statecraft and agricultural production. 

Gunawardena had estimated that Sri Lanka (then Ceylon) produced about 62 million litres of milk a year, of which only a fraction was actually marketed. The National Milk Board was therefore established to help the country gain self-sufficiency in dairy products, and to divert milk from regions of excessive supply to those with excessive demand. 

The board established pasteurization plants, and units for collection, processing and storage of milk. The establishment of dairy cooperative societies was encouraged. Plans were made for a nationwide pasture scheme, with coconut lands identified as being ideal for grazing. Efforts were made to inter-breed foreign cows with local varieties to suit the needs of smallholders. 

One of the board’s most iconic undertakings was the establishment of the Colombo Central Dairy factory with aid from New Zealand under the Colombo Plan Aid. A photograph from the opening depicts Gunawardena and the Prime Minister of New Zealand Sir Robert Gordon Menzies drinking milk from a bottle reminiscent of today’s iconic and much beloved Highland Milk.

In 1986, the National Milk Board was converted into a State-Owned Enterprise company called Milk Industries of Lanka Company Limited in 1986. It was privatised to Kiriya Milk Industries of Lanka (Pvt) Ltd. in 1998, but re-nationalized in 2000 and renamed MILCO (Pvt) Ltd. in 2001.

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Today, MILCO has a diversified portfolio of products including yoghurt, pasteurized milk, sterilized milk, curd, butter, ice cream, ghee, processed cheese and milk powder. It enjoys a 25 percent market share in milk-based products, mostly under the widely-trusted Highland brand name. According to the Ministry of Finance, sales of Highland milk powder increased 38 percent in 2020 compared to 2019 due to increasing demand.

However, MILCO has been in financial straits for the past few years, accumulating both losses and debt, which have only recently turned around. From 2017 to 2019, the company had an annual loss of over 600 million rupees. The company’s liquidity problems, likely caused by mismanagement or poor investment decisions, had a knock-on effect on dairy farmers who were not paid on time, causing some loyal suppliers to sell to the private sector instead. 

This was turned around by 2020 by new Executive Chairman Lasantha Wickramasinghe’s decision to swiftly pay back arrears and increase the purchasing price of milk, thereby regaining the trust of suppliers. In 2020, over 99% of the company’s revenue came from the sale of milk production, while direct expenses made up 90% of all expenses. The company registered a profit of 417 million rupees in 2020, its first in three years.

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