1

Paper presented at the EMNet 2011

December 1 – 3, 2011, Limassol, Cyprus

(http://emnet.univie.ac.at/)

Structures and relationships in supply chains and networks: conceptual

issues and application in German dairy sector

Beate Pinior a, c

, Vera Belaya b, Brigitte Petersen

c, Thomas Selhorst

a

a) Friedrich-Loeffler-Institute, Federal Research Institute for Animal Health, Institute of

Epidemiology, Seestr. 55, 16868Wusterhausen, Germany

b) Johann Heinrich von Thünen-Institute (vTI), Federal Research Institute for Rural Areas,

Forestry and Fisheries, Institute of Farm Economics, Bundesallee 50, 38116

Braunschweig, Germany

c) Institute for Animal Science, Preventive Health Management Group, University of Bonn,

Endenicher Allee 15,53115 Bonn, Germany

Abstract The increasing globalization of the world economy and internationalization of trade have lead to a growing

intensification of the competition among global food industry stakeholders. Though the competitiveness of

single companies strongly depends on the effectiveness of their production and marketing processes, more

recently the role of effective supply chain structures and strategic chain partnerships has been gaining

importance in agri-food sectors worldwide. The importance of global trade for the spread of food

contaminations has been illustrated by a number of recent food scandals, which increasingly moved to the

center of public and political interest. The scandals have contributed considerably to the awareness of food

quality and safety among consumers and, thus, to the spreading of tighter forms of vertical coordination.

The increasing integration of markets complicates the traceability of supply chains as well as the timely

application of prevention and intervention measures in practice. As a result, there is a growing body of

scientific literature studying the formation of interorganisational relationships as well as strategic and

economic implications for the firms participating in strategic networks and partnerships. Although the

concepts of supply chains and interorganisational relationships are not new, there is still a need to study

their principles in practice. The German dairy sector is one of the most important sectors within the national

agri-food economy and has also experienced the impact of these recent developments. Today many dairy

products are produced in vertically integrated organizations or networks which are coordinated by big

branded processing companies - also called ‗chain captains‘ - monitoring all stages of the supply chain. In

order to understand the formation of interorganisational relationships in German dairy sector, we critically

review the literature on supply chains and networks and conduct a descriptive analysis of dairy supply

chains in Germany.

Keywords: supply chains, networks, dairy sector, Germany

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1. Introduction

The increasing globalization of the world economy and internationalization of trade have

lead to a growing intensification of the competition among the global food industry

stakeholders. The importance of global trade integration for the spread of food

contamination has been illustrated by a number of recent food scandals, which

increasingly moved into the center of public and political interest. The scandals have

contributed considerably to the awareness of food quality and safety among consumers

and, thus, to the spreading of tighter forms of vertical coordination. The increasing

integration of markets complicates the traceability of supply chains as well as the

application of prevention and intervention measures in practice.

Food scandal over the melamine poisoned milk in 2008 made it clear that trading

interactions can cause diffusion of contamination to other food branches on the one hand,

and other countries on the other hand (Chan et al., 2008; Ingelfinger, 2008; Okazaki et al.,

2009). The effects of the melamine scandal were recalls of milk products and the

associated economic damage of about 50 million U.S. dollars for a single company, as

well as the death of six children and 300,000 reported illnesses (Xinhua News Agency,

2008; Duchowski et al., 2009). The melamine was not only in baby food but also in

leaven, toffees, soy products, etc. According to Hennessey et al., (1996) the distribution

of food is a decisive component of the spread of foodborne infections, which will gain

more and more importance through increasing global trade (Henessey et al., 1996;

European Commission, 2008).

Though the competitiveness of single companies strongly depends on the effectiveness of

their production and marketing processes, more recently the role of effective supply chain

networks and strategic chain partnerships has been gaining importance in agri-food

sectors worldwide. The basic foundation for the analysis of commodity flows in supply

chains and networks is the understanding the topography of the network (Christley et al.,

2005; Keeling and Eames, 2005; Newman, 2011). The trade structures are, on one hand, a

relevant factor for the spread of a contamination, but, on other hand, the knowledge about

the structures also opens up the possibility of interventions in the trade system (Keeling

and Rohani, 2008; Dubé et al., 2009; Chadés et al., 2011).

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Germany, with a milk production of 29.6 million tons, is considered the biggest dairy

manufacturer in the European Union (BLE, 2011). The globally produced milk yield in

2008 was about 700 million tons, of which about 70% was manufactured in dairies (ife,

2010).

This article aims at understanding the formation of interorganisational relationships in

German dairy sector by investigating the theoretical principles of relationship formation

in supply chains and networks and by looking at those principles in practice using the

example of German dairy supply chain. In order to fulfill our aim we pursue the following

research tasks in our paper: 1) critical literature review on supply chains and networks as

well as on formation of interorganisational relationships in the agri-food business; 2)

investigation of supply chain structures and relationships in German dairy supply chains,

using the theoretical findings of the first aim.

2. Theoretical background on formation of interorganisational relationships in

supply chains and networks

2.1 Supply chains and networks

The term ―network‖ is used widely in the economic, social, technical and social sciences

(Newman, 2003). According to the graph theory a network is formed out of nodes and

edges, where nodes symbolize actors or objects and edges – relations between the nodes.

Along the edges (trade connections), products are transported that are produced in the

nodes (companies). Each edge connects two nodes, shows a direction orientation

presented by arrows and indicates relations as well as their interdependences graphically

(Männel, 1996).

Thorelli (1986) suggests viewing a network as consisting of nodes or positions (occupied

by firms, households, and strategic business units inside a diversified concern, trade

associations and other types of organizations) and links manifested by interaction between

the positions. Networks may be tight or loose, depending on the quantity (number),

quality (intensity), and type (closeness to the core activity of the parties involved) of

interactions between the positions or members. He suggests that ―…the entire economy

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may be viewed as a network of organizations with a vast hierarchy of subordinate, criss-

crossing networks‖ and calls a network ―…two or more organizations involved in long-

term relationships‖, which contributes to the fundamental understanding of this concept.

The idea that a network consists of more than two elements is also supported by a number

of other authors (e.g. Lazzarini et al., 2001; Omta et al., 2001). For example, Anderson et

al., (1994) define networks ―as a set of two or more connected business relationships, in

which each exchange relation is between business firms that are conceptualized as

collective actors.‖

The next characteristic of a network which is mentioned in the literature is the repetitive

character of interactions among the network elements. Menard (2002) says that this term

covers all arrangements defining recurrent contractual ties among autonomous entities.

This view is supported by Todeva (2005) who posit that ―networks are sets of repetitive

transactions based on structural and relational formations with dynamic boundaries that

comprise interconnected elements (actors, resources and activities)‖.

Having examined the concept of networks, let us clarify the meaning of supply chains and

supply chain networks. A supply chain is a linked set of resources and processes that

begins with the sourcing of raw materials and extends through the delivery of end

products to the final customer (Bridgefeld Group ERP/Supply Chain Glossary, 2004).

Stevens (1989) calls a supply chain ―a system whose constituent parts include material

suppliers, production facilities, distribution services and customers, linked together via

the feed-forward flow of materials and the feed-back of flow of information and financial

capital.‖ Another definition of a supply chain is provided by Christopher (1998), who

claims that a supply chain is ―a network of organizations that are involved through

upstream and downstream linkages in different processes and activities that produce value

in the form of products and services in the hands of the ultimate consumer.‖ So supply

chains consist of three main stages: purchasing, production and distribution running in

upstream and downstream flows. The flow of goods has a downstream character, whereas

the flow of money and information is upstream, as consumer demands determine the

variety of goods they want to buy.

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Going one step further we come to the notion of supply chain networks. As mentioned

previously, after forming supply chains, firms driven by vertical integration necessities

tend to build more complicated structures and form supply chain networks. The concept

of a supply chain network, introduced by Harland et al., (2001), tries to integrate the

network and supply chain approach. She regards individual firms as a nexus with their

own unique network of upstream and downstream partners. So the interesting question is:

where does the supply chain stop being a supply chain and begin to represent a supply

chain network? Van der Vorst (2005) refers to a supply chain network as a food supply

network and calls it an interconnected system with a large variety of complex

relationships such as alliances, horizontal and vertical cooperation, forward and backward

integration in supply chains.

Supply chain networks are commonly characterized as firms that are embedded within a

complex network of horizontal (i.e., strategic alliances, joint-ventures) and vertical (buyer

and supplier) relationships (Lazzarini et al., 2001; Omta et al., 2001; Belaya and Hanf,

2008). A ―supply chain network‖ can be understood as the joint and co-operative

behaviour and actions of companies that are related by vertical product and information

flows in the supply chain in order to provide a product or service to the end consumer

(Belaya et al., 2007; Gagalyuk and Hanf, 2007; Gagalyuk et al., 2009). The objective of

most of the supply chain networks is to produce higher quality and/or efficiency by co-

operation rather than by full integration of the supply chain or by market transactions

(Hanf and Kühl, 2002; Hanf et al., 2009)1.

2.2 Criteria for formation of interorganisational relationships in dairy sector

One of the most interesting areas is the way such relationships come into existence and

the decisions regarding the selection of the right partner, which could be regarded as the

glue that holds the relationships together. In fact, there is a great variety of suppliers and

buyers available for different categories of products which have different quality and

1 Belaya (forthcoming): ―Influence Strategies in Supply Chains and Networks – A Study of Russian Agri-

Food Business‖, Martin-Luther-University Halle-Wittenberg/ Leibniz Institute of Agricultural Development

in Central and Eastern Europe (IAMO), Halle (Saale), Germany. Ph.D. thesis

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other factors important for conducting business. Therefore, choosing the appropriate

partner is one of the main issues in order to secure the performance of the firm (Reid and

Riegel, 1989). As mentioned by some researchers, the process of partner selection in

general is a multi-criteria problem, since it involves decision-making process based on

various criteria such as price, quality, delivery, etc. (Aguezzoul, 2008).

Some of the general criteria for partner selection are widely described in the literature.

According to the study by Reid and Riegel (1989) buyers prefer suppliers who provide

accurate and on-time delivery. Other studies (McGinnis et al., 1995; Menon et al., 1998)

suggest that both the firm‘s competitiveness strategy and external environmental are vital

for the selection criteria. Besides, further general selection criteria include: consistent

quality, reasonable pricing, willingness to work together, reasonable minimum orders,

volume discounts, frequency of delivery, payment policies, technical competence,

geographical distance, financial stability, creative management, responsiveness to

unforeseen occurrences, integration level index, increment in market share; research and

development ratio, environmental expenditures, and customer satisfaction index (Reid

and Riegel, 1989; Meade and Sarkis, 2002; Efendigil et al., 2008).

Some criteria are common for all sectors, whereas some of them reflect specific features

of the dairy sector in Germany. The price of milk is also mentioned among the economic

factors influencing the choice of a partner by milk producers (Steffen et al., 2010). Since

the settlement of the milk price in private dairies is usually done by price negotiation, this

criterion deserves a special attention. In the end both groups of supply chain actors (milk

producers and dairy processing companies) are business organizations and need to make a

profit from their business partnerships. Therefore, we posit that the level of offered milk

price by dairies is one of the essential factors influencing the decision of the farmer to

enter a relationship with them.

The agreed price usually consists of a basic reference price and a unique contract bonus

which is dependent on the duration of the contract. Therefore, one might also assume that

such criteria as duration of contract, contract cancelation period, contract bonus payment

as well as any additional payments for quality could make the relationship more or less

attractive for dairy farmers and could also play an important role in the partner selection

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process (Steffen et al., 2010). Whereas risk-averse farmers prefer contracts with a longer

duration and certain fixed prices, other less risk-averse farmers may want to choose a

contract with a shorter period of duration but with a possibility to negotiate a better price.

Steffen et al., (2010) describe a „cafeteria― system of negotiating the right kind of contract

between German dairy farmers and processing companies. This system allows specific

components of the contract, including the absence or presence of sanction mechanisms, to

be chosen. Therefore, we posit that this criterion (absence of sanction mechanisms from

the side of the dairy processing company) might also play a role in choosing the right

partner in the dairy industry. Another experiment by Steffen et al., (2010) included an

exemplary contract with a regulated quantity of milk and specific mechanisms to avoid

oversupply of milk from some farmers. Therefore, one might also assume that this point

could also influence the decision of farmers to enter the relationships with a certain dairy

processing company.

Some of the mentioned general factors for selection of partners could apply for dairy

processing companies (e.g., milk price, duration of contract, contract cancelation period)

etc. Usually the contract duration between milk producer and dairy is two or three years

(Spiller and Schulze, 2006). However, one also has to mention that milk producers and

processors are probably driven not only by economic factors for selecting the right

partner, but also by a number of social and historical factors which are tightly connected

with traditions and emotional preferences. For instance, the milk producer‘s willingness

to change to another company after the duration of contract has ended depends on the

quality of the business connection between milk producer and dairy (Gerlach et al., 2005).

From the milk producer‘s point of view, the quality of the business connection is

influenced by the company‘s sympathy to the milk producer‘s market problems, the

agricultural orientation and the way of communication, as well as the dairy‘s management

ability. Here the individual factors regarding the quality of business between the milk

producer and the dairy can be weighted differently.

Gerlach et al., (2005) showed in an empirical analysis that the influence on the quality of

business connections is dominated by intrinsic factors as opposed to extrinsic factors.

Intrinsic factors are inner motivations to establish, maintain and deepen trade

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connections, for example commercial support for milk producers with difficulties on the

dairy market. In contrast, extrinsic factors are governed by economical, logistical and

technical considerations, such as milk producer‗s price contentment (Gerlach et al.,

2005). The consolidation of the commitment between the supplier and the processing

company through an effective supplier management can boost a dairy‘s potential for

success inversely by securing the commodity receipts and the connected planning

reliability for the company (Spiller and Wocken, 2006).

Finally, we used the discussed points for summarizing our findings on criteria of partner

selection in German dairy sector by differentiating among milk producers, dairy

processing and food retailer companies (App.1).

3. Study of German dairy supply chains

3.1 Material and methods

In order to investigate how the supply chains and networks are formed and how they

function in German dairy sector we tried to describe the existing structures and

relationships by using the so called description model. The description model helps to

describe the complex systems with their components, functions and interactions. The

description of the system regarding the dairy distribution grid was designed with

information contained in literature. The description of the system was then amended by

the data analysis of the year 2004, 2006 and 2010. The data for 2004 were allocated by

the Bavarian State Ministry for Nutrition, Agriculture and Forestry (StMELF) on behalf

of the German Federal States. This data included the German dairies‘ locations in

counties that source their milk from the milk producer and the corresponding number of

farmers, including the locations of each dairy. This data was collected uniquely for 2004.

At this point 327 dairies and 106,963 milk producers existed, situated in 385 different

counties. The data for 2006 and 2010 is based on the observation of the market for the

German milk industry and were allocated by the Federal Institute for Agriculture and

Nutrition (BLE). The data for 2006 provides information about the trade volume between

the milk producers and dairies over the period from 2000 to 2006.

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To measure the smoothing2 production ( F

iS ) per state (F) and special year (i) the

difference between the quantity produced ( F

iP ) and the milk delivery to dairies ( F

iD ) in

each province was formed for the years 2000 and 2006 (BLE, 2006). Then, the difference

per state in terms of total volume produced in Germany (F

F

iP ) was calculated for both

years in order to make statements about the absolute amount of smoothing production per

state ( FS ) for the entire quantity produced (Formula 1).

Then the change in the proportion of smoothing processes ( F

i ) to the overall amount of

smoothing production in Germany (F

F

iS ) for the period 2000 to 2006 was calculated

(Formula 2).

The data for 2010 includes the purchase and sales volumes between the dairies which

were needed to create a description of the system.

2 The term ―smoothing‖ implies in this case that milk producers trade with another dairy, which is not in the

same federal state.

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3.2 Description of structures in German dairy sector

The description of the system encompasses the trading structures and relationships among

the supply chain actors in the German dairy industry. In Germany there are 220 dairies

which process 96.8% of the raw milk and which can be classified into cooperative and

private dairies. Cooperative dairies process 70% of the milk and stand out due to the milk

producers are co-owners in the dairies. In Germany, 93,497 milk producers produce 29.6

million tons of raw milk. Large dairy companies can usually afford to collect milk from a

bigger region, implying longer travel distances and higher transportation costs. The

increase in the amount of dairy products and processed milk would require an expansion

of the milk collection area. Smaller dairies might not be willing to pick up milk from a

supplier situated far from the processing facilities.

Appendix 2 makes clear that smoothing processes took place in 8 of the 12 shown federal

states between 2000 and 2006. The minimum share of smoothing processes amounts to

4% (State 1) and the maximum share amounts to 74% (State 11). Contradictory

developments can be found in four federal states. In these four states, the share of the

smoothing processes decreased, referring to the total amount of produced milk.

The results of the data analysis show that in some federal states the share of the

smoothing processes related to the total amount of smoothing processes is around 53%,

e.g., in federal State 11. In State 8 the development points to a low share of smoothing

processes during the passage of time. In this state the share of the smoothing processes

decreased by 190% related to the total amount of smoothing processes (App. 2).

The comparison of the initial situation shows for some federal states, like States 2, 6 or 7,

that smoothing processes took place, but that the share of smoothing related to the total

amount of smoothing processes in Germany decreased. The data analysis in 2004 showed

that one dairy is supplied on average by 327 milk producers and that the milk producers

are on average 68 km away from the dairies (Fig. 1). The maximal distance according to

the 2004 data was 557 km and the lowest 0 km. For the distance analysis the center of the

county between the 327 dairies and 106,963 milk producers was chosen. As one

administrative district is, on average, only 60 km wide, there is an interval of 0-60 km in

which the milk producer has the lowest distance to the dairy. Generally that is to say that

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96.3% of the milk producers are within a distance of 0-100 km from their dairy. Raw milk

is obtained at a distance of more than 100 km by 3.7% of the milk producers (Fig. 1).

Fig. 1: Distance between milk producer and their dairies

However, in order to be cost-efficient, dairies pay attention not only to the geographical

distance of collection points and farmers, but also to the density of the area. Therefore,

towns with a greater number of suppliers would be preferred due to low travel and

transportation costs. In contrast, stand-alone farms situated far from other farms would

have fewer chances to be chosen as supplier if the quantity of the milk to be collected is

not sufficient to fill the milk car.

Besides the direct trade connections between milk producer and dairy, there are also

indirect trade connections among the trade network through interconnected actors.

Interconnected business partners are, for example, national dairies that sell their milk to

other dairies. The dairies move quantities of milk among each other by purchasing and

selling (smoothing of production capacities= trade within a supply chain). This should

lead to a harmonization between the dairy‘s capacity and its need for raw material.

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According to estimations, the trading volume has a percentage of 30% in the whole

delivery quantity in Germany (Fig. 2).

Fig. 2: Purchase and sales volume of milk between the dairies

The trade interactions between the companies serve to reach the companies‘ goals more

efficiently more through cooperation and effectiveness than by competition

(Bidlingmaier, 1967). Therefore the potential of cost reduction, but also gain in

efficiency, realization of competition advantages and the modification of market barriers

are very important for the cooperation (Rotering, 1993). Especially synergetic effects,

access to new markets and the distribution of investments are supposed to be realized

through horizontal cooperation. Wegmeth‘s studies in 2002 showed that horizontal

cooperation in the dairy industry is entered especially in the production sector. Here big

distances can have a negative effect on a cooperation because of the high transport costs

between the cooperation partners (Wegmeth, 2002). The data analysis in 2004 showed

that the average distance between the dairies was around 340 km.

Dairies that do not have any own delivery, which means that they do not get the raw milk

from farms, are called ―purchase companies‖ on the supply chain.

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Other interconnected trade partners are milk collection companies who collect the raw

milk but do not process it and sell it to the dairies and at the same time settle up with the

farmers. The bundling quantities of the milk collectors amount to 32% of the whole

delivering quantity. Considering the background of the milk flow must be noted that the

dairies distribute their milk on their business enterprises as well. Here they produce other

products and thus follow other trade networks per business enterprise. For example whey,

which emerges as a by-product in the cheese production. The whey can be transported

back to the farmers for the purpose of feeding.

The spot market‘s integration on the producer level causes another marketing possibility.

This channel of distribution allows the producers to sell the raw milk‘s short-term excess

or remaining quantities for the current price and to sell them to any dairy that offers the

highest price. The percentage of the traded raw milk on the spot market is estimated to be

0.03% and is connected to a price and customer risk for the producer (Bahr et al., 2010).

Moreover there are two more commodity flow quantities on the producer level because

there is no trade connection between the dairy and the producer. Of the raw milk that is

not processed in dairies, measured on the total production, up to 2.7% is fed and up to

0.2% marketed directly by the producer (BLE, 2011).

After the processing, the finished dairy products enter the food retailing sector, the food

industry, the pharmaceutical industry, schools and the wholesale trade, as for example to

hospitals and canteens. A special consumer of dairy products is the food retail trade that

markets about 40% of the dairy products that are produced in Germany. From these 40%,

about 54% of the products are sold by discounter shops. 44% of the dairy products are

exported and 16% are distributed on the formerly named channels of sales (BKartA,

2009).

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4. Summary and conclusions

In this paper we aimed to understand the formation of interorganisational relationships in

German dairy sector by investigating the theoretical principles of relationship formation

in supply chains and networks and by applying the theoretical knowledge using the

example of German dairy supply chain. In order to fulfill our aim in the first step we

conducted a critical literature review on supply chains and networks taking into account

the factors influencing the formation of interorganisational relationships in the agri-food

business in general and in German dairy sector. The essential characteristics of networks

mentioned in the scientific literature could be summarized as follows. Networks can be

viewed as systems consisting of more than two elements, which are connected among

themselves through linkages and relations of repetitive character, through which they

exchange resources. Supply chains integrated into networks lead us to the concept of

supply chain networks. Thus, the supply network concept appears to be more complex

than the supply chain concept. Supply chain networks are firms that are embedded within

a complex network of horizontal and vertical relationships with an aim to provide a

higher quality product or service to the end consumer. Besides, we also used the

discussed points about the factors responsible for formation of interorganisational

relationships and summarizing our findings on criteria of partner selection in German

dairy sector by differentiating among milk producers, dairy processing and food retailer

companies.

The second research task addressed the investigation of supply chain structures and

relationships in German dairy supply chains. The different trade interactions in the dairy

sector are affected by numerous interconnected actors and trade cycles, for example,

through the return of the whey from the dairy to the milk producer, and by means of

intermediaries. In this context it is evident that several dairies have to approach several

regions to save their commodity receipts. The proper choice of business partners is a

decisive factor for the consumers‘ supply with an optimal product quality, as well as for

the survival of the company with regard to the loss of reputation should damage occur.

The choice also affects a company‘s success and strengthens the international

competitiveness for a dairy company. In several German states the results of the choice of

15

business partners are quite obvious: dairies in certain German regions process about 4-

74% for the total produced quantity of milk in these regions. The remaining milk of the

milk producers is delivered to other dairy companies, which are not situated in the same

region as the milk producers. Basically, the mentioned smoothing processes can turn out

higher for each federal state, because the smoothing processes cannot just proceed from

the milk producers, but also from the dairy in each federal state. In this context the

mentioned results provide no information on whether the milk is processed in the

respective federal State (App.2). Therefore the dairies have to use their capacities fully by

purchases of milk collection companies which can be situated in other regions, or

respectively, to the purchase of other dairies (Fig. 2).

From the point of view of food-security and traceability, these trade connections are

defining the spread of food-contamination, as they were in the case of the melamine

scandal. The commodities with inadequate quality can be passed from one partner to

other partners of added value chain through the trade connection. This can lead to an

increasing infection cascade: on the one hand in different dairy products and different

food sectors, that for example add milk to their products, and on the other hand, in other

countries because of cross-border transactions. These international transactions are

becoming more a focus of the dairy sector because of the glut on the local markets and

could be affected by the trade connection. The cross-linked and complex commodity

flows make the traceability and the connected transparent form of supply chains difficult.

So the cooperation‘s of companies in networks have to be arranged in a way that the

consumer in the milk supply chain can rely on the temporal, quantitative but also on the

quality of the dairy products. The transparent form of the supply chain and the connected

exchange of information between all actors of the supply chain build the basis of food

security. Thus, a strong vertical integration of the milk producers towards the dairies and

traders could influence the exchange of information and the transparency in the food

chain. The generated knowledge on the formation of structures in German dairy supply

chains could be used for effective detection of food contaminations (e.g. opens up the

possibility of interventions in the trade system) and determination of the associated

economic losses in case of food scandals.

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Acknowledgements

We thank U. Platz, Dr. U. Ahrens and R. Wolter for the discussion that pointed out the

data problems of tracing in the milk industry. We also thank R. Carmanns (Hi-Tier) and

BLE for providing the German 2004 and 2010 dairy data. This work was supported by the

Federal Ministry of Education and Research 13N11208. We would like to thank Dr. H.

Hansen, D. Führmann and two anonymous reviewers for their comments.

20

Appendix 1. Economic factors for the choice of partners in the German dairy sector 1

Milk producers Dairy processing companies Dairy processing companies (Wegmeth, 2002)

- Milk price (Steffen et al., 2010)

- Duration of contract (Steffen et al., 2010)

- Contract cancelation period (Steffen et al., 2010)

- Contract bonus payment (Steffen et al., 2010)

- Additional payment for quality (Steffen et al.,

2010)

- Absence of sanction mechanisms from the side of

the dairy processing company (Steffen et al.,

2010)

- Flexible quantity regulation (Steffen et al., 2010)

- Competence (Reid and Riegel, 1989)

- Responsiveness and readiness to solve problems

together (Reid and Riegel, 1989; Gerlach et al.,

2005; Spiller and Wocken, 2006; Aguezzoul,

2008)

- Financial stability of the dairy processing

company (McGinnis et al., 1995; Menon et al.,

1998)

- Service offered by the dairy processing company

(consulting services, etc.) (Meade and Sarkis,

2002)

- Reliability of the partners (Aguezzoul, 2008;

Kaleka, 2002)

- Business success of the dairy (Gerlach et al.,

2005; Spiller and Wocken, 2006)

- agricultural orientation of the dairy (Gerlach et

al., 2005; Spiller andWocken, 2006)

- Milk price (Steffen et al., 2010)

- Duration of contract (Steffen et al., 2010)

- Contract cancelation period (Steffen et al., 2010)

- Milk producers structure (Density of milk

producers‘ location and structure of the milk

producers) (Buschendorf, 2008)

- Geographic or transportation distance

(Buschendorf, 2008; Reid and Riegel, 1989)

- Costs of transportation of raw milk from milk

producers to dairy processing company

(Buschendorf, 2008)

- Negotiation costs (Porter, 1990)

- Quantity of deliveries (Steffen et al., 2010)

- Raw milk quality (fulfilment of hygiene and

microbiological for raw milk) (Buschendorf,

2008)

- Stability and competitiveness of the suppliers

(Porter, 1990)

- Performance of the suppliers (Meade and Sarkis,

2002)

- Reliability of the partners (Aguezzoul, 2008;

Kaleka, 2002)

- Economies of scale

- increased in productivity

- higher capacity utilization

- optimized allocation factor

- Expansion of product range and optimal product

rang disgn

- higher know how

- distribution of risks

- common pool resources

- Distribution of investments

- Better Market position

- specialization effects

- flexibility

- Geographic

Food retailer

(BKartA, 2009)

- Quantity delivered

- Geographic or transportation distance

- Sales price

between dairies between milk producer and dairy

Betw

een

dairy

and

retailer

21

Appendix 2. Smoothing production per federal State in Germany