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Look to Improve Process to Increase Margins

While rising healthcare, production and fuel costs continue to put downward pressure on profits, food producers and distributors need to look carefully at internal efficiencies and cost savings to boost margins. At the same time, competition from foreign producers is on the rise, creating additional pricing pressure from customers.

U.S. consumer spending on food is expected to grow annually at a one to three percent pace for the foreseeable future.  However, manufacturer and retailer labor costs will tend to rise with inflation in the one to two percent range.  Distribution costs will continue to fluctuate in the short term, but will most likely rise in the long term.  

Commodity and other raw material cost fluctuations are anybody’s guess given recent history.  Under these parameters, there is not much room for price increases to maintain current level of profitability.

So what can food and beverage manufacturers and distributors do to maintain and even increase margins?  The answer could be found in process improvement and innovation.

 Materials

Assuming you are already hedging your commodity purchases, raw material costs savings can be found by:

  • Reducing Process Loss – analyze your production process from beginning to end.  At each point in the process, the yield should be measured over an appropriate period of time. 

Use process improvement methodologies such as Kaizen events and root cause analysis to find the smallest of improvements in process loss.  The combination of several small improvements can result in big savings in raw materials costs. 

  • Use Scan Data to Get Closer to Your Customer – if your warehoused raw materials are going out of date or you are experiencing quality problems, your raw materials may be on site for too long.    A common way to reduce raw material costs is to partner with your largest customers and determine how they forecast sales. 

Almost every grocer and broker has access to scan data which could increase the reliability of your sales forecasting process.   Work with your customers to order raw materials closer to the production and shipment.  Not only will this reduce potential waste caused by out of code materials, it could also reduce warehouse requirements and labor needed to move materials from one point to another.

Labor

  • Minimize Changeover Time – we are not advocating implementing longer production runs thereby reducing or eliminating changeovers.  The closer you can get your production schedule to mimic customer demand, the more profitable you will be. 

However, you should analyze every changeover and eliminate wasteful steps.   Are you scheduling production runs that have similar processing steps in succession? Can you set up a new production run while the previous run is ongoing?  Each reduction in change over time directly reduces labor costs.

  • Preventive Maintenance – a good maintenance program will decrease labor costs (and materials costs through reduced scrap.) If your maintenance department is always putting out fires, your profits are probably going up in smoke. 

Don’t accept the excuse that the maintenance group can’t implement a true preventive maintenance program because they are responding to emergencies.  The decreased costs you will realize through a good PM program will make you more competitive and profitable.

Overhead

  • Lean Process Improvement – an often overlooked segment for companies implementing Lean is administration.  Companies should apply the same Lean principles to their accounting, purchasing and IT departments that they apply to the plant floor. 

For example, if your purchasing department can work with suppliers to reduce lead times for high volume raw materials, you could see reductions in warehousing space and labor.  If you can streamline your invoicing process, you will most likely experience improved cash flow resulting in less interest expense.  The application of Lean principles to your back office will result in reduced overhead costs.

Pennies still matter in the food industry.  The smallest of cost improvements is a big deal.  The improvements discussed above are just the tip of the iceberg. 

Manufacturers must maximize the utilization of their biggest and best asset – their employees – to drive cost reductions, streamline processes and eliminate waste throughout the entire supply chain.

If you haven’t done so already, challenge your supervisors and teams to look for process improvements and reward them for finding them.  

Richard Feldt, CPA, is a partner in the Manufacturing & Distribution Services Group for national accounting firm, RubinBrown. Feldt specializes in audit and the management of Sarbanes-Oxley engagements for clients in the food and manufacturing and distribution industries.

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