In a recent forecast, the U. S. Department of Agriculture, said that it expected the inflation rate for food products (that is, the increase in retail food prices) to be the lowest since 1992. On the other hand, food manufacturers have seen their materials and indirect costs surge in recent months. This essentially leaves food manufacturers squeezed in the middle – their costs going up, but not the price of their products – putting their gross margins at risk. While it has been exacerbated recently, the increasing cost/price squeeze trend has been present for the past decade (see graph below).
Many thought-leading food manufacturers have been able to leverage information/data to minimize the negative impact of the cost/price squeeze and thrive. Below are three strategies that you can use to reduce the negative impact of the cost/price squeeze.
1. Get a comprehensive view of your cost
A good place to start is to have a comprehensive understanding of your cost structure and the drivers of cost. What percentage of revenue are your raw material costs, and which ingredients matter the most? What about packaging? How about indirect costs like energy? By leveraging integrated historical and current cost data organizations are able to actively manage, reduce, and/or optimize product, process, activity, business unit, as well as functional costs, margins, and profits.
2. Break down supplier costs
Successful companies have purchasing functions that can break down all costs associated with each supplier by item and category, and then rank suppliers by their contribution margin. Procurement managers are able to examine metrics such as fill rates, on-time delivery and delivered cost. By actively managing supplier performance, procurement managers for industry leading manufacturers are able to negotiate better business terms from “costly” suppliers and provide discounts and better purchase commitments from high performers.
3. Plan procurement based on facts
One of the biggest contributors to unnecessary cost is an inability to plan and forecast procurement need. It’s surprising how many food manufacturers plan based on simplistic assumptions or gut feel. Good food manufacturers are able to develop a deep understanding of costs, cost drivers, the price and volume variability and sensitivity of each driver, and the extent to which price and usage is controllable. Industry leading manufacturers are able to connect this understanding with an analytic environment that enables examination of causality and simulation of possible scenarios for better decision making.
Connecting your Business and Data Strategies
While all of these strategies are effective means of controlling costs, their success is dependent on a solid business intelligence and analytics program. Your enterprise resource planning (ERP), manufacturing execution system (MES), and other application systems probably provide most of the required data, but business intelligence (BI) is needed to provide the analytic capability to turn that raw data into the understanding you need. You may develop a sophisticated and detailed view of your cost structure, but if the systems you rely on to take meaningful action provide you with data that is incorrect, incomplete or not timely, then the benefits are greatly reduced.
DecisionPath Consulting specializes in BI and analytic solutions for the food industry. While each company has unique cost structures and different cost drivers, there are certain patterns of behavior in the food manufacturing industry. If you’re being squeezed between rising input costs and flat prices for your products, we can help you understand your costs and what you can do about your situation. To find out more about how our solutions can help food manufacturers, visit our PerformancePath management framework.