Three levers for rapid cost reduction
Over the past 12-months, operating conditions in the food and beverages sector have been challenging. Consumer demand has softened. Borrowing costs remain high.
And retailers are pushing back against price increases.
Sadly, we are seeing more food and beverage companies tipped into voluntary administration as a result of these challenges. With many high-profile casualties on this list, including Sara Lee, HS Fresh Food, Proform Foods, Australian Plant Proteins and others.
As a result of this, many in the industry are asking what they need to do to avoid a similar fate.
With price increases mostly off the table .…
And limited growth options .…
The main option is to focus on cost.
In the hope it might benefit your business - we would like to share our approach to rapid cost reduction.
We recommend food and beverage manufacturers focus on three key areas:
Reducing input costs
Using labour more efficiently
Optimising the supply chain
Let’s look at these in more detail, one by one…
Input Costs
Input costs consist of raw materials and packaging. These costs often make up 50% - or more - of a food manufacturer's cost base. So, this is where we typically start when looking for cost savings. The two approaches we use are:
1. Product redesign – can we change product formulations or packaging designs to reduce costs? For example, can we substitute ingredients? Or reduce the amounts of high-cost ingredients used? Or remove unnecessary packaging? All these changes can deliver benefits. The key is to do this in a structured way, by putting effective testing and controls in place. This will ensure quality—and consumer perceptions—are not affected.
2. Strategic sourcing – this is almost always a 'go-to' for input cost reduction. Optimising product specifications, introducing competitive tension and running a rigorous, structured RFP process consistently delivery benefits.
Over the past two years the prices of grain, proteins, cardboard, plastics and other commodities have fallen dramatically, leading to good savings on raw materials and packaging for those that have gone to market.
What's more, sourcing can be done in a short timeframe to quickly realise benefits.
Labour Efficiency
Large improvements in labour efficiency often come from capital intensive automation projects. But in a world of high interest rates, slowing growth and shrinking margins many companies do not have the capital to invest in automation.
There are, however, several levers companies can pull to improve labour efficiency without the need for CAPEX. They include:
Labour mix – Align the mix of casual and permanent labour to demand patterns. This delivers benefits by reducing reliance on expensive casuals or by avoiding over staffing during quiet periods.
Rostering and scheduling – Optimisation of shift structures to better align with production volumes can increase available production time and reduce overtime cost, while also avoiding unnecessary penalties.
Manufacturing efficiency – Broad and unfocused lean programs can be slow and of questionable benefit. In contrast, a targeted focus on specific improvements can yield significant benefits.
Increase line speeds. On many occasions, we have seen a production line running at a certain speed because “that’s the way it’s always been run”. Or because it’s the manufacturer's specification. An alternative approach? With engineering support and safety assessments, increase the line speed by half a percent and monitor the impact. Then keep increasing speed bit by bit until you start running into issues. This can ‘flush out’ the next round of maintenance fixes to let the line to run faster again. Over the years, this approach has consistently delivered 5–10% increases in line speeds for us.
Eliminate causes of downtime – log and categorise all downtime events. Then form a multifunctional team to work through the issues one by one, starting with the largest. Bring in external technical support if the plant team can't fix these issues.
Reduce changeover time – run rapid changeover projects on key lines and equipment. Using this approach, we’ve seen changeover times reduced by more than half. This has increased production uptime - and added planning and scheduling flexibility.
Introduce visual management – measuring OEE and downtime is key. Making the results visual on the shop floor is an effective way to drive improvement, ensuring focus and quick resolution of issues.
Supply Chain Optimisation
Freight and logistics costs tend to make up 10% – 15% of a company’s cost base. These costs have increased significantly in recent years. In large part, because of labour and capacity shortages in the industry.
The recent good news? Labour shortages have improved. And excess capacity- for both warehouse space and transport—is opening up.
There are two ways companies can quickly drive down supply chain costs. They are (1) to increase utilisation and (2) to tender your transport requirements.
Increase utilisation – companies can take many actions to increase utilisation and transport efficiency. They can reduce delivery frequency and increase MOQs, resulting in larger orders delivered less often. This has a major impact on transport costs and, often, only a minor impact on customers. Likewise, switching from own fleet to more efficient 3rd party providers for low volume, low density runs will deliver cost savings.
Tender requirements – for the first time in years, excess capacity is opening up. Which means now is a good time to tender your transport requirements. While this can be a complex project that carries some risk, we recommend breaking it up into manageable pieces. For example, sourcing key metro to metro lanes first. Followed by regional runs, or separating linehaul from last mile.
That, for now, is where we recommend you start your cost cutting efforts. By reviewing your input, labour, and supply chain costs.
Once you’ve done this, the other cost base areas worth reviewing are overheads and SG&A. A subject we will cover in another article.
In the meantime, if you would like to uncover how and where your business can optimise cost, please contact me for an initial, informal discussion.
You can reach me on +61 408 995 207 or at peter.cook@westbournefoods.com.au
Peter Cook
Founder and Director
Westbourne Food and Agriculture