How Food Manufacturers Can Protect Margins in Uncertain Times W H I T E P A P E R As Raw Material and Energy Costs Skyrocket, Food Manufacturers Rely On Integrated Business Applications to Control Costs and Maximise Profitability Executive Summary With the margin of profit in the food industry defined not by pounds, but by fractions of pence, it is essential that manufacturers understand and control the costs of production. And today, food manufacturers are being squeezed like never before. Distributors and consumers expect fresh, high-quality products at the lowest cost at the same time that input prices for producers are skyrocketing. Intense competition, new regulations and compliance requirements, and changing global market conditions demand fast, efficient inventory control processes. However, many food manufacturers instead rely on inventory procedures peppered with disconnected technologies and manual processes. These manual inventory procedures do not provide the depth and breadth necessary to provide enterprise-wide inventory tracking and costing analysis. While food manufacturers have little control over rising raw material and energy costs, they often overlook the one area where they can control costs, their inventory. Consequently, many food manufacturers incur costs that could be reduced, if not eliminated entirely, as a result of wasted or spoiled inventory. The need for integrated business applications that provide broader visibility into inventory is critical to reduce inventory costs and to ultimately ensure margin protection. In this paper, you will learn how to avoid the five problems caused by poorly controlled inventory and how to protect your margins in an uncertain market.
The Drive to Cut Costs Controlling costs has become a key driver in the inventory management strategies of businesses in the food industry. In fact, Aberdeen reports that reducing costs is now tied with growth as the top objective stated by food and beverage manufacturers. 1 Unfortunately, production costs have increased for manufacturers in two key areas: Raw Materials. The prices of key input goods, such as milk, eggs, grain, and oils, have reached record levels. UK food inflation was reported to be over 6% with fresh categories over 10%, the highest since 1991. 2 Manufacturers have often seen even greater increases as a result. For example, The Economist reported that the cost of ingredients used by Kraft jumped by 9%, or $1.3 billion, in 2007. Commodity prices are likely to remain high for the foreseeable future. Rapid economic growth in China and India is keeping demand high, and exports of U.S. agricultural products have reached record levels because of a weakened dollar. Additionally, the increasing diversion of crops into energy sources is further squeezing supply. Biofuel production could increase the cost of corn by more than 25% by 2020. 3 Fuel and Energy. The rising cost of energy and transportation is the number one challenge to growth citied by the food and beverage industry. 4 It will come as no surprise to anyone scanning the headlines or filling the petrol tank that fuel prices have soared, and energy rates across the nation have been increasing as well. Demand for both fuel and electricity continues to grow, with major energy consumers such as the USA expecting to use 45 percent more by 2030, according to the Energy Information Administration. As a result, the government projects continued price escalation for crude oil and natural gas and higher costs to transport, distribute, and refine fuels. 5 Manufacturers have limited pricing power over the costs of raw materials and energy, and the volatility in both of these markets creates tremendous uncertainty. Therefore, manufacturers are looking to improve inventory management in order to reduce costs and waste associated with poor inventory control, optimise the selection and use of materials, and respond quickly to changing market conditions by gaining better insight into the effect that rising input costs have on margins. 1 Aberdeen Group, ERP Plus in Process Industries: Pushing Beyond Traditional Boundaries, February 2008. 2 BRC October 2008 3 International Food Policy Research Institute, Biofuels, Food Prices, and Food Security, February 2008. 4 Aberdeen Group, ERP Plus in Process Industries: Pushing Beyond Traditional Boundaries, February 2008. The Cost of Poor Visibility Unfortunately, many companies lack the technology that would enable them to achieve these goals. They simply have not acquired the integrated business applications that would provide the visibility into inventory throughout the purchasing, production, and sales cycles or rely on manual processes and spreadsheets. Additionally, companies struggle to deal with disconnected order entry, purchasing, production scheduling, and financial management applications. In the food industry, companies often lack inventory management systems that have the capability to capture and monitor information associated with perishable products or to help them respond to regulatory compliance issues. Therefore, manufacturers are not able to: Gain visibility into raw materials. Product manufacturers in every industry need to understand the raw materials they have on hand to use in production. But for manufacturers in the food industry, raw materials do not have an indefinite shelf life. Lack of or limited visibility therefore leads to incorrect sequencing of inventory usage, spoilage, and waste. Effectively manage work in process. Without accurate, up-to-date information on goods in the production process, companies procurement decisions are often based on best-guess analyses, leading to overages that increase waste and costs or to shortages that reduce revenue and damage distributor and customer relationships. Manage finished goods inventory. Without accurate insight into finished goods and the ability to marry this information to demand forecasts, companies must increase safety stock or risk inventory shortfalls. However, this practice increases carrying costs and, since inventory is perishable, the chance for waste due to spoilage. Reduce expirations. Companies without effective inventory control risk despatching expired goods, which can result in additional despatching costs and loss of distributor or customer confidence. Excess inventory, also caused by lack of effective inventory control, further increases the likelihood of spoilage. Understand, model, and project energy and related costs and their impact. Energy costs impact all areas of production from manufacture through transportation. Companies that lack detailed insight into costs and profitability are unable to quickly identify and act on variances. The common thread in each of these problems is a negative impact on the bottom line. Ultimately, uncontrolled or poorly controlled inventory, combined with rising production costs, leads to margin and market erosion. 5 Energy Information Administration, Annual Energy Outlook 2008. Ross Enterprise White Paper
" Improving Inventory Visibility & Insight To address these challenges effectively, best-in-class food manufacturers are deploying integrated business applications capable of providing greater visibility into inventory. This is a strategy of systems and automated processes that brings inventory under control and provides visibility throughout the production lifecycle, from raw material to manufacture to distribution of finished goods. The first step is to replace manual inventory processes and spreadsheets with integrated business applications that enable a company to automatically track inventory throughout the production process. Aberdeen points out that doing this not only enables top performers to respond We were attempting to track inventory expiration dates with spreadsheets, but that was a mess. It was leading to a high level of waste " Derek Christensen IT Director Juice Harvest more quickly to challenges and opportunities, but also enables them to make better use of the full traceability features in the business applications they deploy. 6 Business applications should provide forward and backward traceability in order to provide needed data on inventory from either end of the supply chain. And, this information should be available online any time and be updated automatically as inventory movements occur. But automation and bi-directional lot traceability are not enough: the design and capabilities of integrated business applications must also be tailored to the food industry. The system must be able to deal with shelf life and expiration data, which supports effective raw materials usage and planning and minimises spoilage and returns. It should also help food manufacturers comply with regulations they face and help companies respond to mock or real recalls within required timeframes. Finally, inventory management requires integration: connecting systems that support order entry, procurement, production, and financial management processes. Aberdeen points out that best-in-class manufacturers are 50% more likely to select an integrated solution than laggards. 7 6, 7 Aberdeen Group, ERP Plus in Process Industries : Pushing Beyond Traditional Boundaries, February 2008. 5 Steps to Margin Protection An integrated inventory management strategy will provide food manufacturers: 1. Better visibility into raw materials It s not enough for a company to know simply how much raw material it has on hand. It also needs to capture, track, and utilise information about when that material was received, its shelf life and, therefore, the priority in which it should be used. Particularly as commodity prices continue to increase, this capability becomes more and more critical in order to reduce waste and protect margins. Traditional inventory management systems often lack this granular level of detail. For instance, Juice Harvest s legacy system, designed for a discrete manufacturing environment, could not track the expiration of raw materials, which the company needed to use within two or three days. The company replaced its legacy platform with business applications designed for the unique needs of the food industry in late 2006. Today, Juice Harvest can capture inventory data in near real-time and run hourly or daily reports. This allows its quality assurance department to act proactively when raw materials need to be used immediately or changes need to be made. Waste of raw materials has been reduced, and the company has decreased monthly inventory adjustments from 12 percent to just two percent. Lot traceability has also enabled the company to automate the recall process. It s completely changed how we handle and manage inventory, Christensen said. 2. Improved management of work in progress A company needs to understand goods that are in production to determine how much additional raw material is needed to sustain production and fill orders as well as to project the amount of finished goods that will ultimately be produced. The longer the production time for products, the more critical this capability becomes. Disconnected systems impede companies from gaining this understanding. For instance, Breyers Yogurt Company had been tracking productivity through its overall equipment effectiveness software, weight control through another system, and quality control through a third system. Because of this disconnect and the difficulty operators had entering sample weights into the system, data accuracy suffered and the company could not achieve accurate portion control. Replacing these disparate systems with a single, integrated resource planning system enabled Breyer s to effectively manage production issues, including portion control. Within weeks of using the system, Breyer s discovered that it had been giving away more product than it had previously Ross Enterprise White Paper 2
believed. Because entering sample weights is now much easier for operators, the company has significantly improved data accuracy and greatly reduced over-packing. Berner Foods lacked the ability to capture work-in-process information from its production line, preventing the company from identifying and addressing root causes of production inefficiencies and capacity restraints. Implementing an enterprise-grade resource planning system enabled Berner to gain insight into these problems and address specific issues directly through individual improvement campaigns. For instance, by comparing inputs and outputs in a line, operators use the system to easily identify the reasons for scrap. That gives us the level of granularity we need to take appropiate action of quality and continuous improvement. If the data reveals that we're getting a lot of breakage in a certain line we can walk down to the shop floor, talk to the operator, root cause it and fix it Gary Gold Manufacturing Director Berner 3. Maximised control and management of finished goods inventory, including safety stock Because inventory is a cost item that ends up on the balance sheet, minimising unnecessary inventory and safety stock will have a positive impact on a company s margin. Integrated business applications are necessary to accurately account for inventory and to optimise the amount of product on hand. Gehl s Guernsey Farms is the leader in specialized aseptic food products and is behind some of America s best-known brands and private labels. However, Gehl s lacked integrated business applications capable of providing full inventory visibility. As a result, gaining insight into its finished goods inventory was a cumbersome, manually intensive exercise. Without the ability to accurately track inventory, we would commit to orders and not have complete assurance that the inventory was available to fill all requests, causing significant customer service issues, said Andy Gehl, company president. Inventory was often overlooked if it was hidden outside the direct line of sight. Since implementing an enterprise resource planning system, Gehl s now knows exactly what products are on hand in real time to accurately fill pick orders from the warehouse. By streamlining inventory management, Gehl s has eliminated manual inventory processes and freed up space on the warehouse floor by reducing the amount of safety stock held. This has given the company more room to support a three-fold increase in the number of products it offers and increase its overall business, which has doubled since system implementation. 4. Minimised spoilage and expirations In the food industry, the need to reduce or eliminate spoilage is essential. Not only do companies deal with the costs of wasting inventory and handling returns particularly in an era of high fuel prices but they also face the soft costs associated with loss of goodwill if expired goods are shipped to a customer. Companies need visibility into their own inventory that is combined, through integrated inventory management, with accurate replenishment demand forecasting. The legacy systems used by Guida s Milk & Ice Cream could not handle variability and the company could not perform accurate demand forecasting. Instead, replenishment was based on past order quantities, not true demands. This led to spoilages in some areas and stockouts in others, necessitating costly special deliveries. Lack of an integrated platform also resulted in inefficient manual processes. Even the simplest order would take hours to generate because of tedious workarounds and manual calculations based mostly on gut-feel, said Mark Schenking, senior retail merchandiser for Guida s. In just 90 days, Guida s selected and implemented a solution that provided demand, inventory, and replenishment planning. Today, orders shipped reflect the true needs of each individual store, which not only minimises spoilage but has also eliminated special deliveries, saving Guida s thousands of pounds each month. 5. Management of fuel and energy costs Businesses can t control rising raw material or energy costs, but they can model and project the impact on margins and take action as a result. Understanding the impact of costs, ideally at a granular level that applies to particular products or business lines, enables a business to make intelligent decisions and respond nimbly in a volatile energy market. In addition to the challenges it faced due to lack of visibility into raw material, Juice Harvest also did not have a clear and timely understanding of what it cost to make its products. Often, it did not have insight into this information until a month-end inventory was performed. The company also could not assign costs related to fuel, labour, and other overhead to specific products. With new business applications in place, product cost accuracy has improved dramatically, enabling improved decision-making and new business growth. Confidence in costing data has enabled Juice Harvest to seek out new customers, and improved operational performance has led to new business with a large retailer. With more accurate information, we can grow unimpeded, without Ross Enterprise White Paper 3
Becoming Best-in-Class Best-in-class companies have realised the benefits of a strategy that enables them to bring inventory under control and that provides visibility throughout the product lifecycle, from raw material to manufacture to distribution. They know when they purchased raw materials, from whom, and at what cost. They understand where those materials are stored and for what products they are destined. As goods are produced, they understand where goods are in the process, where they are warehoused when finished, and where their final destination is. Their production process is augmented by accurate demand forecasting that avoids shortages while minimizing spoilage and waste through inventory optimisation. The visibility provided by their integrated business applications also enables these best-in-class companies to respond quickly to compliance demands, including mock and real recalls. Having reduced waste and optimised production efficiency, they have invested in a platform that will support continued business growth. In an era of rising commodity and energy costs, it is essential that you optimise your internal processes, including inventory control. You need to evaluate your existing inventory management capabilities to uncover where inefficient manual workflows and disconnected systems exist. By addressing these issues with business applications that provide deep visibility into inventory, you will obtain effective, accurate, and actionable insight into inventory, maximise your margins, and increase your competitive advantage in an unstable market. About Aspera Solutions Ltd. Aspera Solutions Ltd. is an IT systems specialist serving the key industry sectors of food, speciality chemical and pharmaceutical manufacturing and distribution. Aspera is the sole implementation partner for CDC Ross in the UK and Ireland and has a long-standing relationship with CDC Ross as the exclusive distributor of the software in Ireland. Aspera provide business critical solutions based on established, world-class software products with project management, development, implementation and support services provided by a highly skilled team of business, application, and technical consultants. The company's headquarters is in Dublin, with a UK office in Birmingham and consultants based regionally to provide local implementation and support services. For more information, please visit www.aspera.co.uk. About Ross Enterprise for Food and Beverage Ross Enterprise is CDC Software s comprehensive suite of applications for food and beverage manufacturers. The suite of applications includes enterprise resource management (ERP), supply chain management (SCM), warehouse management, customer relationship management, real time performance management and business analytics. Together, these systems address the unique challenges in food and beverage including the need for detailed product costing and profitability analysis, management of pricing and promotions, optimised forecasting and scheduling, improved order fulfillment and customer service, inventory optimisation with minimal spoilage, and compliance with food safety regulations and mock recalls. Ross Enterprise is used worldwide by more than 1,200 companies including Kerry Group, KK Fine Foods, Glenhaven Foods, Gordon Fine Foods, Natures Way, Mack, Gerber Foods and Dairygold. For more information, visit www.rossinc.com. About CDC Software CDC Software, The Customer-Driven Company, is a provider of enterprise software applications designed to help organizations deliver a superior customer experience while increasing efficiencies and profitability. CDC Software s product suite includes: CDC Factory (manufacturing operations management), Ross ERP (enterprise resource planning) and SCM (supply chain management), CRM, Customer Response, development tools and analytics. These industryspecific solutions are used by more than 6,000 customers worldwide within the manufacturing, services and wholesale and retail distribution industries. CDC Software is the enterprise software unit of CDC Corporation (NASDAQ: CHINA) and is ranked number 12 on the Manufacturing Business Technology 2007 Global 100 List of Enterprise and Supply Chain Management Application vendors. For more information, please visit www.cdcsoftware.com. aspera solutions ltd. address: central boulevard, blythe valley business park, solihull, birmingham, B90 8AG, United Kingdom ph UK: +44 (0) 845 862 0864, ph IRL: +353 (1) 461 1700 e-mail: info@aspera.co.uk, web: www.aspera.co.uk Copyright CDC Software 2008. All rights reserved. The CDC Software logo and Ross Enterprise logo are registered trademarks and/or trademarks of CDC Software.