All ContentControlling cost in the food supply chain
Controlling cost in the food supply chain
Controlling what you can control
When creating their marketing plan, brand managers know their assortment, their key
customers (in most cases), roughly what volume of products and prices they can expect
and the marketing investments needed to support these volumes. They make their budgets
based on this information and then constantly measure against these targets and goals.
At a high level, senior managers and their reports keep track of sales targets and revenue
goals by revising budgets and forecasts on a monthly or quarterly basis, keeping on track,
looking ahead—always trying to protect the margins they had predicted. This effort requires
close monitoring of the actual cost of sales.
On the operational level, the plant and supply chain managers have to track and control
production costs on a continuous basis. This effort requires advanced product cost
calculation models to define all cost drivers at a fairly granular level. These models include
the costs for different kinds of raw materials and packaging materials as well as for energy,
water, setting up and running the production line, paying the workers, and all the other cost
elements.
Today managers have to work on a fairly sophisticated level to be able to meet the predicted
levels of cost, price and margin on a continuous basis. What are the actuals on a daily or
weekly basis so that you know that you are on track? If you slip off track, what do you need to
do to get back? Should you adjust your production processes or adjust recipes, or was the
cause inadequate raw material quality? To implement corrective actions in a timely way, you
need to receive alerts and notifications on a regular basis. You have to capture mounds of
data in order to properly capture actual costs and precisely allocate them to specific products.
Data capture tools such as sensors may feed that data directly into the enterprise
management system; mobile tools used by receiving or production personnel may cover
other parts of the process. Ideally, the mobility solution is integrated with your enterprise
management system so that you have real-time data.
Yield and mix variances
All food and beverage manufacturers involved in processing and converting raw materials
strive to maximize yield, with 100% yield being “the holy grail.” Yield, the relationship between
what you consume and what you are able to produce, can in theory be 100%, but in practice,
there are almost always some losses or variations.
But yield is not the only explanation for variances in production. Results cannot be monitored
and explained by a pure ratio between input and output but may depend on a number of
factors. Improved output might be due to having, for instance, a certain fat content or a certain
grade or composition of chicken. Also in many food production processes, you are mixing
different ingredients or different grades of the same ingredients. Depending on the availability
of material, as well as its characteristics and costs, you may mix in different proportions to
reach a proper end product. Variations due to changes in input are normally defined as
mix variances. Most production processes need to be analyzed both from a yield- and
mix-variance perspective.
Infor
Infor is in no way committing to the development or delivery of any specified enhancement,
upgrade, product or functionality. See “disclaimer” paragraph contained herein.
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Mix versus yield variances
Yield variance—the cost impact of generating more or less output from a
standard mix of raw materials.
Yield variance is the part of the cost variance in the total cost of materials related to
the variation in the yield or output obtained from the materials used i.e. the standard
output that should have been achieved for the actual input and the actual output/
yield. Note, a pure yield variance assumes a standard proportion or mix of different
materials and grades used as input.
Mix variance—the cost impact of using different proportions of raw materials.
Material mix variance is the part of the cost variance in the total cost of materials
related to a variation in standard mix of materials (the standard proportion of
materials to be mixed) and the actual mix (proportion in which they are actually
mixed).
Source: http://www.accountingformanagement.com/mix_yield_example.htm
Managing yield by controlling grades and attributes
The ability to analyze various grades or attributes in the raw materials can help you explain
ups and downs in the yield. Yield means different things for different industries and segments.
In dairy, for instance, it is crucial to measure and monitor the butterfat content in order to
control the process and understand the yield and value from the raw milk provided by the
farmer. In a livestock environment, what would normally concern a processor is the ratio
between input (the number and weight of whole chickens) and output (e.g., the parts like legs,
wings, breasts and offal). Here, you strive to maximize the ratio of the most valuable parts like
the breast. In the case of grain, fruit and vegetables, processors strive to minimize byproducts like peel, bran, seeds, and so on.
That same data is used in vendor selection and evaluation. Suppliers have to fulfill certain
standards. You pay the supplier based on receiving certain grades, attributes or
characteristics; you don’t pay the same price for every chicken. For example, too high a fat
content might degrade the material for your purposes and thus lower the rate your supplier
can charge.
Patrik Sjoberg, food industry product director for Infor®, illustrates the benefit of analytics
applied to yield management with an anecdote from his experience working for a food
manufacturer producing potato products. Sjoberg recalls, “We used to have a very dedicated
plant manager who was completely focused on maximizing the potato yield. He had longterm experience in the potato industry and had collected decades of statistics about how the
size of potatoes in a lot varied according to the statistical bell-shaped curve (see Figure 1).
A small proportion of the potatoes were large enough to produce premium french fries.
The midsize potatoes could then be used for ordinary french fries while the fraction of small
potatoes only served as input for mashed potatoes. By maximizing the purchase of large
potatoes at a reasonable price, he could maximize the yield of premium french fries and thus
maximize the profitability of the overall potato business.”
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Infor
Infor is in no way committing to the development or delivery of any specified enhancement,
upgrade, product or functionality. See “disclaimer” paragraph contained herein.
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