Food Manufacturers- Hidden Costs and Building Profit

By Jon Searles

Owning and managing a food production facility can  be challenging.  Manufacturing any food product for a consumer population that is becoming more knowledgeable about the food they eat and hazards associated with manufacturing and distribution of those foods requires an attention to good manufacturing practices (GMPs) like never before.  Manufacturers need to be completely honest with themselves when they get into the business of manufacturing foods and realize that profit making is the goal.  Whether a company’s decision  to enter the market is  to offer products with a specific dietary focus (gluten free, allergen free) or to advance a global message (African rainforests, biodynamics, free trade), have no doubt, profitability is the only way to survive.

Package sourcing– Paper or plastic?  How are you going to present your product?  So many times manufacturers find that the packaging material needed cost almost as much, sometimes more, than the product itself.  In today’s “green society” with customer calls to reduce waste, a food company needs to find packaging that is well presentable, economical and protects the product during distribution.

Ingredient sourcing– Small or large,you want the best price for the products you buy to put into your product without sacrificing quality.  Buying strategies are available that take into account freight considerations, quality requirements, and price controls.  Food buying cooperatives are also available, that can strengthen your buying power by combining the needs of other manufacturers.

Equipment evaluation– Do you want to buy new or used? Whether it is one piece of equipment, a line expansion, or an entire facility, the right equipment is essential to produce a safe and profitable product.    Used equipment could save as much as 30-70% than buying new.

Preventive Maintenance and Maintenance controls- Maintenance is always overlooked and underfunded until after it becomes an issue for the facility.  How many parts should we have in stock?  When should we replace parts?  A strong maintenance department will not be an expense but a way to maintain profitability.

Audit preparation– Whether it is the local restaurant inspector, the FDA, or a required customer audit, the attitude should reflect a production floor that is ready at a moment’s notice.  Practicing a culture of making details of GMP, HACCP, SQF, or BRC audits the daily routine at the facility rather than a last minute exception, is paramount.  Proper training and understanding of what is essentially a list of very simple and necessary concepts for manufacturing safe and wholesome foods is a necessity.   SQF and HACCP plan preparation and implementation does not have to be an overwhelming expense.  There is no secret formula to their success.  Organization and understanding is needed to comply.

Efficiency evaluations- Can you run your product at 5 units a minute or 150 units a minute and still maintain quality and profitability?  Sometimes entrepreneurs realize they cannot manufacture a great product at a speed that allows for mass production and cannot find meaningful sales in all sales locations because the price point is too high.

Co-packing planning, arrangement and oversight- You may not have the capital to manufacture your own product but you want someone with the assets and production time to manufacture your product for you.  Many facilities have available production capacity that can be yours through a properly structured arrangement to manufacture your product and get it to market.  Many companies may never actually own a facility for their product, but build lasting relationships to manufacture successful products.

Distribution planning– Will you do direct store delivery or use outside distribution?  Do you have your own warehouse or do you need to rent the space?  Do you know how to set up an arrangement with a third party logistics provider?   If owners and managers do not manage distribution properly, costs will drain profits.

Shrinkage and Waste stream evaluation- Many times managers can walk by the same thing every day and do not realize the loss that is occurring.  Lights left on, a leaking fitting, improper weight control, careless damage of packaging, or paying for disposal of a recyclable material are all examples of pennies, when counted, add up to recoverable dollars in profits.

Real cost models- Do you really understand all the costs associated with the manufacturing of your product?  That dollar of profit you expect at your dock door may be eroded by distribution costs, warehouse fees, customer promotions, regulatory fees, set up fees, slotting fees, or any number of hidden costs that did not go into the final costing of your product.

A business owner should not feel they are along and unable to learn this information through their own manufacturing missteps.  Using a consultant should never be an expense relegated to the line item of labor.  Consultant services, if properly used, should have an immediate return on investment (ROI) when properly sourced and implemented.  The role of an expert consultant in your business is to point out areas of possible loss, available savings and monetary payback that will decrease loss of revenue and increase profitability.  We all have tried to network with friends in our industries to expand our businesses.  Unfortunately, as we expand, those friends become competitors working to earn the same dollar that you are working to earn.  Larger manufacturers purchase many successful small companies, and soon local and regional companies become national competitors falling under the rules and regulations of a larger company that is serious about confidentiality and cutting information sharing and networking.

The food manufacturing business requires attention to every cent.  Profitability is a game of pennies that can decide whether a company can keep the lights on.  The goal is to eliminate waste, increase efficiency and produce a quality product that is good value to the consumer.  If this translates into a cost effective endeavor, the goal of profitability is within reach.

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