Production costs on the rise? How to keep them in check
Margins are tight in food and beverage processing. When inflation rates rise, and most ingredients are more expensive, the cost of doing business can be a source of anxiety. Maximizing production at the lowest cost possible without sacrificing quality can be a battle.
That’s where teamwork may come into play and hold value for your business. Whether you decide to reformulate to efficiently use ingredients, move to group buying or make the leap to co-packing, there are options to try to shave dollars off the cost of production.
Play to your strengths
When April May Bellia began Granola Girl in 2011 in Vancouver, B.C., her biggest challenge was finding employees. The challenge became even larger when orders would come in and had to be filled on short notice, making it tough to retain labour when it was virtually impossible to give them a predictable schedule.
“Managing staff was one of the bigger challenges for me,” Bellia says. “It was hard to give current staff consistent hours; we only had a 10-day lead time to know when the orders were coming in. We didn’t want to prepare them in advance too much. There’s always that tricky fine line of supply/demand and not holding onto inventory too long.”
A friend who owned a co-packing business approached Bellia to consider using a co-packer and hiring out the tasks of purchasing ingredients, manufacturing the granola, packing it and storage. After she made the move, Granola Girl’s overhead was immediately halved. The co-packer worked five days per week with a full-time core staff, had bigger ovens and produced more granola in less time.
“Not only was I offloading challenges and problems, but I was also going to have more money in my pocket, more margins,” she explains. “It turned out to be an amazing relationship. They did a wonderful job.”
Reputation equals multiplication
Hamid Asli, president of the co-packing company Candiz Foods in Burnaby, B.C., says he saves food companies 20-plus percent when they work together because of his economy of scale on the production floor. “They can save lots of money,” Asli says. “Our job is to bid to decrease the costs of production of their products.”
Asli works with 25 different companies, all of which trust him to produce their products to the highest standard possible, which is the No. 1 reason companies contact Candiz Foods in the first place.
Buy bigger, buy better
Tatianna Bossy, co-founder of Maison Le Grand, a plant-based food company, learned that one way to save money on ingredients is to start buying in much larger quantities and, if possible, crossover ingredients used in other SKUs.
“I’m able to increase overall buying power,” Le Grand says. “The secret is to focus on negotiating on high overall volume and not individual ingredients.”
She says for her company, it’s not possible to swap out ingredients because they’re non-GMO and organic. The key to reducing costs is to focus on consolidation.
If your margin is under 30 percent, you should seriously consider cutting the SKU.
“I centralize as many ingredients as possible, but with fewer suppliers, so we bring more volume to the table, and we have preferred suppliers,” she explains. “Instead of six top suppliers, we have three. We are centralizing the greater part of our volume with our few preferred suppliers, and we can negotiate on greater volume.”
Bossy says she’s also considering creating a buying group with other like-minded businesses to further drive down costs – an idea popular with American grocers.
With her products regularly going into the United States, Bossy typically shipped orders to her distributors’ various dispersal centres. However, she now ships to a central U.S. hub and has signed a deal with a major player in Canada to do the same. With smaller orders, she also suggests companies can investigate the possibility of a split pallet with two different SKUs.
The toughest cost-saving measure, she says, may be deciding to cut a product. Bossy suggests that as a rule, if your margin is under 30 percent, you should consider cost-savings measures, such as cutting a SKU.
Who can help?
Bellia recommends bringing in experts to help make critical decisions. When she was working through the process of deciding to use a co-packer, her outside team of experts was an invaluable investment that helped save her money.
Three kinds of experts who can help your business
- Financial analyst. They can give you an arm’s length snapshot of your business, but without the emotional attachment.
- Business coach. They have the benefit of working with countless clients. Working with many businesses that have succeeded and failed brings invaluable institutional knowledge to your conversation.
- Food/beverage industry broker. It’s helpful to speak to a third party that knows your world and what needs to be done. Bellia’s broker steered her in the right direction and helped make sound business decisions within her industry niche.
Article by: Trevor Bacque