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Food Manufacturing Cost Reduction:
Declining food industry margins are making strategies for manufacturing cost reduction more critical than ever.
Food manufacturers need to understand where to cut costs, reduce waste and improve efficiencies — all ways to save money they can then reinvest in their businesses.
By turning to new technologies like the Internet of Things (IoT) and collaborative robots, industry leaders are innovating in ways that could bring tax savings that can be applied still further back into their operations.
You should follow these three steps in your own search for food manufacturing cost reduction.
1. The Internet of Things and Other Tech
Use the IoT to reduce costs throughout your supply chain. IoT devices monitor equipment remotely, extend the life of your equipment and alert you to potential failures.
The IoT offers greater visibility downstream by collaborating with distributors and retailers through the cloud. This visibility lets you cut costs associated with backlogs and excess inventory. Here are some examples of manufacturers making good use of it.
- Food manufacturer SugarCreek uses temperature sensors, real-time location services and analytics cameras to increase productivity and detect irregularities and foreign materials in products, according to Food Industry Executive.
- The Barilla Group, an Italian food company, released technology that allows consumers to scan a QR code to learn details about its pasta, according to Cisco. This tells buyers everything from where Barilla grew the wheat to how and when the company processed, labeled and transported the product.
2. The Future of Food: Co-bots, Packaging
Don’t forget about robotics and automation. Collaborative robots, also called “co-bots,” start around $30,000 and take over tedious tasks — allowing human workers to focus on creative, higher-value jobs.
These robots are perfect for pick-and-place tasks, such as taking food products from a line and packaging. Get more value out of your current workforce and cut staffing costs with them.
For instance, snack manufacturer Axium noted in Food Quality & Safety that using a co-bot to erect shipping cases has proven faster and safer than having humans do it.
Create innovative packaging to reduce manufacturing and distribution costs, like these:
- Some manufacturers use kelp or tomato peels to replace plastic packaging.
- Nestlé Waters and Danone, the world’s largest bottled water companies, announced a joint venture in March 2017 to make wooden water bottles.
- Ecovative, a New York-based biomaterials company, is making mushroom-based packaging.
3. A Taste for Tax Credits
If you’ve taken the first and second steps, you probably have taken the third, as well — and might not be fully aware of it. Many manufacturers don’t know they can save big on taxes through R&D Tax Credits. This is the greatest (and easiest) means of achieving manufacturing cost reduction.
By researching and developing improvements to your business, you are eligible for a dollar-for-dollar tax credit for those qualified expenses.
That frees up more capital you can apply to additional manufacturing cost reductions.
Qualified research expenses are those related to creating new products or improving existing ones. Typical R&D expenses in the food industry include:
- Developing new recipes
- Improving product formulations to extend shelf life
- Enhancing processing strategies
- Developing new packaging designs
Developments in technology have changed the food industry, and they will continue to do so.
Due to a decline in margins, it’s more important than ever for food manufacturers to go beyond the basics and develop a firm understanding of technological advancements and tax incentives for innovation.
By seeing this as an opportunity to improve operations and cut costs, you can keep reinvesting into your business, using the non-stop evolution of technology to stay ahead of the game.
4 Ways to Reduce Food Manufacturing Costs
July 23, 2018 -
- Food Processing
- Industries We Serve
Food processing is certainly no cheap venture. You have equipment purchase and maintenance expenses, recruitment, hiring, and training costs, employee wages, and bills to keep the facility lights on. Before you know it, your expense list can look pretty overwhelming and your mind immediately goes to worrying about how to keep your company profitable. Fortunately, there are some key ways your facility can go through a cost-effective transformation that reduces your food manufacturing costs.
1. Take Advantage of Automation
The unemployment rate across the country is at a significant low point. While this is great news for our economy, it means you need to offer competitive wages to get people to come work for you. On top of that, you have to invest in retaining those employees and spend even more on recruiting, hiring, and training when employees leave for new opportunities. More and more companies are turning to automation to combat this spending. Automated technology is increasingly more affordable, minimizes headcount, and improves the quality of facility processes. Bottom line? Technology is definitely here to stay, and having a solid balance of high-functioning staff and automated processes can be a key part of your food manufacturing cost-reduction strategy.
2. Decrease Water Consumption
It takes a lot of water to keep a food processing facility running smoothly. While water is certainly a resource you can’t go without, there are ways to reduce that business cost and make it more affordable:
- Cut back on landscape water use. Lawn maintenance can require up to hundreds of gallons of water a day. While a healthy, green lawn makes your organization look welcoming, there are cost-effective options out there. Native landscapes don’t require as much water and irrigation systems can help control the amount of water used each day.
- Switch to low-flow systems. Most of your water should be used in your facility’s processing areas. Cut back on water in bathrooms and kitchens by using low-flow fixtures in toilets and sinks.
- Go green with your staff. Every employee plays a role in the amount of water used at your facility. Implement new cleaning processes that use less water and get your employees to join you in your commitment to saving water.
View Our Inventory of Stainless Steel Equipment
3. Invest in a New Refrigeration System
Since the refrigerant R22 will no longer be allowed in the U.S. by 2020, many food and beverage manufacturers are upgrading to low-charge packaged refrigeration or ones that use natural refrigerants like ammonia. This might seem like a large investment up front, but it’ll be worth it in the long-run, especially with used and refurbished refrigeration equipment like ammonia chillers, condensers, evaporators, and compressors.
4. Use More Environmentally-Friendly Packaging
Another step towards reducing your food manufacturing costs and being more environmentally friendly is to update your packaging. Product packaging is notorious for being expensive and bad for the environment. Luckily, companies like Oskar Blues Brewery are finding packaging alternatives that are cheaper, more sustainable, and better for the environment. By using packaging suppliers like Dow Packaging and Specialty Plastics, Berry Global, and Ampacet, Oskar Blues Brewery have seen 40% cost savings and expects a 51% decrease in greenhouse gas emissions.
9 Best Ways To Reduce F&B Operating Cost
Did you know that labour and inventory cost can take up 50-70% of your total restaurant sales?
Even if your sales are high, your profits may not be due to these high costs.
So it is very important that you keep these costs under control!
By now, you probably already know that some costs are fixed (for example, rent).
Fixed costs are those which you cannot control, whereas operating costs are those you can control on a month-to-month basis.
Operating costs are directly related to an increase or decrease in sales. Some examples include food cost, beverage cost, straws and napkins, labour cost etc.
So how do you keep these costs low and maximise your profits?
Here are some of our top strategies that your small business can start using!
1. Get lean and watch your waste
One of the key strategies that restaurant owners forget to consider when cutting costs is food waste.
This is often overlooked as we don’t realise that throwing away food is equivalent to throwing money away.
Here are some tips on reducing food waste:
- Portion sizing – If customers are always not finishing their food, the portion size may be too big. Use portion control tools to serve reasonably sized portions to avoid leftovers
- Kitchen prep list – Have the cook make a daily kitchen prep list which tells them how much of each ingredient is needed to be prepared. Without this, cooks tend to over prepare and this results in unnecessary food waste
- Reuse the ugly – Turn unusable food products into something else. For example, instead of throwing away stale bread, turn it into croutons, breadcrumbs or bread pudding!
However, some by-product and food waste are unavoidable during the cooking process. But there are still creative and innovative ways chefs can still include these into their dishes:
- Use vegetable scraps to make homemade vegetable stock
- Shred up leftover meat and use it in a soup or stew the next day
- Use overripe fruits to make jam or jelly
- Turn any good but unpresentable green vegetables into a pesto dip
- Dehydrate orange or lemon peels and grind them to create fresh zests to top off any dish
- Leftover herb stems can be infused into flavourful oils
Reducing food waste and making the most of your ingredients can make a huge difference in your restaurant’s profits!
2. Happy staff, happy life
In the F&B industry, high turnover rates are a serious pain.
Staff leaving your restaurant means you will have to bear the extra cost of hiring and training new people so it is more cost-efficient if you can keep your current employees and increase their productivity.
To reduce turnover, you should make sure that staff are kept motivated and happy. You could do this by rewarding high performing staff through an “employee of the month” programme and giving them gift cards as a sign of appreciation. Also, treating staff like family can result in them being happier and more loyal. Customers will feel more welcomed if they sense friendlier service.
Asides from keeping employees from leaving, you should also increase staff productivity.
Let’s say 80% of your sales are during the peak hours in your restaurant, the amount of customers you serve during that period without reducing the quality of food and service is critical. Your staff should be productive during these times so you can get the most of what they are being paid for.
Here are some tips on improving staff productivity:
- Cross-train staff – so they can perform multiple roles and help out wherever needed
- Have better scheduling – minimise the number of staff during slow periods or close off parts of the restaurant if it is not in use
- Job descriptions – everyone should be given job descriptions and expectations with clear and measurable performance indicators so everyone knows what is expected of them to perform better
Find out everything your small business needs to know about staff management here:
3. Lower your food cost
Reducing food costs can be as simple as planning ahead and using the food cost formula on each menu item. Although it may be time-consuming to begin with, it is essential for cutting restaurant costs.
Use this formula:
Food cost percentage = total cost of ingredients/menu item price
The food cost percentage will tell you how much you’re spending on ingredients compared to the price of each item on the menu.
Ideally, you should aim for the percentage to be between 15-30% because this means your gross revenue per item will be 70-85%.
If your food cost percentage is over 30%, this means you are spending too much. In this case, to cut costs you should either look for less expensive ingredients or increase your menu prices.
You can also reduce food costs by developing relationships with your suppliers and negotiate for better deals. When possible, make use of buying items in bulk as it gets you better prices.
4. Camera eats first
When looking at your spending, review and cut ineffective marketing from your budget wherever possible and make use of free publicity on social media.
The trend of taking photos of meals and sharing it online is still alive and here to stay! By presenting your meals in a way that makes it look good in photos (‘Instagrammable’), it encourages customers to share photos on their social media profiles.
Here are a few tips on food presentation:
- Use texture and height – stack garnishes on top to create dimensions.
- Get creative with sauces – instead of pouring the sauce all over the dish, drizzle it elegantly or draw dots along the side.
- Use complementary colours – for example, red and green. You can place vegetables and meat next to each other to create a visual colour contrast.
You can also engage with customers on social media by holding small contests to share a photo of the food/restaurant in order to win a free side dish or drink as a prize.
5. First In, First Out (FIFO) method
The first in, first out (FIFO) method means using the first ingredients that you put into your fridge or pantry first.
Most food that’s thrown away and wasted is due to it being past its expiration date. By putting the older ingredients in front, this forces you to use them first.
Ultimately, it will ensure that your fridge and pantry is always stocked with fresh ingredients and will help save money by preventing food expiring without being used.
6. Review your menu
Could your high costs be due to having too many things on your menu?
Perhaps it’s time to review the menu and reduce the items sold to include only the best-selling and most profitable ones.
You should also take advantage of seasonal produce as they can be bought at lower prices.
Highlight seasonal items on the menu and mark up the price slightly by emphasising on the freshness and the limited availability due to season.
7. Manage your stock
Proper stock management is a crucial factor in cost control. You need to have a clear idea of what you’re spending on and how much you’re paying for them.
If you aren’t managing your stock effectively, you’re holding up a lot of extra stock which ties up a lot of cash.
There are many things to consider when it comes to stock:
- Do you have the right products in stock?
- How do you know when your stock levels are low?
- Have you ever run out of stock and lost sales as a result?
- Are you losing money due to an excess of stock?
Find out everything your small business needs to know about stock management here:
8. Reduce your utility expenses
F&B expenses are costs of operations that the company incurs to generate revenue.
After all, it costs money to make money!
One of the main expense F&B businesses incur is from utility costs. This refers to the usage of utilities such as:
- Phone cable
Here is an approximate of how much utility expenses currently cost in Malaysia:
Water and electricity charges – roughly RM5,000 per month
Wifi – RM349 per month for Unifi 100Mbps
While you can’t always control your utility costs, there are cost-saving measures your small business can take to reduce your total utility bill:
- Try to negotiate package deals – if possible, combine deals for your expenses together
- Negotiate rates with your utility providers – if you’re a loyal customer and have been developing a good relationship with your utility provider (by paying previous bills on time), you could try negotiating for a lower rate.
- Reduce your consumption – this could be through using energy-saving appliances, enforcing a rule to turn off the lights whenever the room is not in use, implement water-saving practices etc.
- Use an omnichannel POS system like StoreHub – this helps to cut costs by combining all your operations into one system, instead of using many separate pieces of technological equipment for each process.
Your restaurant’s budget is crucial in determining your financial limits.
While there will always be costs you can’t control, a budget gives you a framework for the financial decisions you can control.
Here’s a simple breakdown of things to consider when setting your budget:
1. Define your accounting period
Before you start budgeting, you need to define your accounting period.
An accounting period is the length of time covered by your company’s financial statements.
There are usually two periods that a restaurant uses: 12 month period or 13 periods of 4 weeks each.
2. Collect data
Once you’ve decided on your accounting period, you should take note of the main pieces of data you’ll be focusing on in your budget. This includes sales revenue, food and beverage costs, staff wages, rent, expenses etc.
Here’s a breakdown of all the costs you’ll be needing to include in your budget:
- Fixed costs – these are long term costs that won’t change e.g. rent, insurance, loan payments.
- Semi-fixed costs – costs that are fixed but can vary every month e.g. salaries, utility bills, food costs etc.
- Variable costs – costs that respond directly to changes in sales revenue e.g. marketing, taxes, delivery charges etc.
When you’re budgeting, it helps to know which costs you can control and which ones you can’t.
3. Set budgeting targets
To set budget targets, you can predict future revenue and costs based on your past performance.
Analyse your previous sales reports for trends and anomalies, but while reviewing past performance, you should also consider the following factors:
- Sales events: promotions, events, giveaways.
- Competition: new neighbouring F&B businesses, competitor pricing, competitor marketing, menu changes.
- Economic trends: food costs, minimum wage, taxes, supplier pricing etc.
Once you’ve gathered all the information you need, it’s time to evaluate your budget and adjust targets to maximise profitability.
For example, after reviewing past performance, your budget might tell you that it’s time to reduce your variable costs in order to maximise profits.
Once this target is set, you can start implementing cost-cutting strategies such as:
- Negotiate for a cheaper supplier price
- Edit your menu offerings
- Reduce labour costs
You must be thinking “wow, that’s a lot of data to collect and analyse”.
What if we told you there’s a way to automate this?
- Set up an automated accounting process
- Pull up past sales, cost and performance data
- Forecast future sales and costs
- Set budget targets
The price for profit: Cost-cutting measures slice and dice the industry
Oct. 5, 2015
As consumers turn to healthier foods in droves, food and beverage companies are looking for their own way to drive healthy profit margins. While margin growth strategies can take many forms, cost-cutting initiatives are the method of choice for many major companies.
"Given the slow volume growth environment, there are two ways to drive earnings: revenue and cost-cutting," said Adam Fleck, director of the consumer equity analyst team for Morningstar, Inc. "[Companies are] working on both, but I think there was a realization that they need to get leaner to show that growth for shareholders."
As revenue has fallen across the processed foods industry, many of these companies have turned to cost-cutting to not only make up for lagging sales but to find the money they need for other efforts that could drive revenue.
"The competitive environment is super intense," said Erin Lash, equity analyst for Morningstar, Inc. "Foreign currency rates are volatile, operating costs are volatile. [Companies have] all taken a hard look at their own cost structure and looked to extract excess funds, a portion of which we anticipate will be reinvested behind the brands. And that’s across the board, both in the form of product innovation as well as marketing."
"The initiatives are not just around cutting costs," said Fleck. "… You’ve also got that being reinvested in marketing in different activations, promotional efforts—those are aimed to drive awareness and growth in a category. And [companies] invest back in innovation as well."
Company cost-cutting breakdown
Company structure, operations, products, and issues are different, so no two companies’ cost-cutting methods look exactly alike.
"There are probably differences in how each of them is targeting," said Lash. "But essentially it’s to make their manufacturing and distribution more efficient, leveraging their purchasing scale, ensuring that the money that they’re spending on media and advertising is effectively spent, [and] reducing unnecessary spend, which affects a number of companies in regards to consultants and travel, etc."
Here’s a breakdown of how several of the major food and beverage companies are approaching cost-cutting.
Mondelez’s cost-cutting efforts have made headlines lately after activist investor William Ackman announced his 7.5% stake in the company and said that Mondelez should either cut costs considerably or sell itself to a competitor. Mondelez announced its restructuring plan in May 2014 with a goal of reducing the company’s annual operating costs by at least $1.5 billion by the end of 2018.
But the company’s margins still fall behind the competition, which were at 12% in 2014 compared to the 15.8% average for U.S. food companies.
This one came as no surprise: Since Kraft Foods Group was merged with H.J. Heinz Co. by owner 3G Capital in July, experts expected the same cost-cutting that drove successful margin growth at Heinz in 2014 to take place at Kraft as well. The combined company eliminated about 2,500 jobs in August. That includes about 700 at Kraft’s headquarters in Northfield, IL, as the company will be moving to a much smaller headquarters in Chicago’s city center.
Kraft also announced several other cost-cutting measures, such as no more refrigerators packed with free Kraft products or limits on employee spending during business travel or electricity use.
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In February, Campbell announced its cost-cutting program with an initial target of $200 million in savings over three years, which included cutting excess management and implementing zero-based budgeting. In July, Campbell had revised that target to $250 million after expecting to save $75 million from the cost-cutting measures already by end of fiscal 2015.
Last October, Coca-Cola introduced its new cost-cutting initiative to mitigate the loss of sales volume in the soda industry. The plan was to cut $3 billion per year through 2019, and in January, the company announced that it would cut 1,600 to 1,800 white-collar non-bottling and non-distribution jobs globally. Fleck said that other changes, such as in-line blow molding, are reducing costs as well. Coca-Cola was also among the 25 companies named in a World Economic Forum report for boosting revenue by to 20% and cutting up to 16% of its supply chain costs through sustainable supply chain practices.
In September 2014, General Mills announced it would cut about $100 million in operational costs after a disappointing earnings report where profit dropped 25%. Cost-cutting initiative Project Century has led to a number of factory closings, from two revealed immediately following earnings to two announced as recently as July.
Last month, and one year after introducing its cost-cutting plans, General Mills reported a 24% profit increase, despite decreases in domestic and international revenue.
Project K, a four-year efficiency program meant to improve earnings growth, is Kellogg’s cost-cutting answer to 2014 having brought the lowest net profits in over a decade. When the plan came about, Kellogg anticipated reducing its global workforce by 7% and making other changes that would generate cash savings of between $425 million and $475 million in 2018. The plan is still in effect.
Along with its latest earnings announcement in August, Keurig also introduced a cost-cutting program to save the company $300 million over three years. Cuts have already begun, as Keurig is shedding 330 jobs, or about 5% of its workforce.
While each company’s efforts may look different, the fundamental idea is often the same across the industry, particularly for processed foods.
"You’ve got these very strong currency headwinds that are driving revenue flat to down in many cases," said Fleck. "You focus on the things you can control, which is why [cost-cutting is] being talked about a lot more now."
Filed Under: Corporate
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