Business Automation and Software Blog

9 Hidden Costs That Can Drain Food and Beverage Profitability

Posted by Robert Baran on Wed, Feb 10, 2021 @ 11:00 AM

food and beverage ERP

Profit is the lifeline of many businesses, and predictable profit can be the difference between growing, or not. The last thing you want are surprises, such as finding major gaps that are draining your bottom line, especially if those gaps aren’t discovered until it’s too late.

Direct costs, such as raw materials purchase, labor, and shipping will be easier to spot on balance sheets. But indirect costs—administrative and operational costs lumped together as overhead—can sometimes be incorrectly tracked or allocated, leading to potential disaster. Maximizing profitability means identifying all costs through tools such as a food and beverage ERP before they drain your profitability.

Knowing where to look for hidden costs and processes that need optimizing is your greatest weapon in the battle against profitability loss. In most cases, gaps occur in at least one of these nine areas within food and beverage manufacturing businesses.

  1. New Product Pricing

This may seem like a relatively simple task, but it’s tough when you don’t update the changing cost of raw materials in your systems or associate them with specific production batches. Combine that with vague production costing where time and resources needed for typical operations—think line changeovers, startup, setup, and teardown—aren’t taken into consideration, and it’s easy to see where inaccuracies in pricing creep in.

  1. Production

There are extra costs your business absorbs from production lines that are rarely measured or allocated to a specific product’s cost:

    • Overtime: You may fall behind on the line, but still have to finish off today’s batch, which means keeping staff and equipment running longer than planned.
    • Rework: If there were defects in a batch, there’s the added cost of additional packaging, labor, and processing paperwork to account for.
    • Scrap: Unexpected things happen during production, like equipment faults or product jams resulting in product winding up on the floor. Scrapped product is lost profit.
    • Lack of automation: If you rely on manual processes and paperwork for data capture instead of automation, you’re spending more on recurring labor for every batch you produce and almost assuring data entry errors which will require more work to correct, if they are even discovered.
  1. Business Promotion

Sales reps offering discounts may win more business and give you the sense that your sales are booming, but it’s at the cost of reducing your margins, a cost not often measured. Marketing campaigns can be particularly resource-heavy, with direct costs in advertising, media and image licensing, and indirect costs via the time and resources it takes to create content. Tradeshow promotions often seem like an effective way to win new customers, but they rarely break even, much less turn a profit, once you account for the cost of implementation and administration.

  1. Actual Purchasing Costs

Purchasers aren’t always given enough lead time or visibility into channel and demand to meet production timelines, forcing a reactive buying mode that results in paying a premium price or expedited shipping charges. Under crunched timelines, they can’t properly evaluate vendor options, meaning the focus is on price alone instead of other important considerations like whether that vendor tends to deliver on time or is prone to quality issues.

Quantity matters too. If Purchasing orders too much stock, you will need to consider the carrying cost of extra inventory in your warehouse. Additionally, as many raw materials age, their quality degrades, affecting the quality of finished goods and in turn negatively affecting your brand. If the insufficient stock is purchased, production can grind to a halt when supply runs out.

  1. Packaging

Packaging is typically one of the most expensive components in production, and one of the hardest to balance given the trade-off between pricing and volume. You will generally get a better price ordering a large amount of packaging at once, but if there is a design or spec change, that stock will go to waste. Ordering in smaller batches offsets some of those risks, but it introduces new ones like running short on inventory, resulting in last-minute rush orders that can cost a fortune to deliver. You will also need to consider the administrative costs associated with packaging, like the design, artwork, and storage.

  1. Warehousing

Warehousing processes run the gamut from how you keep tabs of your inventory to how you manage expiration dates to where you keep your on-the-floor knowledge. There’s a lot of room for error and unexpected costs if they aren’t tightened up or even automated.

  1. Logistics

Logistics is the second-largest component of manufacturer cost, and those costs can unexpectedly increase due to issues like customers charging fines for missed delivery times or fluctuating fuel prices. The way you plan your route and fill your trailers makes an impact too. Add that you are paying for the driver, fuel, and wear and tear for those returning empty trucks. Unfortunately, customers rarely accept additional fees or price increases; you are expected to simply absorb these costs on already slim margins.

  1. Quality

Quality needs to be top-of-mind in the food and beverage industry, not only to protect your brand in the eyes of the consumer, but also to adhere to the guidelines and requirements of governing bodies like the CFIA and the FDA. If your quality management system is based on running product measurements and incident reports via manual processes, spreadsheets, or a combination of both, it’s harder and more time-consuming to share information with all of your stakeholders and there’s more opportunity for error throughout the reporting process.

  1. Recall Traceability

Your plan to control costs in the event of a recall should start with a strong traceability system designed to mitigate risk before a recall ever happens. If your information is written on a form and stored away in a box with hundreds of other forms, someone will need to search through all those files. If there are inaccuracies or fields that were never filled in, someone needs to find the right answers (in some cases, this can take months). Without the full details at hand, you will be forced to recall more of your product than you potentially need to. That’s time, energy, and money you could have saved with a system that tracks all your materials throughout your manufacturing process in just a few clicks.

Find It So You Can Fix It

There’s no single solution for all these issues, but these approaches may help you find what works best for your business:

  • The 80-20 rule: Focus on the highest-impact areas where you can make a change. What are your strengths and your weaknesses? By looking through your data, you’ll be able to pinpoint where improvements can pay off most.
  • Standardize processes and operating procedures: Food and Beverage companies have one of the highest plant worker turnovers in any industry. Ensure there is clear, regular—and, most importantly—two-way communication between management, supervisors, and workers. Regular plant “walkabouts” by production management should be the norm. When things do go wrong, standardized processes make it faster and easier to pinpoint the weak spots and get them resolved quickly.
  • Implement technology: A food and beverage Enterprise Resource Planning (ERP) system, for example, can electronically record, centrally store, and analyze information from all areas of your business—including the production line—and deliver it in real-time, where it’s needed most to make better decisions. Not only does this reduce the errors associated with manual systems that come with multiple data entry or trying to decipher handwriting, it also saves time when you need to find that data later on.

Finally, automate production where you can. This does not need to be a large investment all at once. Even sensors that can cover basic, repetitive, and error-prone tasks like weighing and counting, can make a big impact.

Standardizing and automating processes, capturing data electronically, and implementing a food and beverage ERP system that centralizes and shares information in real-time across all departments will give you visibility to where you are making and more importantly losing money. You can now use this information to make progressive changes and accurately measure the impact.

Find the right ERP solution for your food and beverage business. Start by talking to a software expert now.

Topics: food and beverage ERP