Food processors have always lived in a world of challenges, and food prices have historically been volatile. But the unrelenting price increases over the last two years are troubling at best. Food prices spiked 4.9% in 2007, the biggest jump in 18 years, according to Time Magazine. Wheat and milk prices have risen to all-time highs. Soybean prices are at their highest level in 34 years, and corn prices have hit an 11-year peak. Rice and coffee are now at 10-year records, and meat prices are up by 50% in some countries, according to reports published late last year in the Financial Times.
Explore this issueOctober/November 2008
For a growing number of senior executives and industry analysts, these trends are much more than a hiccup. They are a clear indicator that the food and beverage manufacturing industry faces a long, severe cycle of rising prices—unlike anything we have seen in decades. In an article in March’s Sunday Times, David Budworth said that commodity cycles, which tend to last an average of 20 years, indicate that the current run in prices is just beginning and could very well last for the next 15 years or longer. Exacerbating the rise in commodities are major macroeconomic factors such as an unstoppable demand for grain-derived ethanol, unprecedented global demand for energy, and the rapidly growing middle class in Asia and Latin America.
On the supply side, the rising scarcity of arable land is a significant problem. In Asia alone, an estimated 75% of land that could be used for agriculture is already under cultivation. In India, that figure is closer to 95%. Moreover, the increasing shortage of water is making it more difficult and costly to plant crops.
Together, these factors are creating a perfect storm. Food processors are rapidly losing pricing leverage. Energy costs show no signs of abating. And consumers, who continue to feel the pinch from falling home values, rising fuel costs, and recession fears, are starting to show that they are not impervious to price increases. But a number of food processors have found an answer to this dilemma—manufacturing operations management (MOM), technology and techniques that represent a fundamental shift in the way food manufacturers improve production performance.
Tough Times, Smart Measures
For food processors, powerful economic factors are creating systemic ills that call for much more than the standard medicine. Stopgap measures like reductions in capital expenditures, recipe reformulations, and creative packaging solutions will only provide short-term relief. Engineering-based improvement initiatives involving plant and equipment are not the answer either. Research into failed continuous improvement initiatives suggests that the inefficiencies at the core of today’s consumer packaged goods factories do not reflect an engineering problem.
In fact, an 18-month benchmark study recently conducted by CDC Software’s CDC Factory on more than 100 food plants in North America and the United Kingdom—one of the largest and most comprehensive analysis-based studies of its kind in the food processing industry—revealed that 37% of the losses in the plant are not related to inherent constraints or plant conditions. Instead, they are people-based issues. They are workflow and management problems—problems that must be treated differently from the engineering-led focus most companies use today.
The massive, long-term price increases faced by today’s food industry require a paradigm shift in how food processors can reduce the underlying costs of production while improving their ability to respond to change, maintaining product quality, and protecting brand equity.
With pricing leverage gone, the allocation of labor and material to the production process remains the most significant variable food processors can still address—the last bastion of significant and sustainable performance improvement opportunity.
Poor Transparency Prevents Action
Unfortunately, most food processors lack the transparency needed to identify where this waste reduction opportunity lies and how significant it may be. The CDC Factory study uncovered a staggering $98 million cumulative opportunity for margin increase just by making simple changes to the way existing workers are deployed on the shop floor. The study also revealed that addressing these improvement opportunities would help organizations avoid an additional cumulative $400 million in unnecessary capital expenditures.