How processors can take a new approach to raw material price inflation
by Mark Sutcliffe, IMPO Magazine
Manufacturers in process industries are no strangers to raw material price volatility. Historically, price fluctuations of 15 to 20 percent have been common and threatened only the weakest companies.
But when prices surge by 100 to 200 percent over the course of 12 to 24 months, the rules of the game change. And when those increases become systemic—not just cyclical—they threaten the viability of all processors– large and small. And that’s exactly where the industry finds itself today.
Take food processors, for example. According to a growing number of industry analysts, the current inflationary trend is much more than a hiccup. The unstoppable demand for grain-derived ethanol, higher global demand for energy, shortage of arable land, a weak dollar and the rapidly growing middle class in Asia and Latin America are all part of a series of fundamental drivers that have created a perfect storm for food processors.
Unfortunately, passing on the increased cost in lockstep is not always an option, so there is an escalating margin lag every quarter. Employment and personal income growth has slowed dramatically. And consumers, who continue to feel the pinch from falling home values, skyrocketing fuel costs, and recession fears, are already showing that they are not impervious to price increases.
Recipe reformulations and creative packaging solutions offer no panacea, as many of these strategies carry their own risks related to brand equity and customer loyalty. And the situation is even more dire for private-label manufacturers, where price sensitivity is an even greater issue.
The Wrong Antidote
In an effort to offset higher raw material costs, many processors have flocked to short-term, equipment-based continuous improvement (CI) initiatives. Unfortunately, the results have been less than inspiring.
Only a fraction of food processors ever report experiencing substantial and sustained financial gains from a CI effort, even after heavy additional investments in data capture technology such as manufacturing execution systems (MES) and data historians.
While the reasons for these disappointing results vary, research shows that much of it has to do with companies’ myopic obsession with plant and equipment issues—factors that ignore the potentially dramatic impact of the workforce.
But that tide is rapidly turning. A growing number of processors are recognizing that their biggest hope for sustainable production performance improvements in this inflationary environment does not lie in plant and equipment improvement initiatives.
Instead, it resides in the workforce—the operators and supervisors on the shop floor who can make a direct and dramatic impact on production efficiency, if only they had the visibility and mechanisms necessary to repeatedly contribute their knowledge, skills and experience to the production process.
Practical Approach to an Old Idea
The idea that the workforce holds the key to massive and sustained production efficiency improvements in plants is certainly not new. Management has been trying to tap into this under utilized asset for years. But a number of obstacles have prevented most from unlocking the latent human contribution.
For one, shop floor personnel are operating in the dark in most plants today. They lack the relevant real-time information required to identify and report production-line problems as they occur, which prevents the company from being able to identify where the waste-reduction opportunities lie and how significant they really are.
Additionally, even when a CI program is rolled out, many processors rarely have a framework within which to identify, teach, execute, and sustain daily operating best practices.
The result is that plant directors aren’t able to identify and quantify the compelling need and potential improvement benefits— not because they’re unwilling to reveal the opportunity, but because they are not aware of it themselves. As a result, company executives are not able to take steps to drive meaningful change.
The key to solving this elusive challenge lies in providing the shop floor personnel with a system they can use to improve performance. Specifically, they need a people-centric application that allows them to contribute their knowledge and experience to the production process in real time—not a data-hungry beast that only leads to more paperwork and cynicism on the factory floor.
Closing the Performance Gap
A growing number of companies have turned to manufacturing operations management (MOM) to close this performance gap. Much more than technology, MOM systems and techniques represent a fundamental shift in the way manufacturers improve production performance. In essence, it’s a new way of thinking about the shop floor’s contribution to the business.
By systemizing the human element, MOM systems, techniques, and best practices take what has traditionally been a theoretical, feel-good concept (the idea that people are the most under utilized asset in food plants) and turn it into practical, repeatable and predictable production efficiency improvements.
And unlike most traditional factory floor systems—which are designed merely to collect production data and not to interact with shop floor personnel—MOM systems are based on the way operators work. Unlocking the latent human contribution with implementation of MOM systems also requires a much smaller capital outlay than equipment or plant-focused initiatives, a critical factor to businesses in this cost-conscious environment.
MOM systems also eliminate the endless, de-motivating reams of paperwork and instead provide plant floor personnel with clear, real-time insight into the performance of their own production lines at any given moment, much like a speedometer helps a driver adjust his or her speed.
Advantages of MOM
The advantages of MOM in an environment of systemic and lasting increases in raw materials are tangible and far-reaching. Hundreds of processors have already embarked on MOM initiatives. Within eight weeks of deployment, many companies are experiencing production efficiency gains of 15 to 40 percent, along with decreased labor hours and increased customer service levels.
Among MOM’s advantages over other approaches are:
In an environment of massive inflation, all of these factors that increase production costs become critical.
MOM in Action
Faced with spiraling raw material costs and increasing competition in the private-label food business, a $1.5 billion private-label manufacturer of pickles, relish, puddings, soups, and sauces embarked recently on a MOM initiative across its 18-plant network.
Within eight weeks of the start of each implementation, the company achieved measured productivity gains. In fact, as the sixth plant was going live, the first plant confirmed that it had achieved its ROI targets within 5 percent.
Based on its results from the nine plants where the system and techniques have been implemented, this company expects to achieve a 5 to 10 percent efficiency improvement across its plant network within one year.
Because each percentage point of increased operational efficiency is worth $500,000 to this processor, the expected total return from this initiative is between $2.5 million and $5 million annually.
An Idea Whose Time Has Come
The inflationary challenges the processing industry is facing today require practical solutions that deliver immediate and significant results. Because of the size of the improvement opportunity and its potential impact on the entire business, companies must move beyond the traditional engineering-led, silo-driven approaches to production improvement and look for ways to systematically tap into the knowledge, skills and experience of the factory floor personnel.