Understanding the economic impact of feed mill variance

Making feed inaccurately can severely affect a feed mill’s efficiency and profitability.

Courtesy Interstate Commodities Inc.
Courtesy Interstate Commodities Inc.

Incorrectly formulating animal feed from batch to batch can have a drastic economic impact on a feed mill’s profitability. This impact is seen not only in terms of the mill’s costs, but also in terms of operation needs, and animal performance and quality, according to Dr. Jeff Hansen, director of technical services – swine, NutriQuest, speaking at the 2017 USPOULTRY Feed Mill Management Seminar, held in Nashville, Tennessee, March 22-23.

Consequences of imprecisely producing feed

A feed mill that suffers physical losses, either in ingredients or finished products, could experience the negative result of this economically due to theft, moisture losses in grinding or pelleting, or discarded product lost to damage or environment, for example.

Economic losses from feed mill variance can also be felt in terms of the financial impact on milling and transportation costs, Hansen said. Mill employee time and energy is wasted when employees have to re-do work causing excess manufacturing time, investigate errors or handle any regulatory impacts. Accounting resources are lost when employees have to compute shrink reports on a more frequent basis, investigate errors or make site visits.

“All these things take time and energy, and when variances aren’t right, you will spend time fixing them,” Hansen told the audience.

Jeff-hansen-speaking

Dr. Jeff Hansen, director of technical services – swine, NutriQuest | Alyssa Conway

In spite of best efforts, what is formulated to go into a feed batch and what actually ends up in feed, and in what quantities, are not always the same. This, Hansen said, can negatively affect animal performance by reducing growth rates, increasing feed conversion and reducing livability. Additionally, it strains operational needs, requiring excess feed, slowing manufacturing rates and putting the mill at risk for a product recall. Inaccurately making a batch of feed also has an impact on animal quality in the finished product, which again could result in a recalled product or lost business.

Must-dos to control feed mill variance

Hansen offered some “must-dos” in order to monitor and control variance in the mill:

  • Monitor theft – best done with cameras and scales.
  • Identify moisture loss and take it into account.
  • Conduct daily physical inventory reconciliation of key ingredients.
  • Check scales routinely for accuracy.
  • Identify screw configuration and free fall for ingredients.
  • Make sure bins are intact with no leaks.

Greatest opportunities to improve the mill

For many feed mills, several areas of opportunity exist to improve the feed production mill, thus reducing the economic impact of variance. One of these areas, according to Hansen, is by bringing to employees an understanding of the mill’s contribution, through shrink/use reports and monetizing feed mill accuracies, for example. Mills may also want to consider upgrading their control systems to access data that would allow for implementing process control and monitoring. Finally, mills should invest in making feed safely and accurately.

“You can’t save yourself to prosperity,” said Hansen. “… If this is an important asset, we have to invest and do it right.”

Understanding batch variance cost  

Batch variance is the target ingredient amount minus the actual ingredient amount, and helps to put a monetary value to feed mill variance. Hansen emphasized that although batch variance summaries may come out balanced on paper, animal performance will still be affected for animals that consume feed batches in which an ingredient was incorrectly added or forgotten. According to Hansen, a 2-2.5 percent batch variance is a practical, tolerable target level.

Once batch variance is figured for all ingredients in the batch, economic values can be assigned to each of these variances, showing the economic impact of over- or under-adding any of the ingredients with a variance for each batch.  

“It’s not just a little error; it doesn’t take long to add up to a lot of money,” Hansen said.

Using batch variance costs to quantify the lost animal performance from incorrectly making feed help mills to make key decisions, like realizing their greatest financial opportunity and prioritizing spending. Hansen added that batch variance costs can help justify equipment improvements, incentivize employees by recognizing when employees achieve a lower negative impact, and monetize problem ingredients. 

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