Just about every poultry operation – for that matter, every manufacturing operation – establishes standard costs for products. But is it possible that too much focus, or the wrong focus, in the area of costs is reducing your company’s profitability?
This is where the debate involving localized efficiency comes into play. What is localized efficiency and why should a poultry processor or further processor care?
Tracking against standard costs
Let’s say, for instance, an operation produces breaded chicken strips. Management will know the standard costs for batter and breading, packaging and labor, and how much general and administrative cost (or overhead) is in each pound or case. The operation will likely track – and I advocate tracking – how many pounds per hour are produced to ensure production levels are at or below the standard cost. This is its local efficiency.
Localized efficiency does not describe how efficient a company is, just a particular production line. So does the sum of multiple good localized efficiencies add up to an efficient company? Here is where I part ways with normal production philosophy.
Overlooked costs in high-volume production
How many pounds are produced per hour has little or no relation to how profitable a plant will be. “What?” you might ask. “That makes no sense whatsoever. The lower the cost per pound, the more money our plant makes.” That is the normal mindset of management.
Certain other costs, however, aren’t accounted for in this preference for high-volume production. If more product is made than is sold, a plant is building inventory, and that inventory may sit in the freezer for weeks before it is shipped. Now, on top of the cost of producing the product, there must be added the cost of transporting it to a freezer, the cost to let it sit in the freezer and the cost to pull it out of the freezer and ship it to the customer. So would the plant still be the low-cost producer?
Nonetheless, the high-volume mindset encourages running the same product for an entire period – say startup to break or possibly an entire shift – just to achieve the low-cost-per-pound goal.
Is low cost-per-pound the right goal?
If this describes your plant, you may be thinking, “But isn’t the lowest cost per pound the goal?” Is this really the goal?
What if you had the ability to produce only what is already sold? What if every case of chicken fingers you produced today, went on a truck directly to your customer instead of to a freezer? What would this mean for your operation? Likely, it would mean lower inventory carrying costs, lower transportation costs, lower obsolescence and increased price per pound, not to mention the favorable impact on your “carbon footprint.”
How would increased price per pound be a good thing? Let’s think about it this way. If your cooking line were capable of producing 3,000 pounds per hour, it would have the capacity to produce 24,000 pounds per eight-hour shift. That amount of production would give the lowest cost per pound. However, if only 18,000 pounds were sold per day, the inventory in the freezer would quickly build. Should you continue to be the lowest cost per pound producer? This is a controversial conversation in nearly every poultry company.
Some people would as much of the product as possible should be run through the plant so as to get the unit cost (cost per pound or case) as low as possible. I would contend, however, that if the plant’s scheduling methodology were changed to produce only the number of SKUs that are actually sold, the company would become more profitable.
Now you may be asking, “How can I run only what is sold? That’s not realistic. Changeovers would kill our cost per pound!” This is where some of the methodologies already discussed in previous articles need to be applied.
In production facilities, the biggest pushback comes from people saying there is no way so many different SKUs can be produced in a single shift. Overcoming this hurdle starts with identifying product families. Chances are that many of the SKUs are really the same products with different packaging. Some are a single SKU with an additional ingredient or step in the process. This research will reveal that many SKUs are really not all that different. This allows you to begin to address some of the scheduling issues.
Proficiency in changeovers
Eventually, you have to do real changeovers during production. This is where Lean Manufacturing’s SMED (Single Minute Exchange of Dies) principles get applied. Think NASCAR; begin treating changeovers like pit stops. Define internal vs. external activities (those things that must be done while equipment is down vs. that which can be done while you are running production). This will require another complete mindset change in production and maintenance. Once everyone is working on the same team, changeover time (pit stops) quickly becomes a moot point.
There are also mindsets that need to be changed elsewhere in the company for this to be truly effective. For instance, in the short term, as inventory levels decrease, the company’s balance sheet shows that the company is worth less on paper (thanks to GAAP accounting rules) because inventory is considered an asset, just like plants and equipment. This begins to make people nervous, until they look at the increased cash flow.
Also, sales departments begin to get skittish as they watch inventory levels drop. They no longer have the safety net of inventory to get them out of a jam when their forecasts are wrong. Of course, they also need to understand lead times have now been drastically cut due to having the ability to quickly change from one SKU to another.
Are you a supplier of choice?
Make no mistake – this is a major change in the way of doing business for most companies. When properly implemented, however, it can transform your business making you the supplier of choice for many of your customers and allowing you to gain market share in a competitive marketplace.