No one goes into business expecting that their venture will be unprofitable. It is often easier to plan for direct costs like product or ingredients, labor, and shipping than indirect ones. Your administrative and operational expenses (collectively referred to as overhead) can sometimes become a problem.
Unless these costs are tracked and allocated correctly, you may lose track of the accurate picture of where your business stands. To maximize profits, you need to identify your costs with tools such as a food and beverage ERP.
The software will help you to identify hidden costs as well as processes that need optimizing. The following parts of your business are areas where you may find hidden expenses.
1. Actual Costs of Raw Materials or Ingredients
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.
2. Production Expenses
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.
Packaging is typically one of the most expensive components in production, andone 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.
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.
Find the Problem, Deal with It
There’s no single solution for all of 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, but 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.
Acumatica is a software solution that provides you and your management team with the benefits of real-time visibility in the business. It makes tracking costs and expenses a much easier process. To discover more about what Acumatica Cloud ERP can do to help eliminate unseen costs in your business, contact us today for your free consultation.