Food manufacturing: now what?
With the war in Ukraine and the risk of entrenched recession in many financial systems across the globe, the food manufacturing industry has been impacted by an unprecedented increase in energy and raw materials commodities prices and a dramatic decrease in consumer demand.
Nonetheless, according to the Food and Agriculture Organization of the US (FAO) and the World Bank, the markets have shown a recovery from the volatility that was not seen since 1970.
By taking a quick look at the FAO Food Price Index (2014-2016=100), we notice that we are at levels that exceeded the financial crisis in 2008, however, the short-term trend is downwards, which is also confirmed by a recovery in the Commodities Price Index (2014-2016=100) for Q3 2022:
Source: FAOSTATS Sept 2022
On the other hand, the energy market is showing mixed signals, while the trading prices are on a downward trend (August to July comparative statistics), the World Bank Energy Index (2016=100) Q3 2022 is on the upward trend for the foreseeable future, which is attributed to the disruption in Natural Gas supplies in EU:
Source: World Bank Pink Sheet Sept 2022
With the supply mainly relying on energy and raw materials, the demand can be looked at by many factors, more importantly, the Consumer Price Index (CPI), which measures the overall change in consumer prices based on a representative basket of goods over time.
A quick look at a 12-month change in CPI for the US and Canada shows the soaring increase in prices that’s officially reported by the two governments, which might suffer from downward/upward biases for political or economical reasons:
Source: Stats Canada, Sept 2022
CPI is important because it’s a measure of inflation, which in return reflects on the consumer purchasing power, while a sharp increase in the CPI doesn’t necessarily imply a sharp decline in demand, due to many socio-economical factors.
With supply and demand impacted by a volatile market, there’s also another important factor, the supply chain, a hugely troubled sector yet recovering since COVID-19, adding to the hardships of managing a food manufacturing business and resulting in squeezed profit margins which are already squeezed due to the competition.
As the lead time for purchases increases due to supply chain disruptions, delays in manufacturing attributes to different reasons, and a long Inventory Turnover cycle -Averaged at 55 days for US manufacturers [Source: First Research, Food Manufacturing, July 2022]-, there’s a major risk of inventory expiration and product recalls.
By also considering other factors, such as Accounts Receivable Aging Average at 40 days and a shy Working Capital Turnover -A measure of how efficiently a company uses its capital to generate sales- sitting at 11% for Small and Medium-sized US Manufacturers [Source: First Research, Food Manufacturing, July 2022], it’s clear that without proper management of the operations, businesses might fail to commit to their financial obligations in the short run and inevitably go bankrupt.
A Deep Dive Into Ops, How Tech Can Help?!
“More data beats clever algorithms, but better data beats more data. – Peter Norvig”
It’s common in the food manufacturing industry to trade commodities on futures contracts, with the increased volatility, it became a necessity to keep up to date with the rapid fluctuations in prices and reflect that on the books, and managing those contracts without Commodity Trade Risk Management (CTRM) software gets harder and harder every day, especially when Mark to Market (MTM) Accounting is required.
With CTRM software combined with Enterprise Resource Planning (ERP) software capabilities, food manufacturers add more data touchpoints to their procurement that allows them to determine the true cost of a commodity over a period of time.
Sales and Marketing
While sales driven by large contracts with retailers, B2B Contracts, is the norm in the food manufacturing industry, many players in the market rely on other channels like independent distributors, brokers, internal salesforce, or direct store deliveries. It’s worth mentioning that adopting an e-Commerce or Omnichannel approach would dramatically increase revenue as it’s estimated that the global food and beverage e-Commerce market size is reaching US$ 566.04 billion by 2028 according to Million Insights.
Supply Chain Management
By combining the accurate history of purchase contracts, item receipts, landed costs, vendor bills, sales orders, inventory fulfillment, and invoices, food manufacturing businesses are now able to use advancements in the technology industry using Artificial Intelligence and take insightful decisions on time to purchase and whom to purchase from, to reduce lead time, also plan the manufacturing to satisfy the demand, seasonal or year-round.
As most manufacturers rely on automated manufacturing processes, incorporating the data from the production lines’ control systems using Supervisory Control and Data Acquisition (SCADA) systems with purchasing and sales data, would allow manufacturers to implement lean manufacturing operations and methods such as Value Stream Map (VSM), which if implemented properly provide visibility on downtimes and waste during the different manufacturing processes and help increasing efficiency.
Due to the nature of the food manufacturing industry, it incorporates heavy investments in land lots, production lines, and technology that must be regularly upgraded and maintained. It also highly relies on research and development to improve existing products and introduce new ones to the market. It’s worth mentioning that many food manufacturing businesses employ seasonal workers for different types of workloads in the production cycle.
Also, many manufacturers are operating in many countries and have different taxation and financial reporting requirements (GAAP/IFRS).
With all of these data sources, accurate financial management, e.g., Assets Depreciation, Payroll, Cash flow Management, Expenses Tracking, Commodity Trading Gain/Loss, etc., requires a battery-included system that provides real-time reporting of different operations.
Which System Fills The Gaps?!
There are many ERP systems that provide features tailored for specific industries, while those systems might provide a good set of features to serve the business needs, all businesses should resort to an ERP system that allows them to scale from day one and eliminate the need for future migration to other systems, this is where Oracle NetSuite® fits.
Introducing Oracle NetSuite®
NetSuite’s ERP software is the industry solution of choice for inventory and order management, e-commerce, financials, and CRM.
Run your business on a single, true cloud platform.
Eliminate multiple systems and bring your data into one unified platform, and integrate with your preferred CTRM and SCADA systems.
Know your operations like never before.
Gain insight from data gathered across your organization and empower your employees with the information they need.
Get a 360-degree view of your customers.
Record every interaction automatically in a single, searchable system—from marketing and sales to service and support.
Engage your customers everywhere.
Deliver seamless shopping and service experiences across web, mobile, in-store, and call-center.
Organisations are successful because of good implementation, not good business plans. – Guy Kawasaki
While any ERP system in general and Oracle NetSuite, in particular, would work as long as it incorporates the features needed for current and foreseeable business needs, it’s important to work with a partner that understands your business as well as the product itself.
We at Haya Solutions Inc. pride ourselves on a track record of successful ERP implementations. With +25 years of combined experience in many verticals such as Manufacturing, Wholesale Distribution, Retail, Medical Equipment, Construction, Insurance, Healthcare, e-Commerce, and many more, working with customers private and public Small and Medium Enterprises.
Drop us an email for a free consultancy call on our website.