Solving the commodity conundrum
Baking & Snack’s panel of experts discusses the issues surrounding rising commodity costs.
BakingBusiness.com, May 1, 2013
by Baking & Snack Staff

Since the last International Baking Industry Exposition (IBIE) three years ago, the landscape has changed dramatically for the baking and snack industries. Companies face a slew of new operational, product development, labor, regulatory and other workplace challenges that are commonplace now but barely existed when Baking Expo last convened in 2010.

To assess today’s state of the industry and address these myriad issues as IBIE 2013 nears, Baking & Snack’s editorial team sat down with a panel of industry experts who contribute regularly to our magazine. We held a freewheeling roundtable during the American Society of Baking’s and BEMA’s “Best Week of Baking” early this year. It was a lot of fun. If you understand how bakers talk, you’ll fully get this insiders’ picture.

Our panel included:

Theresa Cogswell is head of BakerCogs, Inc. and a 30-year-plus veteran of the baking industry. She’s former ASB chair, a miller and a long-term R&D specialist.

Jim Kline is president of The EnSol Group, a consulting firm, and he has 35 years in the baking industry, including working for one of the biggest baking companies in North America as one of its top engineers.

Jeff Dearduff serves as vice-president of operations with ARYZTA North America and has 35 years in the industry. He’s a former ASB chair and a member of BEMA’s Baking Industry Forum (BIF).

Donna Berry holds a food science degree and is a 20-year technical editor, writing for various trade magazines, including Baking & Snack.

In this first of a series of reports, the panel considers how bakers are scratching and clawing to find new ways to save money and lower overhead in today’s environment of high-cost, high-variability commodities.

Let’s drop in on their conversation and find out what they have to say.

Baking & Snack: We’ve recently heard a lot of complaints from bakers and snack producers involving the high cost of commodities and their inability to raise prices in this slow economy. How are they adjusting their operations, formulations and product lines to deal with the volatile situation?

Jim Kline: Depending on your segment in the industry — whether you’re a big player, an intermediate player or a small player — and depending on what you’re buying, everyone in your segment is facing similar constraints. It’s interesting when you get into things such as overhead and costs of doing business because your ­ingredient cost is your ingredient cost.

Someone who buys 1 million lb of flour a year pays one price, and someone who buys 100 million lb of flour a year faces a different price. Those aren’t the things that establish ingredient cost efficiencies and overhead  price points. Over the years, the fundamentals for ingredients have been pretty much optimized. I don’t see tremendous amounts of opportunity there.

Theresa Cogswell: Sure, and if your reject rates have been established at 1% and you can get to 0.5%, that all drops to the bottom line.

Mr. Kline: But it’s not so much reformulating.

Ms. Cogswell: No, you are right about that. It’s the pressure that you’ll get from the corporate office to run more efficiently because everything, including the cost of those goods that end up in the dumpster, has gone up dramatically. Let’s say an average baker runs 2 million lb of flour a week, and they have a 1% reject rate. Now, if you can drop that rate to 0.5%, all of those savings fall to the bottom line. That’s a lot of money.

Jeff Dearduff: To combat the cost of commodities, you have to be efficient. You have to just work and drive cost out of the business. Whether that’s by adjusting headcount or machine time or whatever, that’s what’s going to combat any kind of commodity pressure coming down the road.

Mr. Kline: We heard from two bakeries at this year’s BEMA Winter Summit that noted they’ve taken out 90% of their waste in recent years, and the other one concurred that they’re going through the same process. They said they have a facility that is just about at zero waste outputs to landfill.

Just don’t mess with the formula. Pinching a penny can change the product and turn off consumers.

Ms. Cogswell: That’s a good point, but you have to protect your brand. I’ve been there over and over again. Years ago, pecans went up, so we had to find a substitute for them. Then eggs went up, so we had to take them out of the formula. It’s a cycle. It all comes back around. You’ll get burned in the end. If you mess with the expectations of the consumer, you will pay more than the commodity price.

How do you define efficiency? What are you saying when you say they almost have zero waste to landfill?

Mr. Kline: They are an exception not the norm.

What is the norm for waste to landfill?

Mr. Kline: It’s all over the place. How do you track efficiency? It’s amazing to me how many bakeries that I visit really don’t measure efficiency. Last year, I was in a bakery talking with the owner, and he said, “We’re very efficient.” I walked through and made a few suggestions. Two days later, I get a note, and it starts out, “Oh, my goodness.” When they really went back and looked at their practices, they found 25% waste.

With multi-plant bakeries, you hear their managers suggest that not every plant is the same. Some get the message, and some don’t. Two percent is probably the benchmark on process waste. If you’re doing better than that, you’re doing very well.

Ms. Cogswell: Maybe bakers should try this suggestion: When you build a new bakery, instead of placing a huge tub on wheels at the end of the line to recycle ­rejects, put a trash can there. It’s amazing what the perception of that change does for the reject rate.

Mr. Kline: Or take water effluent from the bakery. Bakeries now are being built without process drains. The water effluent has no place to go, but you have to clean up your mess. The new plants have trench drain systems, and the sanitation workers have pails. If they use too much water during cleanup, it overflows on the floor, and they’ve got a mess to clean up. They use equipment to suck that water out and send it out to a waste disposal plant.

Ms. Cogswell: It encourages dry cleaning methods.

Mr. Kline: Yes, but think of this. You’re recovering ingredients, and you’re scraping the mixing bowls. You can use high-pressure steam for cleaning, which gives you a dry powder instead of a liquid goo, and you sweep that powder up. But then again, think of all of the ingredients that you are throwing away. That powder is money.

Jeff, what critical areas are you seeing for controlling waste in the baking industry

in general?

Mr. Dearduff: You can describe this roadblock in one word: complacency. Operations can get locked into the mindset of, “Here’s what we do today. We’ll do this again tomorrow.” If it means 5% waste on a 2% target is the norm, it just continues until somebody steps up and says, “That’s not good enough.” Complacency continues to drive bad numbers.

What’s the most effective way to just gauge efficiency?

Mr. Kline: You have to look at yield: Here’s what I put in in terms of weight, here’s what I took out at the other end, and here’s where my bake loss was. You have to ­realize the real yield and have the measurements for it in place. I’ve been with one manufacturer that collects its waste, packages it, bags it and weighs it. The manufacturer tracks the amount of film waste and uses that as a measure.

What’s also most effective is real-time information. At one point in time, you took a physical inventory at the end of the week. Come Monday, you’d get beat on the head because you were 7% off on your ingredients. That doesn’t do you any good because the horse is out of the barn. And now, you’re justifying instead of addressing.

Today, bakers have the right analytical tools, and they know where they’re being effective with labor, effective with ingredients. They know how they’re doing in real time and can make adjustments right now.

Ms. Cogswell: When those numbers are tied to salary and performance — the accountability factor — it’s amazing how those numbers go down.

Mr. Dearduff: It really comes down to a mentality on the line and in the plant. Somebody has to lead the charge. Somebody has to care about what the bottom line needs to be and how to get there. The “how to get there” is sometimes the hard part. We’re not all tooled up to solve all the problems in the world, but that’s when you — the baker — have to reach out and get help from someone who can solve the problem. So, if you care about it, if you see a problem and you can’t figure out what to do, that’s when you have to reach out. You need to reach outside the walls of your bakery to find the resources who can come in with a clean set of eyes, look at the operation and cause those “Oh, my goodness” moments.

Mr. Kline: The industry has a lot of knowledge and education and training. Companies should be competing on products, quality and research, but we should be trying to optimize those activities that do better for an industry. When it comes to people safety, product safety and education, we should be pooling our resources and learning from each other’s experiences and reactions to those experiences. But we don’t do that because it may give some company a competitive advantage. We shouldn’t be competing on issues like safety and education.

Jeff and Theresa both said something that is really key. It deals with the communities and the people. When people are involved and they have the information, they react well. Whether you’re in there for eight hours doing a good job or a bad job, people would prefer to come away feeling good about what they did.

Ms. Cogswell: And it has to be a team effort. I can’t come in as an R&D person or the operations manager and be accountable when I’ve got a breakdown and the bakery lost an hour and a half of bread production. It wasn’t my fault I lost an hour and a half of production because the equipment broke down. How do you create an environment where your facility works as a team? It goes back to exactly what Jeff said: The mentality of the facility will drive it or break it.

And how do you get a facility’s culture and attitude to change?

Mr. Dearduff: One word: Leadership.

Ms. Cogswell: Bingo.

Coming next month, Baking & Snack’s panel of experts tackles key R&D, formulation and ingredient issues in the next roundtable installment.