Digging ever deeper for cost savings

by Josh Sosland
Share This:
Josh Sosland
With a legacy of tight profit margins, there has never been a time when commercial bakers in the United States have been able to assume a cavalier attitude toward cost containment. Still, over the last several years efforts to enhance supply chain optimization have reached an unprecedented level of intensity. The current era of turbocharged attention to such cost reduction may be traced to the introduction and embrace to varying degrees of extended shelf life (E.S.L.) technology for baked foods, offering cost savings in numerous forms, including more intermittent delivery and reduced waste of baked foods as well as, over time, fewer points of production. More recently a shift by Hostess Brands, Inc. and Kellogg Co. from direct-store delivery in favor of warehouse distribution has been a highly dramatic decision taken by baking companies seeking to fundamentally enhance their cost structure.

Among larger baking companies, stock-keeping-unit (s.k.u.) rationalization and plant closings have been among the more popular tools for pursuit of heightened efficiency. The significant scale attained by the leading baking companies in the United States was made possible by waves of acquisitions dating back decades, transactions that resulted in the accumulation of layer upon layer of small, heritage brands.

Recently, Snyder’s-Lance, Inc. said it is planning to eliminate 750 s.k.u.s (out of a total of about 2,000), a move that is the centerpiece of cost reduction efforts expected to generate $175 million in improved annual profitability over the next three years. Similar initiatives have been conducted by or are under way at Flowers Foods, Inc.; TreeHouse Foods, Inc.; Mondelez International Inc.; Hain Celestial Group and others.

Similarly, it is difficult to remember a period with more baking plant closings than have been announced over the last three years, with Grupo Bimbo S.A.B. de C.V. actively seeking to update its production infrastructure. Flowers has opted not to reopen most of the bread baking plants it acquired after the 2012 Hostess bankruptcy.

E.S.L. and shifts to warehouse delivery systems underscore the degree to which certain baking companies are willing to upend a business model basic to baking for about 100 years. Beyond such draconian and potentially risky steps, smaller changes in supply-chain management may deliver bakers meaningful gains, according to a recent publication by McKinsey & Co. The consultancy suggests that a “more granular” approach may pay dividends. Noting that companies across particular segments of the consumer products industry tend to pursue similar strategies aimed at enhancing productivity, the firm said the cookie-cutter approach has resulted in a “convergence in supply-chain performance, by commonly used benchmarks.”

In work with its customers, McKinsey said across its universe of companies, an 11-percentage point spread separates median and top quartile companies as measured by supply-chain cost.

“When companies mine deeper veins of operational data to create more precise metrics, new paths to improvements appear,” McKinsey said. For example, a 27-percentage point spread separates the median company and the top quartile when measuring overhead costs.

The firm encourages clients to look beyond costs and toward other approaches such as service levels, inventory and product quality. Additionally, regional disparities in cost structure means benchmarking should take such variations into consideration. The consultancy warned that “high-level metrics” sometimes obscure “deeper insights that emerge from scrutinizing individual steps in the supply chain.”

Food and beverage sales volume trends, including baking, remain worrisome with no obvious signs of an imminent turnaround. Even as consumers seem to be buying less, they are more demanding about what products they want and how they want them. S.k.u. reductions of redundant or poorer performing products is a prerequisite for the product innovation consumers demand. Aggressive pursuit of cost savings more generally will be crucial for bakers and all food manufacturers to adapt to the dramatically shifting and more demanding consumer market landscape.
Comment on this Article
We welcome your thoughtful comments. Please comply with our Community rules.

 

 


The views expressed in the comments section of Baking Business News do not reflect those of Baking Business News or its parent company, Sosland Publishing Co., Kansas City, Mo. Concern regarding a specific comment may be registered with the Editor by clicking the Report Abuse link.