Operations Forum: Snack Around

by Steve Berne
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Snack World and Baking & Snack brought together several prominent members of the industry during the Snack Food Association’s SNAXPO conference in April. In a private roundtable forum we elicited opinions, insight and prognostications about current issues in operations and engineering. Comments were candid from the industry managers whose passions and devotions are rooted in the industry.

Capital spending, automation, new products and marketing dominated the conversation. Questions were posed to Steve Surmay, senior vice-president of operations, Shearer’s; Paul Schaum, vice-president manufacturing, Utz Quality Foods; Dan McGrady, vicepresident of technical services, Wyandot; Blake Thompson, senior vice-president, supply chain, Lance, Inc.; and Tim Fallon, president, North America, Kettle Foods.

The goal of this discussion was to draw out insight on issues affecting their professional disciplines, their companies and the snack food industry. Questions were based on results of capital spending trends, conversations at industry events and general industrial concerns.

With the downturn in the economy and a new worker-centric federal administration, companies are taking action to reduce expenditures, minimize waste and maintain or enhance productivity. While these concerns aren’t new, they have taken on new meaning in today’s market.

CAPITAL EXPENDITURES

Do you foresee continued caution in capital spending in the coming year?

Steve Surmay: At Shearer’s, we still have major activity with our new LEED-certified facility being constructed as well as new production lines we want to add at our other facility. However, when the economic downturn crescendoed last October, which coincides with our fiscal first quarter, everything except required maintenance was put on hold. We are now reinstituting projects as banks start to become interested again in making loans.

Paul Schaum: From Utz’s perspective, capital is usually evenly split between repair and replacement and expansion of the business. I don’t see that changing in the coming years. We made a large and strategic investment eight years ago to assure we have sufficient area under roof at each of our four facilities to expand the business and not worry about brick and mortar.

Business is good. We are bringing in house a baked tortilla line and are replacing a pretzel line.

Dan McGrady: At Wyandot, we take a cautious tone but are still willing to add lines or capacity based on customer projects. Food safety projects are always top-of-list and not affected by lower capital spending expectations or mandates.

Blake Thompson: Lance has been pretty aggressive in our expenditures the past few years, including upgrading our DSD fleet and investing in food safety and quality projects. Our private brands business is doing very well, and several capacity projects are in the works.

About half of our cap-ex money goes to manufacturing. Of that, roughly one-third is earmarked for maintenance and upgrade, one-third for productivity and one-third for growth.

Tim Fallon: As long as access to capital is constrained, Kettle Foods will focus on prioritizing projects based on ROI metrics. With that said we are increasing capacity at our Beloit, WI, facility by 50% through additional fryers and packaging lines. We have also focused on expenditures that reduce labor costs and increase efficiency.

Provide examples of internal or external trends and reasons for expenditures?

Mr. Schaum: For most of us, staying flexible is the key justification. We view manufacturing as a service to sales efforts. Therefore, we do everything we can as a production organization to fulfill their wishes. As part of that commitment, we inform them of the total expenses to enable their goal, so that together we can make an intelligent business decision from a manufacturing, people and time perspective.

We still invest heavily in human assets at Utz. This enables flexibility. We have a lot of automation in place, but we still pack 90% by hand so we can change the layout of the product, package or case count. Our automation projects are targeted so they won’t reduce flexibility for our customers.

EXPECTATIONS

Have your expectations of suppliers changed over the past few years, and how have they responded?

Mr. McGrady: During the past few years, suppliers have really begun addressing manufacturers’ process-flexibility concerns. It seems suppliers are now fully cognizant of this need, and it shows in their equipment and layout designs. They are now coming to us with ideas about machines that not only can improve what we are doing now but also enable us to expand our capabilities now or in the future.

Mr. Schaum: For us, I don’t think we expect more, we just expect consistency. That refers to lead times, project parameters and the like. Most of our expenditures are in the first two quarters of the year, so we can be ready for the heavy production season.

Mr. Surmay: We are one of the few companies bucking the trend of reduced engineering departments, and we have added personnel. People capital has proven to be a very important aspect of our success — to have the right people where and when they are needed. However, with that said, we also are more demanding of suppliers, including placing tighter schedules on them for delivery, install and ramp up.

Mr. McGrady: Our expectations continue to be communications, lead time and flexibility. These are key requirements for repeat business, as is after-sale service.

Mr. Thompson: For all of us, we seek production solutions that take up less space with more application. At Lance, we measure profit on a perpound-per-square-foot basis. It is part of our activity-based costing.

We push our vendors on service — tune ups, adjustments and audits — and if it is a well-established customer relationship, we don’t expect to pay for these services. We have 28 baking lines at the company, so there is constant demand for maintenance on these. This service is negotiated in writing before purchase.

Mr. Surmay: Our expectations include a 2-week window in which the supplier has to be sure the equipment is up and running to our expectations. Time is money, and the sooner this is complete, the better a supplier looks.

SUSTAINABILITY

How has sustainability and conservation impacted your operations?

Mr. Fallon: Certainly each of our companies has different products, customers and available capital, so it is difficult to get a consensus. Kettle Foods puts a lot of emphasis on sustainability initiatives, and we were fortunate to have the ability to construct the first Gold LEED level food manufacturing plant. This facility and our facility in Oregon try to address all the key issues relating to sustainability.

Mr. McGrady: From my personal perspective, any project that improves a company’s level of sustainability is good business. From local supply that reduces freight to in-plant recycling programs, many are low-cost and easy to implement. When you start talking about other, more costly, projects, it becomes a little more dependant on where the idea comes from. As a contract manufacturer, we are one step removed from direct contact with retailers, although we are subject to the same mandates placed on manufacturers. Sustainability comes down to economics and asking ‘Why?’

Mr. Thompson: I agree. There are ways, for example, to repipe tortilla ovens or change out burners that will reduce energy by 40%, and suppliers should be touting these attributes. However, you have to consider the investment cost and the return as well as the long-term benefit to the customer, your plant and the environment. There are numerous creative ways to reduce waste throughout an organization. Many consultants offer guidance and ideas in this regard.

Mr. Surmay: With sustainability, it becomes an issue of resource conservation — water, electricity and gas — and determining their contribution to cost per pound of products. Going through the exercise of measuring their impact is very revealing. It helps set priorities for cost and usage reduction. Ultimately, there are, as Blake said, three winners — the consumer, the environment and the company. With branded products, efforts and savings can be part of a marketing strategy.

Like Kettle Foods, we also are building a LEED-certified plant and hope to have it operational by later this year or early 2010.

Mr. McGrady: Even as a contract manufacturer, we have to fill out the Wal-Mart sustainability questionnaire. For that, we have to record what we are doing ‘green.’ We do that because it is required by our customer. We do the other stuff because it simply makes good business sense. Of course, we have to market ourselves as well, and showing progress in conservation and overall sustainability is a tool we use to show our customers that we are championing the cause.

FOOD SAFETY

With the recent issues regarding ingredient contamination and recalls, are you increasing attention and diligence toward food safety?

Mr. Surmay: Food safety is top of mind with any capital project, as is plant and worker safety. Such incidences only reinforce the importance of such programs. We have recently upped our testing for salmonella.

Mr. Fallon: Although every company has different risk levels, I think everyone is concerned about food safety. For us, we have added more testing, particularly in the area of salmonella contamination.

How will the new diligence to food safety affect your business, customers and how you deal with thirdparty audits?

Mr. Thompson: We’re already seeing the affect by more customer visits to our facilities.

Internally we are beefing up programs. I think the requirements coming down from Congress will require much more vigilance by the food industry and a lot more paperwork. Mr. Surmay: The one benefit to all is the added detail we have seen in some of the audits. It takes it to a new level, and we use that as a learning tool. It’s great to see good results, and we share these with our employees, just as we share any comments or results that require attention.

Mr. McGrady: There are already too many audits. It would be nice to have one standard audit criteria that would satisfy customers and regulators. I am not sure if or when that might happen, but I agree that the trend is shifting to more customer audits. And we will have to adjust to the nuances of each one.

Mr. Thompson: I don’t think our country’s safety programs are broken. I am sure that every reputable company in the snack and baking industry has sound and solid safety programs.

However, in any industry, you will have some people that follow the rules and some that don’t. The unfortunate result for food businesses from these recalls is the increase in safety-related costs to manufacturers such as us. I think we have all had more quality audits this year than ever before. Ultimately, reporting requirements and certifications alone could add more than $1 million to our cost of doing business.

Although the snack industry, as well as the baking industry, is challenged by numerous issues, snack foods are fortunate in their status as recessionproof and a comfort food. As evidenced by the many capital projects reported in our annual Capital Expenditures survey in the February issue of Baking & Snack, signs are the industry will emerge from the current national and global situations stronger, leaner and more innovative in its operational capabilities.

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