Roadmap for the future
Sept. 1, 2014
by Mike Pierce and Frank Spano
In recent years, the baking industry has been experiencing significant consolidation. This activity places competitive pressures on bakers to diversify their product portfolios with new products and expand into new markets. As businesses strive to be more responsive to their customers, logistics becomes increasingly more important to their growth strategy.
Coinciding with these activities is increased investment in plants and equipment as baking and snack companies renovate and enlarge their facilities to better meet customer demand. With an improving economy, more bakery construction projects are underway, and various indicators have shown that market growth is expected to continue.
The construction activity from 2013 and to-date in 2014 far outpaces the activity in 2009 and 2010. Hot topics at the 2013 International Baking Industry Exposition concentrated on justifying facility capital investments for current and future products with an emphasis on operational flexibility and expanding capacity; responding to food safety regulations, particularly the Food Safety Modernization Act (FSMA), and preparing for customer audits.
With all of this activity, bakeries are faced with needing to improve facilities and enhance production to remain competitive and pursue new growth opportunities — and the changes must be made quickly.
The necessary capital investments fall into three main categories: site, building and equipment. Each of these investment areas has a critical impact on the efficacy of the overall investment, both immediately and long-term, so it is important to understand how to achieve the optimum balance.
Analyzing all costs
Changing demographics and shifting consumer tastes and preferences all affect bakery product development and production. Bakeries must consider their short- and long-term growth strategies to determine whether increasing production capacity at existing facilities is sufficient to meet demand, or if building a new bakery facility — potentially at a new location — is more appropriate.
Before you move forward with a change in production or facility plans, are you confident that your chosen path will meet your needs? If you decide to build in a new location, are you 100% certain that the site will suit your current goals? How about your goals five years from now? The answers to these questions can be determined by performing a comprehensive logistics study, where the cost-benefit of developing your current site is weighed against expanding operations on a new site.
If a new facility is the answer, then attention must focus on where it will go. Transportation is a significant consideration as these costs greatly affect bakery operating costs. Consider what impact new products will have on the current supply chain and logistics network. If new ingredients are needed, where are they coming from and how will they get to the bakery? In addition, consider whether new or existing products will be targeted and distributed to new markets. If so, what supply chain and distribution channel changes are necessary?
Further, there is increasing demand for frozen and par-baked products. These products can be denser and may have a higher per-truckload capacity, so their overall transportation costs are often lower. With rising fuel costs, the reduced number of truckloads can have a significant impact on potential new site location and logistics decisions.
Knowing your goals
Performing a logistics analysis can prove beneficial for truly understanding the trade-offs with expanding a facility. While construction costs may be lower when expanding existing facilities versus retrofitting or building on a new site, the associated risks include missed growth opportunities, reduced market share and increased logistics costs, among others.
Long-term cost savings, along with potential realization of incentive packages for relocation, may outweigh the additional upfront cost needed to develop operations on a new site. It is well worth the time to evaluate your options to make the most appropriate decision.
To start, bakers need to define their current and five-year goals with regard to market saturation and demand. What is the size of the geographic area trying to be reached? What is the optimal location for new facilities to ensure market coverage and distribution needs for product freshness? How long will it take to implement capacity and market increases, and what are the relative costs? By first understanding what is trying to be accomplished, the baker can determine the best solution to meet its goals.
Evaluate financial incentives
While considering growth strategies, a key factor is the incentive package available for capital investment that creates new jobs. Competition between business-friendly states and local governments vying for the bakery’s business, jobs and tax revenue can encourage bigger incentive packages, which may move the needle in favor of developing a new site. Whether drawing competition to stay at the current site or expand at a new site, a competitive incentives package can assist with costs related to new construction.
Additional transportation-related factors to review include access to highways and rail, tolls and future community development plans. All capacity growth strategies, whether staying at the current site or expanding to a new site, must address future community development plans that could significantly, and detrimentally, impact the long-term viability of the investment.
Other site selection factors should be considered if the bakery chooses to develop on a new site, but in these early stages, a logistics and incentives analysis can be critical in determining what should happen next.
A bakery may choose to perform a logistics study themselves or use the expertise of a third-party consulting firm. A third-party firm is typically better equipped to reduce initial and operating costs through managed competition and incentive negotiations. Either way, taking the time upfront to thoroughly review logistics and operating cost considerations can greatly benefit the success of your next bakery project.
Editor’s Note: Mike Pierce is president of The Austin Co., Cleveland, OH. Frank Spano is the managing director of the company’s Austin Consulting division.