Shrink can ruin bottom line

Shrink can ruin bottom line

Feed industry managers can take steps to control product loss and its financial impact on the bottom line.

*John Conboy is a global portfolio manager with Feed Management Systems Inc., a subsidiary of Cargill Inc. He focuses on the development and direction of new products, solutions, services and continuous improvement consulting for feed industry manufacturing and operations.

YIELDS, or "shrink," as many in the feed industry call it, can decimate a financial statement. Write-offs of lost product can be in the tens of thousands of dollars on a monthly basis.

What are you doing to ensure that you have proper control of product loss at your facility? There are a few steps you can take to understand what your shrink "should" be, to mitigate loss and to drive positive financials to your bottom line.

 

Two kinds of gain/loss

In my opinion, there are two ways to lose or gain tonnage: physical and financial.

As the plant or manufacturing manager, you are responsible for the physical inventories at the plant. This is simply beginning inventory plus receipts minus shipments compared to ending inventory. If there is a loss or a gain, it is real tonnage (not factoring in miscounts). This tonnage was lost or gained due to moisture, bag weights, trash or theft, or it simply blew away in the wind.

As the business or administrative manager, you are typically responsible for the financial gain or loss. This takes into account the physical inventories as well as many other factors, like pricing, receipts, shipments, invoicing, cutoffs, etc. If any one of these factors is off, it can have a major effect on the financial results for the time period.

These two areas have many similarities, differences and dependencies. It is very important that there is a reconciliation process to understand the tonnage differences between the two at the end of a time period.

Best practice would be to tie the physical inventories with the financial inventories in each area. For example, if the plant shipped 10,000 tons during the month, the financial side should say it invoiced for 10,000 tons. Something as simple as a shipment not getting invoiced in the correct month can throw off the financials in a major way.

 

Physical gain/loss

There are many different processes in a feed manufacturing facility. Each one has a best practice of what percentage of product should be lost or gained. Understanding what a specific facility should yield in a given time period is very important. This will keep you from chasing your tail as you look for lost tonnage.

Any time product is moved, there is a potential to lose a percentage. Any time product is processed, there is potential to lose or gain a percentage. Because of this, it is important to understand your product mix and how much tonnage is moving through each various process.

Take, for example, a facility that grinds a large amount of corn. This facility will ultimately lose a percentage of that corn due to flash-off (heat-generated moisture loss when the kernel is exploded). This can vary from system to system, but in many cases, it is 0.5-1.5% moisture loss.

On the other hand, if a facility is steam-flaking corn, there is typically a gain in moisture due to the steam added to soften and gelatinize the corn for the flaking process. In this case, corn might go into the process at 14-15% moisture and come out of the process at 16-17% moisture, in essence gaining 1-2%.

Another example would be in bagging finished product. There will almost always be a loss due to ensuring that a bag weight is met.

In order to hit a 50 lb. bag weight, many manufacturers will set the target on their system to be 50.1-50.3 lb. This ensures that they hit the 50 lb. minimum and that their customers are not getting shorted (not to mention avoiding potential fines for underweight bags). In this case, the loss (on purpose) is roughly 0.5%.

 

Managing loss

Many manufacturers today are losing 1-2%. Even scarier, some manufacturers do not know what they are losing.

In today's business environment, companies cannot afford to lose anything more than what they should. Each ton lost can equate to hundreds of dollars down the drain. If you manufacture 10,000 tons in a month and have a 1% loss but should really have only a 0.5% loss, you are throwing away $15,000 per month (based on a $300-per-ton cost), or $180,000 per year. Maybe it is time to really focus on yields.

In summary:

* Understand your physical and financial gain or loss;

* Set up a consistent process to ensure that it ties together in each time period, and

* Reduce the dollars you are throwing down the drain each month.

Volume:85 Issue:01

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