Lean Food-and-Beverage Manufacturing

Lean Food-and-Beverage Manufacturing

          
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Lean Food-and-Beverage Manufacturing

Lower Costs, Better Products, Improved Sustainability
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  • Food and beverage manufacturers have been accelerating their cost-cutting efforts to improve their profit-and-loss statements (P&Ls). The hunt for savings, spurred by structural changes in the industry such as the rise of private labels and discounters, became more urgent after the recession hit in 2008.

    The economy is now recovering, and growth has become the new imperative. This requires new investments in R&D, product quality, advertising, sales, and pricing. Manufacturers are looking for ways beyond traditional cost cutting to create space in their P&Ls for investment. Although most manufacturers have continuous-improvement lean-advantage programs, lean manufacturing remains an underused approach. With limited capital expenditure, lean manufacturing used to its fullest can liberate large amounts of cash, fueling growth and improving quality with better, fresher, greener, and more delicious food-and-beverage products. It can also be a source of employee engagement and capability-building opportunities.

    Some industry executives, however, have been skeptical. Recently, the chief operating officer of a major supplier that had already done plenty of cost cutting greeted a team of lean-manufacturing consultants from The Boston Consulting Group with a shrug, asking, “What can we learn from these guys? We have been doing this for ten years.”

    Many lean programs tend to be limited exercises that produce one-off savings, leave most opportunities untapped, require larger capital investment, and do little to build employees’ engagement and capabilities. Lean manufacturing is regarded as more of an administrative function and lacks a real leadership or strategic role in the organization.

    With the right approach, however, over a few intense months, workers at all levels can learn new ways to frame questions, find solutions, and improve continuously. These employees become ambassadors and champions for lean approaches, spreading knowledge and best practices from one plant to another. They also learn to focus their efforts, linking initiatives directly to monetary savings. Workers who have had this training do not see themselves as cogs in a machine that “delivers productivity increases.” They are members of a team that creates competitive advantage.

    This approach is producing significant savings even in plants where managers thought there wasn’t much waste left. “I have to admit,” the skeptical COO said later, “that my attitude changed dramatically over time to ‘we really can learn something.’’’

    The opportunity is large. Manufacturers that use lean methodologies effectively can cut their cost of goods sold by as much as 3 percent. That corresponds to 20 percent of their addressable manufacturing cost base. Over the next two years, the top 100 food-manufacturing companies worldwide could save a total of $9.4 billion, and the top 70 beverage suppliers could save $4.2 billion—more than $13 billion of capacity waiting to be turned loose.

    Discounters are gaining market share, and commodity prices are likely to rise. Suppliers, therefore, are feeling pressure to search for and cut non-value-adding costs. These are expenses that don’t make the product more valuable or attractive to customers. In a word, waste.

    • The recession is changing consumer behavior. Shoppers have cut back on nonessential purchases. They shop for the best prices and wait for promotions. Discounters and private labels are grabbing market share and forcing suppliers to cut prices. In the United States, from 2007 through 2009, the market share of discount grocery stores grew from 33.2 percent to 35.2 percent. In Germany, during the same period, discounters increased share from 42.5 percent to 44.0 percent. (See Exhibit 1.)

    • Suppliers face rising prices for materials. According to the Organisation for Economic Co-operation and Development, commodity prices could continue to increase at a rate of 5 percent per year.

    • Pricing for inflation is becoming difficult. There is a growing risk that intense competition and tougher retailer negotiations will not allow suppliers to pass commodity price increases on to consumers.

    • The need for stronger growth is again becoming critical. Many companies have refocused their incentives on stronger growth targets and are searching for new ways to finance the higher cost of products, advertising, sales, and pricing actions.

    • Green production strategies are becoming sources of competitive advantage. Governments, customers, and employees are increasingly pushing companies to reduce material, water, and energy waste.

    exhibit
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