Ride the red rollercoaster

Follow the money. As far as a business strategy goes, it's rather simplistic, but nonetheless true. Never, more so than at present when manufacturers are under pressure, with the screw being turned inexorably tighter by the major multiple retailers.

Not everyone is in the more fortunate position of the big brand owners, which have managed to sustain healthy margins for their products (although even they are now the focus of supermarkets offering cheaper own-label alternatives). For most dedicated own-label manufacturers margins that have always been thin are becoming even more like wafers.

As for margin increases: forget it. When ingredients costs soared earlier last year, some manufacturers were successful in passing their extra costs on to customers. Those that weren't able to do so are now suffering. With input costs now falling, there is unlikely to be any chance of recouping losses now. And with increased price volatility predicted for ingredients going forward, the rollercoaster of doing business in food manufacture is set to become even more of a white-knuckle ride.

So, returning to following the money: if you can't sell your products for more, the only other option is to become more efficient; to control - and ideally reduce wherever possible - your operational and conversion costs ... to get leaner.

However, while lean manufacture is now widely recognised as a useful methodology by the food and drink sector, too many firms are still failing to make the cultural changes required to make lean sustainable rather than another smart-arsed management initiative, soon to be consigned to the initiative waste bin, together with all the other great ideas.

Another mistake is that too many are focusing their attention on operations that will not result in the biggest improvements to the bottom line. The obvious areas for cost-saving aren't necessarily the ones that contribute most to profitability, it transpires. And it's people and not processes that ultimately make the difference.

Making lean pay

These findings were among a number that emerged from a recent seminar called Keeping food production profitable, organised by CDC Software in the West Midlands recently and featuring a number of operations and technical managers from both own-label and branded food companies.

CDC supplies CDC Factory software: a dedicated food manufacturing operations management system that transforms performance by empowering people to take immediate action. By standardising the best practices of continuous improvement, overall equipment effectiveness (OEE) and Six Sigma, CDC Factory is claimed to provide a real-time framework that unites scheduling, operations, quality and maintenance.

Lean guru Dr Nick Rich from Cardiff University, who chaired the event, put it simply: "The business model is key - not necessarily the products you make." But, he remarked, it's all about ensuring your people have the right skills to move forward, using tools such as total quality management (TQM) and total productive maintenance (TPM).

However, remarked Rich: "TPM tends to be lagging behind in the food industry." He also highlighted the dangers of focusing attention too narrowly, without reference to the broader picture: "Some firms have just concentrated on doing maintenance: they have very efficient machines, but full warehouses." In other words it's not just about making shop floor improvements; the impact of management - good or bad - and quality of data used to make decisions are also critical.

Trevor Cusworth, a consultant with Deloitte, suggested using financial shop-floor data rather than OEE to drive improvements. "You need to challenge the current bottlenecks and eliminate all losses and inefficiencies in the way you use labour - to improve the output of products with a strong sales demand."

The trouble, said Cusworth, was: "With limited resources it is often difficult to identify which problems are the most important on the bottom line." He noted that true asset potential was often hidden by current measurement systems and described this as "a hidden opportunity". He added: "It can be millions of dollars and larger than the losses you can see ... People don't ask the question: 'what is the problem worth?'"

To identify the areas on which to concentrate, Cusworth advocated that rather than using traditional cost accounting techniques, a new approach to performance improvement called 'zero loss analysis' be used. This uses an operation's potential as a baseline for assessing performance and identifying improvement opportunities. Instead of relying on artificial targets, it looks at each asset's intrinsic capabilities and detailed operating constraints - the actual drivers of performance. According to Cusworth, the use of this technique had helped manufacturers boost their efficiency and yields by as much as 50%.

Cultural change

In the UK's food manufacturing sector, cultural change in the way firms operate is obviously sorely needed. But, it emerges, there are a number of barriers to change.

Not least of these is the very process of managing change - especially within firms such as Premier Foods, which have acquired a number of businesses over recent years operating from various sites with very different cultures, which they are attempting to integrate. The same is true for Heinz, but here the problem arises from the vast geographical spread of its operations worldwide, where very different working practices tend to be used in different countries.

It all basically comes down to people: "The biggest barrier to change is in getting true hearts and minds engagement," said Will Jacques of United Biscuits. And once you've made the change for the better and reduced costs, you've then got to make them stick, he said. But the barriers to change are not restricted to the shop floor and worker reluctance. Often it is the middle and senior managers that create the biggest hurdles. As Uniq's Mark Salisbury eloquently put it: "It's about educating the educated." However, with endeavour improvements can be achieved, he added: "We've had some large success so far and putting in a lean process can achieve profound change."

This point was picked up by CDC's Mark Sutcliffe who reported on research conducted across food manufacturing plants in the US and Europe, which showed that the biggest barriers to companies making operational improvements were not related to technology or equipment but the resistance of senior managers, together with a failure to focus on profitability goals of making plant changes.

Sutcliffe said: "They can't get people on the executive board to listen to anything new because they have heard it all before." And without buy-in for operational improvement projects from the top, success was unlikely, he claimed.

"You already know most of the problems, execution is the issue," he claimed. "It's all about people - behavioural change. But most of the projects people are involved with are about equipment."

Sutcliffe added: "The biggest failure factor is not aligning operational projects to shareholder and market priorities."

To make matters more difficult for production, staff now have to demonstrate continuous improvement but in a more environmentally sustainable way. And although this does open up opportunities for cutting waste and therefore cost, it can also bring its own set of complications, particularly in businesses such as meat and dairy, which have been shown to have a relatively large environmentally damaging footprint.

Decisions and hard data

From the research reported on by Sutcliffe it also appears that most managers in the food sector are making decisions based on incomplete or sometimes inaccurate data.

Describing the responses to a survey of firms that had installed systems to measure their performance, he said: "81% really hadn't a clue [about what was going on]." He added: "This is the difference between profit and loss sometimes." Even the ways firms measure OEE appears to vary widely. OEE is even used by some operations directors to flatter their performance rather than being used to identify areas where improvement is critical.

Clearly that doesn't signify people who are confident and secure in their positions. Instead, it conjures up images of individuals covering their backs in futile attempts to make themselves appear better than they are with their superiors. Such behaviour is symbolic of companies where the culture is one of blame rather than openness in the way they operate.

So, if the operations director can't be open and honest, what hope is there for the rest of the workforce?

"The compelling vision you paint is only going to resonate if people think it is going to empower them," said Sutcliffe. FM