Tharp & Young on Ice Cream: Managing Costs When Manufacturing Ice Cream
Question: How best to manage costs when manufacturing ice cream?Answer: To effectively manage costs, it is easiest and best to consider sources of costs, quantify the opportunities, and deal with cost management based on specific priority considerations. Priorities can be determined by total cost saving, convenience, need and/or speed. Priorities vary from organization to organization and even within a single organization, so care is necessary when applying an appropriate priority to a cost savings opportunity.
Elements of cost include variable costs, fixed costs, yields and losses, and margin targets. Variable costs vary with production volume. The higher the production volume, the higher the variable costs. Variable costs can include mix ingredients, flavors/inclusions, packaging, labor, storage, freight/shipping, utilities, etc. Fixed costs are independent of volume. As production volumes increase, fixed costs, as percent of total cost, are reduced. Fixed costs include general, sales/administration (G, S & A), marketing, advertising, depreciation, taxes, etc. Of course, yields and losses are critical elements of cost as well.
Often ignored is the impact of yields and losses on cost savings opportunities. As losses in terms of ingredients, packaging, finished product, etc., are reduced, and as yields (amount of finished ice cream made) are increased, more ice cream is made available for sale. The more finished ice cream available for sale, the more total margin is returned. Many times managing yields and losses can be as effective as managing ingredient costs. Further, managing finished product weights (i.e., overrun, inclusion rates, etc.) can prevent giving ice cream away (i.e., ice cream beyond targeted weight per gallon) at sale.
Everything depends on specific situations relative to specific products made in specific plants. Ingredients can be 55% to 60% of finished product costs depending on composition, package size, flavor type, etc. Packaging can be 15% to 20% of total costs; the smaller the pack size, the higher the relative packaging costs. Variable and fixed costs can be up to 25% of total costs. Losses of up to 2% of total costs are typical, and, of course, minimizing losses can be critical to success.
Ingredient cost saving opportunities are limited by regulatory, technical, and marketing considerations. Regulatory limits can include limits due to claims or restrictions due to standards of identity. Marketing considerations are based on what needs to be said about the product. Technical limits can include consumer acceptability as well as ability to meet certain quality targets, such as handling of mix and ice cream and finished eating characteristics.
Yield is affected by various operational losses and the amount of finished ice cream that can be made. Yields are directly affected by mix density and overrun. The heavier the mix and the higher the overrun, the greater the yield of finished ice cream from one volume of mix. Thus, by managing mix density (i.e., mix composition) and overrun, more ice cream could conceivably be made from one unit volume of mix. Since finished ice cream has all costs bundled into it and nets a margin return on all investments, then selling more ice cream returns more to the bottom line.
It is also critical to understand that quality can limit the opportunities in cost savings programs. If quality means delivery of specific sensory characteristics (appearance, body, texture, flavor), then deviation from a targeted quality can create potential market problems.
Cost savings due to improvement in yields can be equal or greater than cost savings opportunities from managing ingredient costs. However, managing these and other sources of costs can help maximize return on your overall investment.