How can one manage costs in a cost competitive environment?

Costs Can be Manageable

How can one manage costs in a cost competitive environment?

Reducing or avoiding costs and increasing return-on-invested capitol are challenges even in the best of times. All elements of cost management need to be considered.

Significant savings or cost avoidances can be achieved by modifying what we do and how we do it, improving raw material selection, considering novel approaches to formulation and increasing yields.

Fixed costs are those that do not vary with production volumes. These include administration costs, R&D, sales and marketing, depreciation, etc. With these costs, the more ice cream made, the lower the cost per unit of ice cream. 

Variable costs vary with product volumes. These include ingredients, packaging, and operational costs. The more product made, the more costs are incurred.  By managing formulation and operational considerations significant cost avoidance can be achieved.

Novel approaches

“Rebalancing” of a product portfolio based on some common approach can be financially rewarding. For example, modifying emphasis from full fat ice cream to low/no fat ice creams or from food service to retail markets or from standardized products to non-standardized products can create new lower cost opportunities and drive sales. Care is necessary as failure to enter the right market(s) at the right time can have the opposite effect. If the novel approach (e.g., low fat ice creams) makes sense, significant new opportunities related to yield improvement (e.g., low fat ice creams can be sold at lower finished weighs per gallon) can be realized. Novel approaches have inherent multiple opportunities to consider.

Approximately 60% of all costs are associated with ingredients and formulation. Thus, it is correct to seek savings from such considerations. Cost reduction opportunities that are more than significant can be achieved by balancing total milk solids, milk fat, sweetener selection and use, mix density (see below) versus functional (i.e., freezing functionalities) and sensory (appearance, taste, texture, body) needs.  Again, care is necessary as serious and sometimes deleterious effects on freezing performance, stability, and sensory attributes can result.

Yield improvement

It is always desirable to make more finished ice cream per unit of mix. Reducing losses and increasing yields (thereby selling more finished ice cream) pays dividends. Calculated margins can return significant profit via added sales. Since ice cream is sold by volume as well as weight, managing yield (beyond reduction of losses) really means managing mix density (pounds per gallon) and overrun, therefore, finished pounds per gallon. By creating slightly heavier mix and freezing to current targeted pounds per gallon ice cream (remembering Standards of Identity for ice cream does not mention how much air to add), more gallons of ice cream per unit of mix can be made. Since all costs associated with ice cream are bundled into the final cost per gallon of product, making more ice cream reduces costs significantly and increases return on all investments. In addition, as finished ice cream has added market value, by making and selling more ice cream per unit mix, more money is returned to the manufacturer.  Depending on location and market specifics, improvement in yields can equal or exceed cost savings from ingredient and formulation opportunities. Ingredient/formulation costs are important but improving yields should never be ignored.

How much can be "saved"?

The answer to that is: it depends.  Certainly each manufacturer has varying degrees of need and varying degrees of opportunity. In addition, costs of goods, portfolio of mixes, operational considerations, sensory needs, and selling environments vary. In general, considering both mix savings opportunities and yield improvements can nearly double the return compared to mix savings alone. This is why we encourage efforts to take novel approaches to formulation and portfolio management, reduce mix costs and improve yields (make more ice cream; reduce losses).  Nothing is done in a vacuum.  n



For more on understanding ice cream economics and other hot topics join Bruce Tharp and Steve Young at Tharp & Young On Ice Cream Technical Short Course, Workshops, and Clinics, Dec. 3-5, 2008, Las Vegas, Nevada. For more on this and new international programs go to www.onicecream.com or call 610/975-4424 or 281/596-9603.