Hitting your targets

Hitting your targets

The life blood of any food company is generating new products that customers want to buy at a profitable margin. The food industry has some of the most demanding customers; the British retailer. The market place is looking for healthier, longer life, better value, even better customer friendly products to meet changing consumer trends and lifestyles.

The job of delivering new products to the market place falls to the NPD department and its process development colleagues. Depending on the business this may range from the introduction of five new products a year set against an existing product range of 40 in an ambient baker, to a large ready meal operation where there may be a need to replace 50% (or 100) of its existing product range. Add to this the constant pressure of offsetting commodity price inflation through recipe engineering and a pressure cooker starts to emerge.

Food manufacturers work in a profit range from 3% to 20%. The vast majority of food companies falling below 10% profit. So if you want to make money understanding why new products do not hit financial recoveries is a critical part of business success. Speaking to financial and manufacturing managers, they tell you new products either hit their financial recoveries in one to six weeks or they never hit them. Subsequently, manufacturing managers assign their manufacturing team the thankless task of trying to deliver financial recoveries on poorly costed new products in the hope of minimising these losses. It is estimated more than 20% of all manufacturers product portfolio’s never hit their costed standard.

So why are products failing to hit their targets?

Knowing your products worth

Before putting new products to market a business needs to establish the value of its existing products. This is known as ‘contribution modelling’; for each product manufactured an accurate financial picture of that product is known. Many businesses are unaware which products actually yield the biggest financial benefit to themselves. Hence the development team, however well managed or furnished with market data, will develop products that may sell but make little profit.

In capacity-constrained businesses this becomes even more important and can often reverse what seems logical. A product that sells for £3 with a 15% margin running at the same speed as a product that sells for £1 with a 25% margin would deliver more cash to the bottom line per running minute.

A business armed with product contribution data should be able to steer its development team in the direction of developing products that make best return. The best businesses also understand the potential impact on overheads – increased energy costs or asset replacement to management time required, adding these can dramatically change a products margin!

Keeping control of your pipeline to success

Retailers have increased the frequency of tendering business as they constantly look for margin growth; this means manufacturers are constantly developing products at short notice. Rushing costings and trials means an elevated risk of errors. Additional NPD workloads fluctuate dramatically through the year.

Businesses need to get onto the front foot in product development, continually developing new products the factory is capable of making and holding a catalogue of de-risked products they can select and present at the stage of tendering. This gives them the additional strength of leading the customer and consumer trends. Yet realistically until long term relationships are in place with retailers this will not happen; why lead the market if that product will be tendered again in 6 months.

Planning your resources and getting onto the front foot

Regularly NPD projects lack sufficient time to deliver. Typically to get a new product with existing processes from concept to launch is 8 to 12 weeks. Achieving nutritional data, packaging designs, ensuring shelf life expectancy and running factory trials was in this timeframe seen as “tight” by the businesses consulted. Due to the rush to progress these, businesses fail to fully evaluate capital pay back and the cost of development to launch. If armed with all these facts, would some products ever have left the test kitchen?

There are elements of this process that could be shortened or removed altogether allowing time for the important initial decisions to be made.

We can model labour requirements for new products using existing processes. It is good practice to have a standards data base with every activity conducted on the shop floor both direct and indirect. This includes the name of the activity and the time it should take to complete. The data base should include all periphery labour activity such as deboxing or goods inward, often missed in labour cost modelling. Once standards has been established for all factory activities a labour cost model can be developed for any product requiring development. With the right model we can draw line diagrams and estimate run speeds for any product still in the test kitchen.

Because manufacturing processes are static from one year to the next, conducting annualised mass balance studies on selected processes and products that represent the whole product portfolio should be carried out annually, thus keeping template information fresh and allowing a full costing model of product before the day of launch.

Learning the variables

Both operations and financial managers reported that data established during factory trials is too weak, whether it is a new concept or a redeveloped product the same trials tend to take place.

To make best use of the time available the NPD team need to know the factory processes as well test kitchen processes. Thus if a new product is to be developed where the existing processes is used; 70% of their focus should be on trials for the 30% that will need testing.

Nothing happens until someone sells something, but how much?

All business spoken to reported poor new product sales forecasts as being the biggest challenge to the delivery of standard costings. Bill of material construction is factored to account for start-up losses based on sales forecasts. When sales forecasts fail to meet the expected volumes, start-up losses impinge on the delivery of standard material and labour costs. Getting an accurate steer on new product sales is a tricky business but it falls to our account managers to get this information as accurate as possible.

Training account managers to use historical trends, setting commercial KPI’s and linking pay and bonuses to forecast accuracy is a good starting point.

Forecasts are used to drive purchasing requirements and minimum batch quantities at a reduced price are often agreed with suppliers to maximise the costed margin. Yet failed launches result in high levels of redundant stock. The business can de-risk itself from a number of the costs by considering smaller initial orders that although see a small PPV variance, prevent a huge stock write-off.

Don’t make the same mistake twice

Post launch reviews were reported as being “sporadic”. A key opportunity to learn from mistakes is being missed. Again, a multitude of responses to post launch reviews were quoted. These ranged from “meetings do take place on a regular basis” to “the culture of the business means that reviews that follow a poor launch for whatever reason turn into a witch hunt where we try to pin the blame on somebody. It’s like pinning the tail on the donkey”.

Whatever the reason an excellent opportunity to learn from mistakes is lost.

Conclusion

NPD must be pivotal in the entire business, like any resource it must be planned, this can be achieved through your Integrated Business Planning process, allowing all departments to look beyond next week and take the complexity and urgency out of New Product Development.

Written by Paul Eastwood

Operations Director at Coriolis