Imagine working in a cost environment that changes every time you touch your product? Well, in essence, that’s what the red meat industry deals with every day.

At the NAMP conference, I attended a breakout sessions on Yields and Costing. What an eye opener! For the food guys not familiar with the meat processing industry it is a very difficult business. Let’s start with a rising cost of raw materials. Beef prices have soared over the last 3 years, fueled by the closing of the Canadian border to live cattle after the BSE scare. Then because of lower corn prices used to fatten feed lot cattle, the guys that  are raising the cattle are raising bigger animals because the incremental cost due to lower feed prices, justifies leaving cattle to grow bigger. And With the rising cost of beef that makes sense, more pounds more dollars. According to John Stika, Vice President of Certified Angus Beef. That isn’t necessarily true. Feed lot businesses like Johns have to buy feeder cattle and their costs are rising fast as well. They must raise bigger animals just to get their required return on investment.  John says “Managing internal costs becomes absolutely necessary for survival”. Just like all you folks, John doesn’t control his raw material costs. I think it gets much more complex than that, and here’s why.

The beef industry is not vertically integrated like the pork industry that simply means there are distinct, unrelated businesses working in the food chain. At the beginning of the chain there are the farmers/ranchers that raise the calves, then the Feed Lot people who “grow” them to size, then the packers like Swift, Tyson, Cargill and other Companies that slaughter and box. Lastly are the processors who take the boxed meat and perform portion control cuts.

As the NAMP members and other meat processors get these larger “primals” from the packers, the raw material used for the steaks and roast and other cuts of meat, their yield goes down. Since they have exact standard of size, cut and origin for the products that they sell, they are required to be more creative, using bigger pieces to get these cuts. Creating for them lower yields and higher costs that cannot be passed on to their customers. Imagine a framer of houses only able to get 2x6’s instead of 2x4’s to frame a house, you can bet his costs would increase and so would the  price of the house. Well as you can expect these NAMP folks haven’t been around over 50 years by not being creative and here are some of things they can do:

1. Create new cuts like “Breakfast steaks and creatively merchandise them to their clients and create new revenue streams for their effort. This is most difficult because of the “standards” we talked about earlier.

 

2. Use historical prices and forecasts to buy raw material at the right time and not get stuck at the high end of the cost or the low end of the selling prices. This data is available on the Internet but must be compiled. There are data services like Urner Barry  Communications that sell market reports like their web based Comtel® service. One attendee at the workshop stated he saved over $40,000 in product cost by buying right using that those tools. Again knowing what to buy and when to buy to leverage market timing to your advantage.

 

3. One of the most compelling examples of cost tracking was Tim Vlcek of Vlcek’s Fine Meats in Illinois. Tim stated, “Product cost is the biggest cost in the red meat industry. Since you process against these costs, these materials must be managed daily”. He has done that with “cutting floor yielding technology” from Syngistic out of Greeley CO. He has implemented a cost yielding system that by job or day or week he can see his total cost of fabrication and make real time adjustments by changing suppliers for better yields. Or he can even see if his labor has slipped on their productivity. He can’t wait to the end of a job to make any adjustments because by then he’s too late.

The most important point I picked up from Tim was the following that applies to all you food guys when implementing any technologies that are “new” I want to credit Tim for the following points:

            Culture change is required:

·         New technologies

·         New procedures

·         New reporting standards

·         Dedicate labor to collect data

I want to thank all my colleagues at NAMP for helping me with this week’s issue of CC4F News.

You need to ask yourself the following question,  

DO YOU KNOW WHERE YOUR COSTS ARE?