In business, minding your bottom line is top priority. Unfortunately for most food and beverage companies, there’s no “one-and-done” solution to balance the books. Instead, these companies take a more strategic approach and calculate the exact cost of products based on the value of ingredients, material, manufacturing and labor used in their production. By doing so, retailers, brands and producers can determine which of these costs can take a trim without sacrificing the product’s quality or risking non-compliance. This process is better known as cost optimization, or rather, optimizing the cost of goods sold (COGS).
Besides padding the old balance sheet, COGS optimization provides a ton of extra perks to food and beverage companies looking to protect their margins and scale operations. Read on to learn all about these fringe benefits and discover how Product Lifecycle Management (PLM) software can help make it happen.
First Thing’s First
Let’s start by defining cost of goods sold (COGS) and how it relates to product development for the food and beverage market.
The cost of goods sold is a figure that determines a product’s true value. In other words, it’s a measure of how much it costs a food and beverage company to sell a certain product.
The five types of costs included in a COGS calculation are raw material, shipping, labor, storage and operational overhead.
1. Determine a period of time to measure. It can be a month, a quarter, the whole fiscal year, it’s up to you. For this example, let’s use the month measure.
2. Calculate the total value of inventory starting at the very beginning of the month. Remember to include those five separate costs we mentioned earlier: raw material, shipping, labor, storage and operational overhead.
3. To that number, add any additional inventory purchases made throughout the month.
4. Once you’ve determined the value of inventory you started with, then calculate the total value of inventory remaining at the end of the month.
5. Subtract the total value of remaining inventory from the initial inventory value, and voila! You have your COGS.
I’ve Got My COGS. Now What?
After determining the cost of goods, food and beverage companies can use this data to identify points along the production chain that are prime for optimization. By trimming extra fat from products and processes, businesses can experience the overall benefit of improved product margins and operational efficiencies. Of course, if you can find ways to shrink these costs earlier on in the product development cycle, the faster you’ll be able to reap the benefits.
This is where Product Lifecycle Management (PLM) solutions come in handy.
Optimizing COGS with PLM
With the help of a digital PLM solution, food and beverage retailers, brands and producers can gain 100% visibility into all product-related data, including costs associated with each phase of development. This transparent view of the product lifecycle gives users a much more accurate picture of the total costs involved, and users can then leverage this visibility to determine areas in need of cost optimization.
Benefits of Optimizing COGS with PLM
It’s a delicate balancing act trying to maintain (or even enhance) brand reputation while minimizing costs and streamlining operations. But with PLM, food and beverage retailers, brands and producers have the ability to leverage the platform’s rich data and analyses to minimize basic COGS without ever compromising on quality, compliance or transparency.
Still, you might be wondering, what are the more residual benefits of PLM technology? Well, here are a few for starters:
– Increased product margins
Food and beverage businesses use PLM software to increase product margins across all categories and private label brands by focusing on two main aspects of development: recipe optimization and manufacturing. By narrowing the focus to these two areas, users can choose the most cost-efficient options that best benefit their bottom line. Of course, that doesn’t always mean cutting costs to the bone. Instead, businesses should balance short-term margin gains against an operational strategy that focuses on long-term business health. PLM’s role is to give business leaders the information they need to confidently make those decisions.
– Decreased sourcing and procurement costs
Whether you’re a food producer sourcing raw materials and packaging or a retailer looking to collaborate with manufacturers on a private label range, it’s equally important for both parties to find the most efficient method for identifying, comparing and selecting ideal sourcing partners. This allows for a much easier cost optimization process and an improved product lead time.
PLM gives sourcing and procurement teams the ability to collaborate directly with suppliers and select those best suited to get the job done. For example, users can filter searches to identify suppliers in compliance with required regulations and quality standards. They can also search different suppliers across regions or cherry pick those with an accredited audit verification to minimize supply chain risk, protect brand value and promote overall safety. This visibility adds an additional layer of efficiency for making informed costing decisions and mitigating the risks involved with sourcing and procurement. Ultimately, the effect of this streamlined approach comes in the form of increased product margins—something every food and beverage company craves.
– More Quality Products Priced to Sell
Cost optimization isn’t just a matter of choosing lower-priced ingredients, raw materials and such. With PLM, this process takes a more deliberate approach, providing users with a holistic view of all costing options for every product. This way, users can strategically design optimal product assortments that are both cost efficient and risk-averse. This “sandboxing” stage of COGS optimization lets users quickly discard those costing options that make a product too expensive or untenable for retail.
PLM software also comes equipped with costing analysis tools, so users can run “what if” scenarios to determine the best pricing options for raw material, ingredients and sourcing and manufacturing partners, all while taking into account constraints like regional regulations and compliance. This enables teams to rapidly commit to creating only the products that have the best chance of success at an optimal cost.
Centric’s market-driven, cloud-based Product Lifecycle Management solution and mobile technology empowers food and beverage businesses to develop brand-defining products, improve supplier collaboration and ensure regional compliance, quality and traceability throughout every phase of the product lifecycle. More importantly, Centric PLM enables decision makers to focus on particular processes—such as COGS optimization—to prime products for retail success. By getting the financial basics right, food and beverage retailers, brands and producers can take the guesswork out of new product introductions and ensure current products produce maximum value.