Though this question has accounting flavour, implications of answer may have vital importance to an industrial bakery: several cents per kilogram or dozen may mean the difference between winning or losing a huge order from a brand name client.
Let’s take a closer look on major cost components to find out what a plant manager can do about them:
- Raw materials
Hardly manageable due to market conditions, has a tendency to grow above inflation
- Direct labour
Managing labour cost means dealing with unions at the risk of labour dispute or lost productivity of disappointed workers
This includes capex, HQ and management salaries, taxes and whatever else HQ will decide allocate to the plant. Not much a plant manager can do to decrease.
For a long time utilities were cheap and considered a fixed cost. Not cheap anymore and can be managed at plant level.
Though utility costs in baking industry typically look insignificant, they are the easiest to manage at plant level.
Effect of utility cost reduction on profit and bakery operation
Harvesting low-hanging fruits of energy conservation is worth about 10% decrease in utility costs; utility here includes natural gas, electricity and water. What does this mean for profitability? Let’s consider an industrial bakery selling $10m worth of product with 10% gross margin. Let utility portion of the cost be 4%, resulting in $360,000 spent on natural gas, water and electricity. Saving 10% of this cost will amount to $36,000 and increase gross profit margin from 10% to 10.36%.
Given that this result can be achieved with no or little capital investments and it will stay for years, do you think CFO will be supportive for the idea?
Utility savings will go directly to plant budget. What energy conservation or equipment upgrades or other projects can plant do with extra $36,000 every year?
On the other hand, misunderstanding the value of energy cost and ways it should be accounted for may lead to various problems: Energy cost forecast may cause CFO to resign