ARE YOU OPTIMISING YOUR FUTURE (OR YOUR PAST)?
In response to our first newsletter, we received a lot of positive feedback. Many of you confirmed their interest in implementing the FPI program and asked for our support. We may not be able to provide support to all participants at once and it may take several months before we can come to visit you and work on the FPI project. I am happy to see such interest in this project and thank you for your patience. This month, I would like to share a very critical project to reduce your formulation cost.
One of the major input in the least-cost formulation system is, along with raw material nutritional values and formulation constraints, the price of every ingredient. These prices will be adjusted regularly to reflect the market variations. Most of feed manufacturers are optimising their feed cost based on the historical purchase prices of their raw materials in their warehouse. This aims at ensuring the best use of these raw materials available. But actually, this have little impact on the overall performance of the company. These raw materials have been bought already and will have to be used anyway. The real chances for the company to reduce their materials cost will come from the next purchase position to capture on the market. The optimisation should therefore be done on the future raw materials prices and not the historical prices.
I am sure that you will find this approach useful for your business.
Such proactive approach of purchase will enable companies to take earlier and better position than their competitors.
Let us go together through 2 simulations varying price of Canola meal
SIMULATION 1 – High price in our warehouse / low price on the market If we keep in our formulation software the historical prices, we will limit the use of Canola meal in our formula and it will take long time before we use all our stock and make a new purchase. Meanwhile, competitors may have bought high volume of Canola meal at advantageous price, which would give them a cost edge. If we update our software with current or future market prices, we will increase the use of Canola meal and make repurchase earlier to capture this opportunity. Formulation department's role is to inform production what are the materials to use in excess (whatever prices we bought them) in order to reduce their stock and trigger a repurchase at a preferential price. SIMULATION 2 – Low price in our warehouse / High price on the market If we keep in our formulation software the historical prices, we will maintain a high usage of Canola meal in our formula and ask to our purchasing department to repurchase expensive Canola meal. We will realize that it was a mistake only once the expensive material will be in our warehouse and therefore in our system. We will then come back to simulation 1. If we update our software with future market prices, the increase of prices in our software will reduce the usage of Canola meal and will therefore do not generate purchase needs for expensive materials. At the opposite, the software will trigger new purchase requirement for other materials whose future market prices are low (cf simulation 1) Such approach could help your organization to make significant savings but it is a major cultural change when we have been used to formulate with historical price