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What's the Cost of Ingredient Cost Control?

Feb. 24, 2009
Processors and ingredient companies share their strategies for helping to control today’s high cost of ingredients – without impacting quality or safety.

You can’t very well leave the fruit out of your fruit bar or the chocolate out of your chocolate chip cookies. Yet with the prices of some ingredients more than double what they were last year, you have to do something.

Processors and ingredient companies might seem to be at opposite ends of the spectrum when it comes to controlling ingredient costs. But it might surprise you just how in synch the two halves of the food processing coin are when it comes to keeping the costs of manufacturing down.

Think of it: If a processor cannot afford to buy good ingredients, where would that leave ingredient companies? While both sides have a few strategies to get through these hard, high-cost times, they dovetail when it comes to some basics.

One approach that at first seems counterintuitive is to look at ingredients that initially cost more. There’s a logic to spending a little more on the front end. At National Starch Food Innovation (www.foodinnovation.com), the focus is on efficiency of ingredient use as a balance to cost.

“We offer savings that go beyond formulating-out expensive ingredients,” says Dinah Diaz, market development manager for the Bridgewater, N.J.-based ingredient company. “We also offer the manufacturer cost efficiencies in (the areas of) supply chain, space, fuel, et cetera.”

“A more expensive ingredient used at a lower [usage] level may save a lot of money, improve shelf-life and increase overall effectiveness,” adds Rodger Jonas, national business development manager for PL Thomas (www.plthomas.com), Morristown, N.J. Taking it up a notch, he adds, “The onus is on the ingredient supplier to do more.”

And that’s what many of them are doing. “We work with our customers to assure that flavor is optimized in their final product,” says Amy McDonald, vice president of sales for FONA International Inc. (www.fona.com), Geneva, Ill. “Perhaps a different physical form or higher concentration — even a more expensive one — would deliver greater impact. This increased impact could allow the customer to reduce the flavor usage level in the final product and deliver a savings.” Danisco USA Inc., New Century, Kan., has gone so far as to create an online “Value Improver Guide” (www.danisco.com/value/pw/index.html) to help processors with ingredient cost control.

Hand in hand 

A Note of Caution

While most of this story was written before the full impact of the Peanut Corp. of America recalls, one processor raised a red flag about looking for cheaper ingredients.

“Although the cost of ingredients is important in any manufacturing business, the quality of our ingredients is most important to us,” says Nicole Dawes, president of Late July Organic Snacks (www.latejuly.com), Barnstable, Mass. “As food manufacturers, we must not lose sight of the importance of integrity and the hidden costs associated with using so-called ‘cheaper’ ingredients.”

“When vetting new vendors or renegotiating with current vendors, we never lose sight that no amount of savings is worth sacrificing quality. Instead, we try to work in partnership with vendors to make sure we’re ‘buying smart’.”

Vendors’ proactive role in controlling the cost of ingredients is reflective of changes over the past few years in how processors approach ingredients and how the ingredient companies work with processors. The role of ingredient suppliers in formulation development and revision has become an industry paradigm just in time for the recent economic upheaval.

“Strong partnerships with food and beverage manufacturers are hallmark of our ability to reformulate products to provide cost savings in a variety of ways,” says Judy Turner, applications manager for Tate & Lyle Americas (www.tateandlyle.com), Decatur, Ill. “The savings potential varies by category and level of customization, [but] cost benefits can be significant.”

Turner notes that cost optimization requires a partner with a “deep understanding of food chemistry, consumer demands and the synergies between ingredients and processing costs to help successfully adjust a formulation.” Pointing to the increased level of vendor interaction, she stresses, “Cost optimization is not a one-to-one, one-size-fits-all replacement of an expensive ingredient with a cheaper alternative.”

FONA’s McDonald has identified three key areas in which such synergy can work to keep costs under control: contracting, consolidation and reformulation.

“We encourage customers to set up year-long contracts for their key flavors based on their projected requirements for the coming year,” McDonald says. “This (might) allow us to lock in raw material prices at the best possible time and reduce the potential impact on customers.”

The advantages of consolidation are multifold: “Moving significant flavor volumes to a single supplier often allows for a guaranteed savings incentive. Further, quality control or transportation savings may make it a worthwhile project for a customer to consider.” 

But consolidation isn’t only about number of suppliers. “We work closely with customers to identify opportunities to save money through projects like flavor consolidation,” McDonald adds. “For example, a customer may reduce the number of vanillas they buy from 20 down to six or eight.” According to McDonald, while an initial investment of product development time and sensory analysis may be required to consolidate flavors, the ultimate end can save money. 

Nicole Dawes, president of Late July Organic Snacks (www.latejuly.com), Barnstable, Mass., says she appreciates vendors that can help with logistics, such as consolidating orders to save on freight, or providing a forecast to help clients know when to buy or lock in a price.

When it comes to reformulation, McDonald ascribes the role of coach to the provider. “We suggest customers truly evaluate the expectations of their consumers and the needs of their brand. Does the new line of hard candies really need a natural and artificial flavor or will an artificial suffice? Do the savings between a current version of a flavor and the artificial version make the sensory testing required to make the switch worthwhile? We often will work with customers to reduce costs by removing unnecessary high-cost raw materials and replacing them with less costly counterparts.”

Optimization in action

PL Thomas’s Jonas agrees with the merit of working synergistically with processors, explaining how doing so can help fine-tune ingredient usage. “We educate customers on using ingredients by functionality and identifying how to optimize the use of ingredients. The term I use is, ‘directionally correct’ when most companies employ ingredients but don’t optimize. (For example,) guar gum has different types that give different results. The supplier must understand how to apply the ingredients in order to help the customer use the correct ingredient and at the correct level.”

Note to Management

Judy Turner, applications manager for Tate & Lyle Americas (www.tateandlyle.com), Decatur, Ill., points out four key considerations for cost-control that involve much more of your organization than the R&D and procurement departments:

• Consumer Trends – Develop a full understanding of marketplace trends, consumer perceptions and attitudes toward ingredients and labeling, desired consumer benefits and possible marketing claims.

• Taste – Learn how to deliver a reformulated product with no detectable difference in taste or overall performance.

• Manufacturer focus – Understand and work within a company’s limitations regarding equipment and plant usage, budget, time, label claims etc.

• Find the right partner – Contract with a supplier that understands your challenges, concerns and consumers, then work with them to determine the most efficient and effective approach for saving money without compromising your product.

He adds it “isn’t enough” just to employ a nutritional ingredient — how much will be left after processing is the real consideration. “This has become a critical point for us,” he says, “as simply providing ingredients is not our only goal. We believe functionality, coupled with the application, is the driving force for future ingredient use.”

In other areas, food and beverage manufacturers are seeking advice on how to optimize formulations for better performance. “The industry seeks improvements in how to better protect delicate flavor systems from oxidation, how to extend shelf life or the desire to have higher-load systems to allow for lower usage levels in the final formula,” says National Starch’s Diaz.

As an example, Diaz points to the company’s starch-based encapsulation products. “These same groups may be seeking ways to maximize efficiencies in productions, including preventing losses such as those from dusting or sticking.”

To change…or not to change

Processors blanch at the thought of changing a well-researched, well-used formulation just to save money. And they should — such moves are not without risks. But changes may come, so ingredient manufacturers have been increasing their technical support capabilities to prepare for that day. 

Ingredient requalification is finding an equal product that will work the same in a formulation but can be contracted in advance to lock in a price.

“Food and beverage manufacturers usually tend to be reluctant to make any change in production [yet they] express willingness to give such requalification high priority,” says Ronny Hacham, vice president of business development and marketing for Gadot Biochemical Industries Ltd. (www.gadotbio.com), Haifa, Israel. “Obviously, this should only be done whenever it is applicable.”
Gadot’s own experience shows that ingredient suppliers can be just as impacted by fluctuating supply costs as processors. “Right now we are trying to produce the same product using different raw material [as a means of] stabilizing the price,” Hacham says. “If market conditions do not allow for further [primary ingredient] cost reduction, food and beverage manufacturers may reformulate-out expensive ingredients and replace them with lower-cost ingredients.”

For some processors, there’s no way around engaging a paradigm shift. George Eckrich, owner of Dallas-based Dr. Kracker Inc. (www.drkracker.com), typically employs two strategies — one basic, the other more daring.

“First, we rented additional warehouse space so we can store packing material and ingredients that won't be affected by storage. That way, we can get additional discounts for truckload purchases. Second, in our new products, we have given up trying to source all ingredients as organic.”

While the company still is using organic grains and seeds, especially as the core of its new product line, Culinary Crisps!, its new products will be “about 70 percent organic.” Eckrich adds, “We continue to bake only with organic flour and organic seeds. But with new ingredients such as dried tomatoes, apple pieces and dried cherries, we’re buying all-natural. We verify that they are 100 percent natural, but we are not going beyond that. We’re balancing affordability and sustainability — which is to say, our own sustainability.”

Eckrich confesses that in the current environment, smaller companies can’t compete with the large manufacturers in securing limited quantities of ingredients at good prices. “We are doing everything possible to keep our prices under control, as we have only seen a few price decreases,” says Eckrich.

Sometimes, cost control means knowing when to sit tight. Many companies, aware that price rises could backfire into lower sales in an economy strained to the limit, choose to simply balance the cost of ingredients with slight retail price rises to avoid larger ones later.

Ingredient supplier Gadot Biochemical Industries must deal with both food processors looking for more economical ingredients and its own ingredient vendors. Gadot right now is trying to reformulate an ingredient with an escalating price using different raw materials.

“Across our portfolio, we continue to adjust pricing as needed based on market factors and the value we deliver to consumers,” says Joyce Hodel, corporate affairs manager for Kraft Foods Inc. (www.kraft.com), Northfield, Ill.

While commodities have moderated recently, input costs remain at historically high levels, she says. “Some inputs, such as wheat and soybeans, are still 150 percent above 10-year averages. In our Q3 2008 conference call, Kraft Foods announced that we expected full-year input cost inflation for the company to be about $2 billion, which is about 13 percent over 2007.”

Hodel explains that many factors influence the retail price of products in addition to commodity costs. “We have been adding value for consumers through significant investments over the past two years in product quality and innovation. Kraft isn’t just blindly talking the long view — the company knows its policy of putting customer needs front and center is crucial to any cost-management program. We must continue to deliver value to consumers and manage competitive price gaps,” Hodel insists.

Look to the Future
Emerging technology is bringing the future of ingredients into the present by removing barriers to some of the trendier nutraceuticals. An example is overcoming issues of solubility for lipid-based ingredients such as omega-3 oils.
“We initially developed our ‘Powder-loc’ technology to create a no-taste, no-smell omega-3 EPA/DHA ingredient from fish oil,” explains Lori Covert, vice president of marketing and communications for Ocean Nutrition Canada Ltd. (www.meg-3.com), Dartmouth, Nova Scotia. “But in the process of developing the technology, we discovered we’d developed an ingredient that would pass on significant cost savings to our customers.
“Technologies (like this) allow food companies to optimize their manufacturing process because dealing with a powder ingredient is much easier than dealing with an oil ingredient. Oils are much more difficult and expensive to handle, equipment requires more cleaning (and) performance of oil is not as consistent across batches so significant efficiencies can be lost when working with an oil ingredient.”
PL Thomas’s Rodger Jonas seconds this emerging trend of synergy in form and function. “We believe functionality, coupled with application, is the driving force for future ingredient use.” For its part, PL Thomas is creating new forms of existing oil-based ingredients such as coenzyme-Q10 to be employed in clear beverages. “We change forms to improve functionality and to reduce cost,” says Jonas. “This simple concept has a lot of work associated with development and a broader understanding of the application in order to get the product to work. We are helping reduce use cost and the actual cost of ingredients.”

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