By Frank Spano, Managing Director and Susan Riffle, Manager of Communications, The Austin Company
Economic change affects all industries, but some are more recession-resistant than others. The food industry is a good example of that. Consumer habits may change due to the economy: restaurants are more popular during times of prosperity, home cooking is more appropriate when times are lean. In either case, the food industry is fueled by consistent consumer demand, although the nature of that demand is, more than ever, constantly in flux.
During May of 2015, the Bureau of Labor Statistics placed employment in the food processing sector at slightly under 1.5-million workers. Annual payroll during this period was approximately $57.5-billion dollars.
If these figures aren’t enough testament to the sector’s overall health, the industry itself proves to be very optimistic. According to the 2016 annual U.S. Food & Beverage Industry Study, released in June by WeiserMazars LLP, most food and beverage companies anticipate a significant increase in sales this year. Survey participants — drawn from over 200 companies across the food and beverage industry — are confident that sales will increase 14 percent compared to 2015, and project net profits will rise by 10 percent.1 That optimism has proven not unfounded: the latest industry figures from CSI Market cited net income in the food processing industry in the second quarter of 2016 as having improved by 53.95 percent over 2015, with quarter-over-quarter net income growth well above the manufacturing industry average.2
Growth Fuels Expansion
With steady growth in the food manufacturing industry comes expansion and the inevitable addition of new facilities. As with any industry, there are considerations of particular importance for the food manufacturing industry when assessing locations for those new facilities.
Water availability, capacity and cost are important considerations in the site location process for food manufacturing companies. Food producers use water as an ingredient, for cleaning, sanitation and manufacturing purposes. It is vital that they have an adequate and viable water supply for current and future use, and in compliance with the strict government standards that regulate the industry.
Aside from water, however, there is another key consideration when food manufacturers are assessing sites for expansion: logistics and distribution. The fast and efficient transportation of inbound raw materials to the production facility, and then outbound product to end-user market concentrations is a primary determinant in a facility’s efficiency, profitability and success. Some estimates place outbound transportation as accounting for up to one-half of total operating costs, so getting site selection right based on logistical considerations is vital to the ongoing success of the new facility – and the food manufacturing organization as a whole.
Inbound Materials, Outbound Products
A thorough review of inbound logistics when assessing a potential manufacturing site will take into account the site’s proximity to growers and raw goods, access to rail lines, access to interstates and the efficiency of those routes, and overall potential inbound freight costs. A thorough assessment of the raw materials supplier network should also be done, and primary and secondary suppliers should be identified to ensure continuity with inbound service in the event of failure related to weather or other factors. In total, the review should not only assess inbound commodity volume required for products currently scheduled to be produced, but also forecast how the volume and variety of those commodities might change over time, as the variety and type of products produced by the facility changes.
Assessment of outbound logistics during site evaluation is an equally complex undertaking. While geography and transportation methods and lines with relation to product end-point destination must again be considered, the potential distribution model to be used — which differs based on the scale of the organization — must also be closely evaluated. In-house distribution networks, third-party distributors and direct-to-retailer models are all possibilities; each should be assessed for its viability considering the potential new site, in relation to logistics and resulting costs.
Rail transportation is more often a factor with inbound logistics, while end-products are more often moved by truck. It is important to consider the competitive landscape of the trucking market in the region around a potential site, and the potential opportunities to optimize efficiencies by, for example, negotiating rates. When end-product perishables are in the mix, the use of refrigerated vehicles if often necessary and the pressures of food safety considerations are heightened. Therefore, an in-depth assessment should be done of potential trucking service providers within the potential distribution network and their capabilities to deliver the product to end users within a tight deadline.
Strategies for the Future
Realistic evaluation of current inbound and outbound logistics and distribution needs is critical before a new food processing manufacturing site can be selected. However, it cannot be overstated that an educated prediction of the future growth and diversification of the potential product lines to be produced within that facility is a key to long-term success.
Therein lies one of the biggest challenges for food manufacturing site selection decision-makers today: how to locate a facility that will suit today’s needs relative to logistics, but also continue to be an efficient logistical site in light of ever-faster-changing food product preferences and trends driven by an increasingly particular and changeable marketplace?
In the past, when demand and production centered primarily on processed foods, forecasting – and logistical networks – were based on volume and predicted volume increases due to simple population growth. Today, increased diversity in population demographics has resulted in fragmented markets based on consumer food preferences. These preferences are also changing more rapidly than ever before.
Today’s food manufacturers have less time than ever to distinguish between short-term fads and long-term trends, and then determine what products within their capabilities might be most marketable. New products must be researched, developed and brought to market with lightening-fast cycle times in order to be competitive in the modern marketplace. In this environment, only the most forward-thinking companies are able to accurately forecast emerging trends, and determine their role in those trends with an eye toward profitability. The wisest site selections are based to a large extent on logistics structures which feed the company’s longer-term strategy for participation in those trends, and enable the efficient production and delivery of relevant new products.
Currently Emerging Trends
There are several strong trends in the food industry right now that represent not only growth opportunities for strategically-minded food manufacturers, but also important to consider for site selection decision-makers. These include heightened interest in ethnic and culturally-themed foods, organics and naturals, foods that feed health and wellness, ready-to-eat products, and comfort foods, to name a few. Underlying all of these trends is a constant demand for food products produced with an obvious sensitivity to environmental sustainability.
Staying attuned to these demand-side trends will help site selection decision-makers evaluate potential locations based on logistical networks that facilitate the plant’s adaptation to future product strategies. Sound business forecasting and planning is essential to success.
Food Manufacturing Site Evaluation: A Logistics Checklist
The complexity of site evaluation for food manufacturing cannot be overstated, and planning for today’s and tomorrow’s logistics needs undoubtedly plays a key role. The following checklist should simplify the process, and can be a guide to ensuring a thorough, detailed evaluation is conducted:
• Proximity to raw materials
• Rail access
• Ground access
• Overall inbound costs
• Supplier network
• Current product volume and variety
• Forecast product volume and variety
• Endpoint geography
• Rail access
• Ground access
• Overall outbound costs
• Distributor framework evaluation
• Perishables/food safety capability
• Current products
• Forecast product mix
3. Overall business forecast
• Key market trends
• Company product strategy
• Facility relevance to strategy
About the Authors:
Frank Spano, Managing Director
As Managing Director of Austin Consulting, Frank develops and leads new strategies to increase The Austin Company’s leadership in aerospace, food and beverage and other manufacturing sectors. Frank also serves as a senior project manager, directs site location studies, and conducts detailed field investigation analyses for clients.
Frank’s areas of expertise include the aerospace and aviation, automotive, food and beverage, general manufacturing and consumer products industries, in addition to pharmaceuticals, publishing and alternative energy. Frank.Spano@theaustin.com
Susan Riffle, Manager of Communications
In her role as Manager of Communications, Susan creates and manages both internal and external communication materials and processes relating to thought leadership, media relations, online and content marketing, and employee training and development. Susan holds a Master’s degree in Business Administration with a concentration in Strategic Marketing. Susan.Riffle@theaustin.com