Refrigeration costs increase. Equipment breaks down more often. Spoilage ticks upward. Sound familiar?
When overhead in your food manufacturing/distribution business starts creeping up, it doesn’t take long before you’re barely profitable. If you’re not regularly reviewing where your money goes, you might be spending more than you need to. The key is knowing where to look and what changes will actually make a difference.
Where does your money go?
Use the standard overhead percentage formula to get to the bottom of your overhead costs:
(Overhead ÷ Monthly Sales) × 100 = Overhead Percentage
So if your monthly sales are $500,000 and overhead is $150,000, that’s 30% — which may signal trouble.
Keep in mind, not all overhead activities are created equal. Break them down into three categories:
- Core activities add direct value to your business. This may include production runs, order fulfillment, quality testing or route optimization.
- Support activities don’t add direct value but are necessary, including inventory tracking, preventive maintenance scheduling and regulatory reporting.
- Non-value activities add no value at all, like emergency equipment repairs or redundant food safety audits.
Cutting expenses without compromising operations
How can you cut costs without cutting corners? Set aside time quarterly to review overhead expenses. And when you conduct a review, involve your operations team for their perspective on cost savings. Consider the following areas:
Cold storage and refrigeration. Commercial cold storage rates tend to fluctuate significantly. Review your leases and look for consolidation opportunities.
Energy costs. Refrigeration and processing equipment are your largest utility consumers. Get an energy audit, and look into rebates for energy-efficient refrigeration upgrades.
Equipment decisions. Does it make more sense to rent? For example, you may rent holiday packaging lines or harvest processing equipment instead of maintaining them year-round. Lease delivery vehicles instead of owning them to eliminate maintenance overhead.
Insurance policies. Review your product liability coverage and spoilage insurance. Make sure you’re not over-insured on older equipment that’s depreciated significantly. Get competitive quotes each time your policies are up for renewal.
Contract commitments. Many food companies discover they’re paying for services they no longer use or volumes they’re not hitting. Examine co-packing agreements, third-party logistics contracts and ingredient supply agreements.
The financial impact of strategic overhead control
Manufacturers that adopt lean principles typically see operational costs drop by 20-30% in the first year.
For guidance on making reductions without hurting operations, Magone & Company works with food manufacturers and distributors to help maximize your financial position. Contact us at (973) 301-2300.
This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance specific to your business situation.