How to Streamline Food Costing with ERP Software
Between the ever-fluctuating economy, supply chain challenges, managing vendor relations, analyzing your business, the rising costs you face, and more, costing can be daunting. It can be seemingly impossible to identify a fair price for your food products that actually covers your costs and allows you to turn a profit without turning your customers away. Unfortunately, as daunting and seemingly impossible as it may be, it’s a necessary evil. Fortunately, there is a way to streamline the costing process for your food business that increases visibility while decreasing your workload and allows you to make pricing decisions with ease.
The Food Costing Struggle & Why It Matters
While understanding the costs of your products is essential for any business to effectively manage and make decisions on pricing, quantities or methods of production, etc. it’s especially complicated and essential for food producers. Other industries may deal with costs that remain relatively steady or are predictably seasonal whereas players in the food industry likely deal with commodities that have constantly shifting prices and can require unpredictable operational costs to produce. For example, Food Manufacturing shared the following five cost-related challenges faced by food manufacturers as described by the senior advisor for food safety and regulation at Mettler-Toledo:
Challenge #1: Reducing Material and Energy Costs – including incorrect fill levels, using machinery with poor energy efficiency, wasted materials through not identifying contaminants until late in the process, and the issue of false rejects.
Challenge #2: Optimizing Human Resources – such as inefficient manual processes that slow production and demotivate staff, continued reliance on employees for tasks that could be better handled by automation and protecting employee safety.
Challenge #3: Avoiding Unnecessary Waste – covering issues such as false rejects which cause unnecessary waste, poorly maintained machinery not correctly identifying issues, product giveaway due to poor fill level control, and time-consuming sample checks.
Challenge #4: Modernizing Data Management – this involves the transition from manual record-keeping to automated processes, improving connectivity between systems to enable data sharing, getting ready for food safety digitalization, and enabling transparency of food manufacturing throughout the supply chain.
Challenge #5: Minimizing Downtime – this section will cover product changeovers, overcoming system breakdowns, reducing cleaning time, and preventive maintenance.
Additionally, that actual management of a costing process can be too much to handle manually and exposes itself to critical errors. If you’re trying to manually calculate landed costs while juggling conversion rates when you calculate pricing per kg and cost per pound or vice versa, capturing duties and/or tariffs for imported items, managing inbound freight from port to warehouse and/or storage and handling in warehouse, etc. to accurately capture logistics costs, and more all across multiple vendors to identify your company’s landed costs for each item, you may already be overwhelmed. Then, if you’re using this data to manually create a cost sheet for sales to then markup with a margin and have it all tie back to the GL accurately, these tedious tasks leave a lot of room for error and even more room for wanting to rip your hair out.
So why do it? Because you can’t have your business operating at a loss and the only way to guarantee it’s not is to know what things are costing you and what you’re bringing in. Moreover, using an accurate costing strategy allows you to make strategic business decisions that can improve your margins even more. For example, the Food and Resource Economics Department, UF/IFAS Extension explains that accurate calculation of product costs can help answer questions such as:
As a farmer, do you know which of your crops is contributing the most to the farm’s profits, or whether one of your crops is losing money?
As a food entrepreneur, would it be more profitable to make fruit jams or fruit pies?
What minimum selling price will fully cover your product costs or provide an adequate profit margin?
Is it less expensive to purchase ingredients or grow the ingredients used in your food products?
How much would you need to expand production and sales to cover the cost of purchasing new equipment or to achieve a certain profit goal?
Wouldn’t it be nice to have the answers to these questions at the click of a button, without manually tracking your costing data with various manual spreadsheets and legacy systems and without wanting to rip your hair out?
How Food ERP Software Can Help with Food Costing
In addition to its standard functionality, a food-centric ERP system should understand the importance and nuance of costing for food items specifically. It should also provide functionality to streamline the process of identifying not only your costs but also strategizing your pricing and managing the associated accounting, all while giving you the visibility you need to make informed business decisions (i.e. what products to produce when and how much).
For example, NorthScope was built to handle landed costs specifically with food producers in mind. As such, NorthScope can track incoming purchase orders and their related invoices for the primary vendor that you’re purchasing product from as well as secondary vendors for freight, duty, customs, or other brokerage fees. This makes it so that you can track not just the purchase price of an item, but all the various components of cost and the system will build a landed cost that is reflective of everything. Then, these costs flow into the general ledger in your inventory valuation and other components of the system wherever you want to see that cost as a whole or the individual pieces of it. This, in turn, allows the system to help you plan and analyze these costs against your planned or budgeted cost and a sales revenue target cost. With this, you can know what you planned for, what the actuals were and identify variances as well as give the sales team a target to sell over which may be different than your landed cost. For example, you may plan to pay $1.25 for something, actually pay $1.27 due to $0.02 more freight than you budgeted and also give the sales team a published target of $1.50 to sell over and calculate sales productivity against.
As a holistic solution for your food costing needs, NorthScope’s functionality includes:
- The ability to create Bills of Materials
- Real-time adjustments to financial and GL balances when transactions are posted for inventory changes.
- Sales inquiries with cost breakdowns to get down to the net profit for each individual item
- AP Invoices cost flows through to Sales Orders
- Visibility from any lot or Purchase Order in the system into what you bought it for, all the costs involved (freight, brokerage, etc.) and what it sold for to see profits.
- The ability for item costs to be manually managed, updated from purchasing activity, and updated based on other expenses incurred such as storage fees Maintain multiple cost values for each item to track concepts like actual vs. market. The ability to setup control of if/how and when costs post to the GL or if you prefer to update the GL manually. Easily audit cost history.
- Mass update or import costs from a spreadsheet. And more!
Streamline Your Food Costing Process Today with NorthScope ERP Software
If you’re ready to streamline the costing process for your food business with a system that increases visibility while decreasing your workload and allows you to make pricing decisions with ease, get a free demo of NorthScope to see how we can help.