Tracking and Costing Dairy Components
by Ryan Mertes, President, DSI
In previous articles we discussed “Why Traditional ERP does not fit the Dairy Industry.” (You can find a link to that story here) One of the topics addressed in these articles focused on tracking and costing of dairy components, and how that is traditionally done in within ERP systems. The results of using item codes for tracking these components generally ends with poor reporting information, frustrated users, and time spent recalculating and rekeying information into the system. Often times this causes financial reporting to lag well behind production and management is unable to see problems until they are too far back in the rear view mirror.
Another common product of the more traditional ERP tracking method is that losses are often unknown and not reported with enough information to accurately identify where the losses are coming from. The classic example is a line item on the P & L Statement for shrink. Everyone asks where this is coming from, but few have the answer. Facilities that run at the lowest levels of shrink not only know what they’re losing, but they know where that loss is coming from. To tackle this issue, DSI likes to break down the facility into several segments to reduce the amount of shrink and identify opportunities to improve the bottom line.
These pieces or zones are procurement / silo shrink, production shrink, and distribution shrink. Many of our customers have smaller zones within each space, for instance in production many facilities track their milk and components into specific pieces of equipment such as the separator, vat, or filler. While the process varies slightly by facility, it can be broken down as follows:
Procurement Shrink and Silo Storage
The first shrink zone is often produced before the milk ever arrives at the plant. Depending on your structure this milk is either coming from individual producers or a cooperative with information on their weights and tests. These weights and tests often differ from load to load, and the cost associated with each load varies slightly depending on your agreements. What is true to most facilities is that you’re often not getting exactly what you pay for. The difference between what you’re paying for your milk and what actually ends up in the silos is your first point of shrink.
As the day progresses and milk and other dairy liquids are brought in and out there needs to be accountability on what is being put into and drawn from the silos not only for costing purposes, but also for traceability between CIP functions. The basic accounting functions associated with a roll forward will help create a divisible line between the procurement loss and production loss. For this reason, the silos become a key data collection point to focus in on the areas of loss.
For procurement zone we recommend:
1. Establish a method to track the total weight and component weights of payment vs. delivered. This data should
track the supplier information such as coop or route, the carrier information like hauler and driver to allow analysis
of where variances are occurring.
2. Verify the scales and meters are accurate. If they aren’t accurate the whole exercise is pointless. Too often people
avoid getting these calibrated in the interest of savings, when this is the choke point for measurement. The old
saying applies, ‘you can’t analyze what you can’t measure’
3. If you purchase from outside cooperatives work with them on your analysis. Co-ops want your business and their
customers to be happy. Most will gladly work with you to hit your goals;
4. If you purchase from producer milk – measure the shrink by haulers and drivers. Share the analysis with the
haulers and drivers, set the goals and share the data with them. This usually cuts the procurement shrink about
.1% alone. It can be that easy…
For the raw silos we recommend:
1. Review the intake procedures to determine the level of accuracy that can be achieved. If two bays are pumping
through the same meter at the same time or the milk is being split between silos without measurement realize that
you have to measure shrink in summary of all raw silos. If you can track the milk from the bay to the silos
accurately you should try to reconcile the raw silos;
2. Determine availability and accuracy of the floor instruments. This takes research but before you start collecting
data determine what is accurate and what is not. Document your assessment and revisit every six months as data
begins to flow;
3. Decide where this data will reside. A lot of data is going to be created at this point, you need an information
system that can store this data and report it back to you in a meaningful way;
4. Reporting – what will you provide to management and when. This can be tricky when your plant is a 24/7
operation, but there are ways to accomplish this if you plan ahead and work with plant supervisors ahead of
time to establish the procedures for handling things like intake, draws and measurement points.
Production Shrink and Production Runs
Throughout the course of a workday, dairy liquids move in and out of the silos into the production zone. This portion of the process is often the hardest to evaluate, however, it is the source of the largest ROI for most of our customers. We often refer to the production floor as “The Dairy Cloud.” We have coined that phrase due to the large number of management staff that are able to tell you what went into production and what came out of production. On both sides of the cloud, the vision is clear and is more easily quantified. In the middle of the cloud, during the production process, the picture is out of focus.
For each step in production we recommend:
1. Start on ends and work to squeeze the middle. A lot of customers know what they packaged and what was
received, but the middle is clouded. Take the first step after receiving and establish the accuracy and tracking
there. Do the same on the last step into production. If you can work on that you can make the Dairy Cloud
smaller at your plant. Once that solved, go the next step;
2. Analyze your measurement points with supervisors. Many plants hold some meters to be suspect, but find out the
ones that people believe are accurate and establish what will be the gold standards. Find the key ones for a zone
entry or exit and ensure the data is captured accurately and being analyzed;
3. By products matter more than you realize. Buttermilk or whey cream can hold a lot of dollars in them. Are you
capturing the value of them and maximizing the value stream? Are you capturing the impacts of this data?
4. CIP’s – what kind of a flush is being done and are you capturing the components in the pipes or is that just waste?
5. If you are cheese manufacturer, don’t just assume the shrink is in the yield numbers and deem it to be good
enough. What went into the vats vs. produced is the biggest dollars in your plant. If you settle for a blended
number you are missing out on potential profits;
6. Reporting – what will you provide to management and when. Agree upon your report formats, what is considered
the gospel and the timeliness of the reports. Share it with the plant supervisors and line employees. They want to
succeed, but they need the tools.
Finished Goods /Distribution Shrink
The final point of shrink is the one most commonly attributed to human error. Finished goods and distribution shrink can come from a variety of sources: bad inventory management, shipping the wrong product, employee theft, spoilage of products, leakers, among others. The good news about this section is it is often the easiest to safeguard yourself against with simple procedures and some help from technology.
1. What are the procedures for ensuring production data is accurate? The supervisors should be reviewing, signing
off and accountable for the accuracy of the production. It should be done each day and shift before the supervisor
leaves. If the production is accurate it then has to exist and be accounted for as a sale or inventory adjustment;
2. Are you analyzing your inventory by aging and shelf life? You should know what is nearing the end of its shelf life
and get it used or sold. Letting it sit on the shelf is simple waste that can be eliminated with proper inventory
3. Track your inventory adjustments by type and report that to management at minimum weekly. Analyze it by
adjustment type and item codes to see if there are any large issues with a certain item or reason and adjust your
4. If you are a route distributor – review the customer credits and returns on the trucks. Why are they happening, is
there a trend of a certain item issue or a customer that needs it pricing increased because they return too much?
Leveraging this type of action plan may sound like a complicated task, but certain tools can help make it easier. By leveraging the experience of your staff and existing technology on the floor, many facilities can achieve large gains by having a more accurate place to accumulate and analyze the data. Choosing the correct software is just one piece of the puzzle when it comes to solving the dairy cloud, but by partnering this with correct procedures your team can find tangible results that will show up on your bottom line.