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In a Crisis, Good Firms Expand

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Food, as a commodity, is generally one of the most price-sensitive. Very seldom do we see companies making monster margins on any single food product. Most companies rely on volume to achieve their goal. That being said, we can consider any severe economic event to significantly affect the profitability of food companies. However, there are three strategies that can help offset a downturn.

1. Local Currency Values When local currency values are low (compared to the US Dollar, for instance), it is always a good strategy to promote export-related activities. This allows smaller exporting food firms to compete effectively with those native to a recipient country. On the other hand, a high local currency value makes it profitable for companies to import machinery and technologies.

2. Product Downsizing The usual way food firms survive during tough times is to downsize their products. Consumers will usually forgo roughly 10–20% of the usual serving of their favorite food in exchange for no price increase.

A consumer paying for 500 grams of their favorite snack at 100 pesos will more likely buy that product at 450 grams if the price is still 100 pesos, compared to the same product sold at 500 grams for 110 pesos. This consumer phenomenon is currently being exploited by a number of food companies.

Meanwhile, if a company wants to increase its market share and production, it is a good strategy to focus less on sales (which will undoubtedly be low) and focus on the expansion of back-end facilities.

This move is usually regarded as counter-intuitive. However, for companies like Magic Melt (a baked product manufacturing company), expanding operations now while production is understandably low means the expansion will be least likely to affect production.

The strategy allows front-line personnel to actively help and provide additional inputs for operational improvements. Magic Melt also uses the downtime to provide training for their personnel.

It is a very risky strategy, but the risk is well worth it as the economy will have to pick up again soon. If it does not, well, we’re all screwed anyway.

3. Flexibility Prudence dictates that businesses keep 1–10% of their operating capital as a contingency fund. This fund should normally be able to tide the company over while undergoing improvements. Some of the money earmarked for operations can be moved to improvements while operations are shut down. The budget for capital expenditure must also be very flexible; that is, able to accommodate changes that will be strategically beneficial for the company in the long run.

Reallocation of personnel from production to other tasks such as maintenance, training, and planning is also a key characteristic of good, flexible organizations.

Where NOT to Cut Corners

While cutting production cost might be a good strategy, there are certain aspects of the business that must never be compromised.

When it comes to food, of course, the No. 1 priority is always consumer safety. Dead customers don’t buy food and sick customers will probably never buy anything from you again. The bad publicity that ensues after either scenario will most certainly bring down your business.

But while there is a cost to maintaining quality and safety, this does not necessarily mean that it has to cost too much. In many cases, the cost of maintaining quality and safety simply substitutes the cost of inefficiency, wasted materials, or the cost of a lost business.

When it comes to the cost of maintaining food quality and safety, businesses which started out right in terms of sanitary building design and employee training have the advantage.

Facilities built based on Good Manufacturing Practices (GMPs) tend to be easier to clean and would, therefore, require less labor and, possibly, even less cleaning chemicals to maintain.

Many business owners tend to think that GMPs are just unnecessary expenses. In reality, you are merely substituting a low expense account for the short term with a lower expense account for the long term.

Take for example a meat facility. One owner decided early on to use waterproof materials for his walls and floors. He also had his facility designed so that it had no angled corners. Two employees (one with a hose, another with a push brush) can clean the entire 100-square-meter floor area in less than 15 minutes.

Imagine if the facility had angled corners, inadequate drainage, and no waterproofing. The same two employees would need more time to clean it. They will probably use up a lot more soap just to get the dirt that accumulated in the corners. (Although in actual practice, workers would rather let the corner dirt accumulate rather than spend time and effort getting it our).

The lack of waterproofing would also mean more cost in terms of replacement and maintenance. Not investing once on a good facility wastes a lot of man hours that accumulates over time. The cost of the facility would have already been realized through the savings the company would have gotten over time.

Print ed: 05/09

 

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