Our client was struggling with appropriately costing out its formulations in a batch processing environment. The typical manufacturing process takes a mixture of dry and liquid ingredients, liquifies them into a slurry, then condenses the slurry into a concentrate or dries into a powder for use as an ingredient in other food products.
The dairy industry is known for seasonal supply fluctuation of milk and its components. The client has combated these supply issues by creating multiple formulations that use a variety of forms of fat and skim solids to ensure their product can always be made, regardless of the availability of milk. On a daily basis, liquid components must be measured and formulas are changed accordingly – resulting in accounting challenges for the team to ensure cost and profitability are managed accurately.
The accounting team needs to forecast requirements for key material inputs in preparation for annual supply arrangements to ensure market exposure risk is reduced to an acceptable level. Many of the formula cost and material planning models include intermediate production that’s completed upstream of the final blending process, which creates multiple layers in the bills of materials. The existing systems cannot easily flatten out the bills to their individual components, so a solution was needed to take final demand projections and effectively tie them to the components required.
Baker Tilly’s dairy industry professionals leveraged their extensive knowledge of the typical liquid components of dairy production to create the initial framework that can be used until specific measuring mechanisms in the Enterprise Resource Planning (ERP) system could be set up. We worked with the client to lay out production process flow across two of their manufacturing facilities to ensure product flow was captured appropriately in the daily formulations. As part of this, Baker Tilly’s preliminary review of formula files identified a set of issues including incorrect formula quantities, conflicting preferred formula selections, and erroneous material master data. We notified the appropriate client team members of the findings and supported them in resolving the problems to improve the accuracy of the proposed solution.
Once the input data was validated, Baker Tilly created a digital model of the production process flow to mimic the production information needed to calculate material solids requirements. Robotic process automation (RPA) and analytics tools were used to build the logic in a manner that would allow for on-demand updates for the production model at any time the user desires.
The transformation process of raw data into useful digital analytics required the encoding of hundreds of business process steps into the operations model. Our Baker Tilly professionals then validated the model with rough manual calculations the company would typically complete one or two times per year due to the significant time required to assemble.
The collection of tools and models developed during this project are now available for daily scenario planning and forecasting to support financial and materials planning across the business. The company plans to leverage the model developed to drive strategic purchasing decisions to balance the need for formal supply agreements and for the opportunity of procuring on-the-spot markets when costs are favorable.
The formula cost and material planning model we have developed will provide management confidence to invest in growing areas of the business to drive earnings before interest, taxes, depreciation and amortization (EBITDA) expansion.
