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2018 On site Mill Profitability - a

grain Management Perspective


procurement
workshops. Peter Lloyd – USW Casablanca

South Asia
Region
Preamble and thanks
• Please note that I am a simple miller, and not a superstar
financier – or I would be sitting with you guys and not up
here!

• Thanks to Kendall McFall, the late Jim McKenna, Sherif


Assran, Mark Fowler and others who patiently tried to
explain the mysterious art of finance to this miller. Also to
those of you here today who have kindly looked over the
numbers for this version.

• My apologies if you have seen the earlier version before,


we have tried to make it more regionally specific and
interesting for you.
“Profitability: A
company's ability to
generate revenues in
excess of the costs
incurred in producing
those revenues”
This Photo by Unknown Author is licensed under CC BY-SA

5/30/2018 3
The 3 key Profit Indicators

1. Net Income - What’s left over after paying all


expenses. 

2. Return on Investment – Percent returned on


our investment to do the work of making “Net
Income.”

3. Cash Flow – Enough cash coming in from sales


made to fund operating expenses, inventories and
investments.

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Other Indicators - Financial Ratios

Financial ratios can be classified according to


the information they provide. The following
types of ratios frequently are used:
• Liquidity ratios
• Asset turnover ratios
• Financial leverage ratios
• Profitability ratios
• Dividend policy ratios Don’t Worry – this is another
whole presentation for
another day….
Today’s Example:
1000t per day flour mill somewhere in South Asia

 Conventional milling operation.


 Wheat importer (60 days wheat stock)
 Average wheat stock turnover 30 days.
 Free-market environment.
 No import duties on wheat.
 Commercial Interest rates @ 8%
 Operates 275 working days per year
 Average dirty wheat extraction of 76.0 %.

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Results of milling Total flour sold : 210,233 MT

exercise Wheat used : 275,000 MT

ITEM Credit Debit


Value of flour sales $ 121,071,650
Value of bran, pollard & screenings sold. $ 18,995,900
Landed cost of wheat used $ (82,706,250)

Net Receipts $ 57,361,300

Total non-wheat Variable costs $ (7,968,803)

Total Fixed costs $ (6,184,334)

Net Cost of Operation $ (14,153,137)

Net Pretax Profit $ 43,208,163 30.85%

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There Are Only 2 Strategies To Increase
Profits

1. Increase sales revenues

2. Reduce the cost of sales.

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Strategy # 1 – Increasing Sales Revenues

Only two options open to us;

1. Increase Sales Volumes

2. Increase Sales Price

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Difficulties With Sales Growth

• Sales volume increases require ;


– Available production capacity
– Available market capacity
– new markets
– vulnerable competitors.
• Sales price increases must be market
justified.
– We may apply a price, but the market decides
if it is willing to buy at our price.
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Improved Sales Require Improved Value!

VALUE is a function of
Service Quality
Service + Quality +
Price!
Price

As perceived by our customers


Enhanced by improving quality, service or both.
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Enhancing Value: Improving Product Quality

• Improve Product Consistency


– Functional Consistency
– Processing Characteristics
– Optimizing Ingredient Levels
• Improve Food Safety
– Increasing focus in South Asia
• Improve Sanitation
– In everyone’s interests

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Enhancing Value: Improving Customer Service
• Technical Assistance for the Customer
– Training

– Baking / Processing technology

– Sanitation / Food Safety

– Formula Development

• Improved Delivery Times and Quantities

• Customized Packaging Sizes

• Back up Inventory

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Strategy # 2 “Reduce the Cost of Sales”

Cash to Cash Cycle for


Manufactured Products
Cash in
the Bank Cash in
from credit
CASH

Cash spent on sales.


wheat and
Cash in
manufacturing
from cash
costs.
sales
Cost
of
Sales
TIME

5/30/2018 Courtesy of Kendall McFall - KSU 14


Strategy # 2 – “Reduce the Cost of Sales”

The cost of sales is a function of three broad areas.

• Inventory Costs– inventory is all the money that the


system has invested in purchasing raw materials to transform
and sell.

• Throughput – throughput is the rate at which the system


generates money through sales.

• Operational Expense – operational expense is all the


money the system spends in order to turn inventory into
sales.

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Reducing Inventory Costs
• Inventory cost is a function of
– Plant capacity
– Grist formulation
– Purchase logistics
– Transportation Logistics
– Minimum and Maximum Inventory
– Inventory turnover period
– Interest Rate

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Some tools used to reduce Inventory Costing

• More frequent purchases of smaller


quantities of grain e.g. Consolidated buying
• Maximum margin wheat blending.
• Optimized purchase scheduling. (N/S
harvests, Winter/Spring wheats)

• Forward positioning of stocks by suppliers –


great for us, but risky for them.
• ‘Grocery Boat’ service
5/30/2018 17
U.S. Wheat All Classes 15-year Average Prices
$260

$258

$256

$254

$252
$US/MT

$250

$248

$246

$244

$242

$240
January February March April May June July August September October November December

Average Monthly Price Average Annual Price Poly. (Average Monthly Price)
Simple Tools - Reducing the Cost of Sales
By Increasing Throughput

•Throughput in milling can be the amount of wheat


ground in a day to produce flour.

• A more useful definition for Throughput is the


rate at which the system generates money through
sales.

Thiese photos by Unknown Author are licensed


5/30/2018 under CC BY 19
Cost of “Milling” Throughput –
Capacity Utilization

20 % decrease in
wheat ground
Tons per Day of Wheat

300

290

280

270

260

250

240
25% increase in
manufacturing costs
per ton
A 20% decrease in wheat ground results in a 25%
increase in the cost per ton of flour.
5/30/2018
Courtesy of Kendall McFall - KSU 20
An Expanded View of Throughput

Cash to Cash Cycle for


Manufactured Products
Cash in
Cash in
from credit
the Bank
sales.
Cash spent on
CASH

wheat and
manufacturing Cash in
costs. from cash
sales

TIME

5/30/2018 21
Courtesy of Kendall McFall - KSU
Cash Gap Defined

• The cash gap is the number of days


between a business’s payment of cash for
goods and services bought and the receipt
of cash from its customers for those goods
or services sold.

5/30/2018 This Photo by Unknown Author is licensed under CC BY-ND 22


Cash Gap Pictured

The Cash Gap - An Easily Visualized Concept


Inventory Inventory
Arrives Ships

INVENTORY
Days
PAYABLES RECEIVABLES

CASH GAP

0 20 40 60 80 100 120 140


Cash
Cash Received
Paid

5/30/2018 Courtesy of Kendall McFall - KSU 23


The Flour Mill Cash Gap

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Managing The Cash Gap
The three ways to reduce the cash gap;
1. Increase the payables period.

2. Decrease the collections period.

3. Increase the inventory turnover or “throughput”.


1. Maintain the inventory level while increasing sales.
2. Lower the inventory level while maintaining sales.
3. Lower the overall cost of sales while maintaining gross sales .

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Analysis of a Cash Sale – at best (excluding weekends)

Day Activity

0 Truck Loaded, delivery note generated.

1 Customer receives flour, delivery note sent to our accounts department

3 Our accounts prepare batch invoices, put in post.

7 Customer receives invoice in mail, sent to accounts.


Customers accounting Dept. batch process payments.
10 Put in post

14 We receive payment in post, sent to accounts

16 Accounts batch process incoming payments, sent to the bank by messenger

23 Bank processes the payment and money is in our account.

A ‘cash sale’ is actually 23 days of credit!!


Fisher Mills, Seattle. Killing Cash Gap.
Fisher Mills, Seattle - Stage 1
Day Activity
0 Truck Loaded, delivery note and invoice generated.
Customer receives flour, delivery noteand Invoive sent to their accounts
1 department
3 Customers accounting dept batch process payments. Put in post
7 We receive payment in post, sent to accounts
10 Accounts batch process incoming payments, sent to the bank by messenger
14 Bank processes the payment and money is in our account.
This saved on average 9 days of cash gap on flour sales

Fisher Mills, Seattle - Stage 1


Day Activity
Truck Loaded, delivery note, invoice and receipt generated.
0 Direct billing payment processed
1 Money is in our account.
This saved on average 22 days of cash gap on flour sales
Incentive paid to customers in the form of discounts for this method
THE COST OF CARRYING FLOUR SALES CREDIT.
US$ total for 50% credit sales

Value of flour sales $ 60,535,825

Days 6% 8% 10% 12% 14% 16% 18% 20%

30 $298,533 $398,044 $497,555 $597,066 $696,577 $796,088 $895,599 $995,109

60 $597,066 $796,088 $995,109 $1,194,131 $1,393,153 $1,592,175 $1,791,197 $1,990,219

90 $895,599 $1,194,131 $1,492,664 $1,791,197 $2,089,730 $2,388,263 $2,686,796 $2,985,328

120 $1,194,131 $1,592,175 $1,990,219 $2,388,263 $2,786,306 $3,184,350 $3,582,394 $3,980,438

150 $1,492,664 $1,990,219 $2,487,774 $2,985,328 $3,482,883 $3,980,438 $4,477,993 $4,975,547

180 $1,791,197 $2,388,263 $2,985,328 $3,582,394 $4,179,460 $4,776,525 $5,373,591 $5,970,657

210 $2,089,730 $2,786,306 $3,482,883 $4,179,460 $4,876,036 $5,572,613 $6,269,190 $6,965,766

240 $2,388,263 $3,184,350 $3,980,438 $4,776,525 $5,572,613 $6,368,700 $7,164,788 $7,960,876

270 $2,686,796 $3,582,394 $4,477,993 $5,373,591 $6,269,190 $7,164,788 $8,060,387 $8,955,985

300 $2,985,328 $3,980,438 $4,975,547 $5,970,657 $6,965,766 $7,960,876 $8,955,985 $9,951,095

330 $3,283,861 $4,378,482 $5,473,102 $6,567,722 $7,662,343 $8,756,963 $9,851,584 $10,946,204

365 $3,632,149 $4,842,866 $6,053,582 $7,264,299 $8,475,015 $9,685,732 $10,896,448 $12,107,165

5/30/2018 29
Learning Points

• Each day of credit sales less saves us $13,452. This is a LOT


of money which can be used to pay salaries, power and other
costs. (50% of flour sold on credit).

• Each 1% of interest less saves us some $37,000 over 30 days.

• Experience has shown that it is more effective to reduce the


price for cash NOW rather than a slightly higher price LATER.

• Each day of wheat stocks reduced saves us $23,775 in interest.

• Each 1% of (average) flour price discounted costs us $5.76 per


ton, compared to $17.60 per ton on credit. Better to trade 2%
discount for cash.
Impact of interest

Reducing credit sales by ten days = $132,681 saved

Reducing wheat stocks by ten days = $ 237,744 saved


========
$ 370,425 saved

Or almost 1% in net pretax profit increased.

5/30/2018 31
Simple Tools - Reducing the Cost of Sales
By Reducing Operational Expense

Operational expense is all the money the system


spends in order to turn inventory into sales. This
takes in to account many items including labor
costs, power costs, insurance, maintenance costs
and supplies.

In milling, the extraction while not a traditional


operating expense item significantly impacts the
cost of product sold.

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Cost of (B1) Extraction

6 % decrease in
extraction
Extraction Percentage
75%
74%
73%
72%
71%
70%
69%
±9 % increase in
cost of product

5/30/2018
Courtesy of Kendall McFall - KSU 33
Effect of extraction on profit in our example mill;

Each 1% gain of extraction will increase annual


net pretax profit by $ 910,000.

Each 1% drop in extraction will drop annual net


pretax profit by $ 913,000.

Each day of operation is worth $155,000 in net


pretax margin to us.

Selecting the best equipment for your mill is an investment in yourself.

5/30/2018 34
Revenues
Operating Data
CR DB
total flour 1 $ 91,280,888
Wheat stocks days 60 Days total flour 2 $ 22,820,222
total flour 3 $ 5,310,888

Average wheat t/over days 30 Days


total flour 4 $ 1,659,653
$ 121,071,650
Import duties 0%
Days Offals $ 16,596,525
Days operation per year 275
Screenings $ 2,399,375
Mill capacity per day 1000 mt $ 18,995,900

Capacity Utilization 100%


Gross Receipts $ 140,067,550

Percent of flour sales on credit 50% Minus Wheat used $ (82,706,250)


Net Receipts $ 57,361,300
Average receivables 30.00 days

Annual Interest rates 8.0% Less Costs


Total non wheat Variable costs $ (7,968,803)
Wheat avg stockholding 30.00 days Total Fixed costs $ (6,184,334)
Net Costs $ (14,153,137)
Variable costs $37.91 / Ton Flour

Fixed Costs $29.42 / Ton Flour Net Pretax profit $ 43,208,163 30.85%
Mill Production Costs Total: 15.4% of Average flour costs

Admin & General costs 2.02%

Payroll 2.18%

Depreciation 2.51%

Finance Charges 2.00%

Non-wheat variable costs 6.66%

0.000% 1.000% 2.000% 3.000% 4.000% 5.000% 6.000% 7.000%


What does this tell us?

• Clever wheat buying is the most efficient way of


increasing your bottom line profit in the mill. “6B -
Better Buying and Blending Brings Bigger Bucks”
• Managing Credit is the second.
• Manage these 2 correctly and you have
optimized more than 85% of your costs.

5/30/2018 37
Simple Tools - Reducing the Cost of Sales
By Reducing Operational Expense

• Other Areas to Consider


– Electrical Power Costs
– Costs to Reprocess Returns or Out of
Specification Product
– Manual versus automated processes

5/30/2018 38
Some final words
• In milling so much of the profitability of the plant is
dependent on your operations staff. Please do not be
tempted to cut costs on your production staff!

• Motivated Millers Make More Money for you!

• Investment in millers yields massive returns, whilst….

• Paying peanuts only attracts monkeys.

• Cutting corners on purchasing an efficient flow


diagram only results in cut profits.

5M
5/30/2018 39
A-Z of Enhanced Profitability – with some license on the English Language

A After-Sales Service
B Better Blending
Control, cut or cancel customer credit.
C Customize
Capacity Utilization
D Diminish Due Days
E Enhance Extraction
F Food Safety and Sanitation
G Gainful Gristing
H Hallmarked operation and products
I Innovation
J Just in time inventory, where possible
K Kilowatt Kontrol
L Lower Inventory wherever possible
M Motivated Millers

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A-Z of Enhanced Profitability - 2
N No corner cutting in new mills
O Optimize your flow for maximum extraction
Partner for profit with your team, suppliers and
P customers
Q Quick Quality Control – Quality Assurance better
R Rapid Response to customers
S Speedy Sales System, SRC, SDS/LA Seds.
TEAMWORK
T
Timely Deliveries to Customers
U US Wheat, of course!
V Variability Voids Value
W Wise wheat buying
X Xtract supplier credits where you can
Y Yakuza - to handle bad payers. 
Z Zero Returns

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Thank You for your kind attention.
5/30/2018 42