Hitting your targets
With few exceptions, perhaps 57, new products are the life blood of any food company. The challenge is to develop profitable, creative products for some of the most demanding customers in the world; British retailers. The marketplace is on a constant drive for products that are better value, have a reduced environmental impact, provide improved customer experiences, meet ever changing consumer trends and, through extended life, provide reduced waste.
This task of satisfying these requirements falls to the NPD department and its process development colleagues. Businesses vary, but the annual product churn is typically between 5 and 100 products, or to look at it another way, between 12% and 50%.
Food manufacturers typically work in a profit range between 3% and 20%, with the vast majority falling below 10%. As products become commoditised, so margins tend to erode, and understanding why new products so often fail to hit their expected financial recoveries is critical to business success. When we speak to financial and manufacturing managers, they generally say that new products either hit their financial recoveries in one to six weeks or never hit them at all. It is estimated more than 20% of all manufacturers product portfolio’s never hit their costed standard.
So why are products failing to hit their targets?
Understanding your products and processes
The first step in developing an effective process is to establish the real value of existing products. For each product manufactured an accurate financial picture should be defined. Many businesses are unaware which products actually yield the biggest financial returns. As a result the development team, however well managed or furnished with market data, may develop products that sell but make little profit.
Typically products are costed on a percentage basis but in a capacity-constrained businesses it is not the percentage contribution that is critical but the contribution per hour. For example a product that sells for £3 with a 15% margin running at the same speed as a product that sells for £1 with a 25% margin would deliver more cash to the bottom line per running minute.
A business armed with high quality product contribution data should be able to steer its development team in the direction of products that make best overall return. The best businesses also understand the potential impact on overheads – increased energy costs or management time required. Taking proper account of these can dramatically change a product’s margin!￼￼
￼Keeping control of your pipeline to success
With good data for creating new product concepts businesses can get on the front foot, continually developing new products the factory is capable of making and holding a catalogue of de-risked products they can select and present at the tender stage. As they have looked for margin growth, retailers have increased the frequency of tendering business which has resulted in manufacturers needing to develop products at short notice. Rushing costings and trials significantly increases the risk of error, and having a robust process is critical to managing this risk. The last thing a business wants to win is a product it will make at a loss because the costing was wrong.
Getting onto the front foot
For one of our clients the time to get a new product from concept to launch using existing processes is 8 to 12 weeks. Achieving nutritional data, packaging designs, ensuring shelf life expectancy and running factory trials was seen as “tight” and due to the rush the businesses did not fully evaluate the capital payback and the cost of development to launch. If armed with all the facts some of its products would never have left the test kitchen.
However, there are elements of the process that could be shortened or removed altogether allowing time for the important initial decisions to be made.
Labour requirements for new products can be modelled using existing processes. It is good practice to have a standards data base covering every shop floor activity, both direct and indirect including areas such as de-boxing and goods inward, often missed in labour cost modelling. Once the standards have been established for all factory activities a labour cost model can be developed for any new product while it is still in the test kitchen, including realistic line diagrams and run speeds.
In manufacturing processes that are static from one year to the next, mass balance studies should be carried out on products that represent the overall portfolio, keeping template information fresh and allowing a full costing model of any product before the day of launch.
Learning the variables
In a survey we carried out, both operations and financial managers reported that data established during factory trials was unreliable. It is not romantic or exciting, but NPD time is often better spent developing robust trials for the few products with real prospects of success than working on the next new concept.
Nothing happens until someone sells something
All business spoken to reported poor new product sales forecasts as being the biggest challenge to the delivery of standard costings. Sales people are almost inevitably optimistic about prospects. Be conservative and remember that every product has a life cycle. If you can’t make profit out of it well into the product decline, you probably shouldn’t start, and if it is to be a short lived or seasonal product, plan for the packaging write-off.￼￼
￼Don’t make the same mistake twice
Post launch reviews were reported as being “sporadic” or “an opportunity to assign blame for what went wrong”. Many reviews focus on documenting the mistakes and responsibilities, but the only value of these meetings is in identifying the root causes and eliminating or mitigating them. It is not a sin to make a mistake, but it is one to repeat it perfectly.
What do I do now?
The cost of getting NPD wrong is potentially enormous, as is the opportunity for profit. Any business with a significant need for new products should regularly and critically review its NPD process. If you can’t see a way of improving it, you’re probably not looking.
Written by Paul Eastwood, Operations Director at Coriolis
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