Driving your mill to maximum profitability
September 1, 2010
Kendall McFall and Vaughn Studer
A flour mill today may be spending $45 in manufacturing costs and close to $400 in wheat, freight and taxes to produce one tonne of flour. Is your mill realizing the most of that investment? Often in the complex operation of the milling enterprise, significant points of profitability are lost to the daily tasks that consume mill managers and executives. These tasks could also be drawing attention away from significant opportunities that exist from tying the right wheat purchase to the corresponding flour value in the market. The true challenge to optimize profits comes from understanding and monitoring all the critical points regulating cost consumption and revenue generation.
Mill managers might equate the decisions they make when stepping into the control room of the modern mill to the ones a car enthusiast makes when getting behind the wheel of high-performance automobile. There are dashboard gauges to watch and adjustments to be made in both instances. How accurate the information is and the reaction to that information can provide both the mill manager and the driver effective tools to improve performance.
To further set the stage, we all understand that the purchase of a family-sized SUV results in a much different driving experience than the purchase of a new European roadster. Similarly, the initial capital investment made when the mill was built can have a large effect on the mills’ performance, its flexibility and profitability as the management team responds to market changes. Most mill managers never get the opportunity to design or build a new mill, but it does not excuse them from the responsibility of “driving” the mill they now operate in a way that maximizes its financial performance.
Profit is the net equation of revenue minus costs. Profit is impacted either through cost savings within the operation or by selling the resulting products at higher prices. We will examine different elements of cost savings, beginning with the type and source of wheat purchased, continuing through the operation. Lastly, the price in which flour is offered to the market must be examined in order to ensure consistency in terms of both actual and perceived value of the product by the baker. We will also point out the gauges on the mill’s dashboard that can help you answer the questions as to whether or not your milling enterprise is operating at its peak performance.
WHEAT: DASHBOARD – FUEL
Quality fuel is essential to the performance of an automobile, and wheat is the fuel of our milling engine. Without wheat the mill doesn’t run, and with wheat priced out of balance with its economic value, the mill doesn’t perform well economically. Wheat comprises approximately 85% of the finished flour’s cost and as such carries both opportunities for high reward and threats for high risk. The question is: What are the right gauges on which to focus, and how do you use those gauges to help in your next “fuel” purchase? One gauge that is often overlooked is the wheat moisture gauge. In today’s market, 1% less moisture on the inbound wheat could result in about $4added value to the mill per tonne of flour sold.
Another gauge to be considered is one that puts into economic value the percentage of non-millable material present in the wheat you purchase. If you assume the entire amount of material removed from the cleaning house can be sold as your animal feed, then you could create a gauge that compares the percentage of the material present against the cost of purchasing pre-cleaned wheat. For example, 1% additional screenings could carry as much as a $3-per-tonne-of-flour-produced negative impact to the bottom line. However, if the cost to purchase cleaner wheat was more expensive than the negative impact, the mill would be better served to buy the higher percentage of non-wheat material, clean it at the mill cleaning house and sell the removed material for animal feed.
The most valuable of all economic gauges for a milling operation is one that evaluates the cost benefit of protein in wheat. There is no doubt that higher protein can provide comfort when considering the customer’s performance. Currently, protein in hard wheat is worth about $7.50 per 0.25% protein. This would mean that for every 0.25% of flour protein delivered in excess of the baker’s requirement, it could cost the miller $10 per tonne of flour. No other issue is more important to understand, measure and manage.
MILL: DASHBOARD – ENGINE
Across your control room, you must also have the dials and gauges to allow you to take control of the mill’s financial performance in a constantly changing environment. Much the same way you look at the dashboard of the car before each trip, you must approach the mill in the same fashion. At a bare minimum, you must ask questions related to your wheat supply each day — questions that relate to quantity of inventory (How much gas is in the tank?), supply logistics (How far to the nearest gas station?), current wheat costs (price per gallon), the value of one class versus another (premium grade fuel versus standard grade), and opportunities for wheat value improvement in the next tender compared to your competition (buying gas today versus waiting until tomorrow).
The questions don’t stop at the elevator. They continue when you consider wheat blending opportunities. These questions include: What is the best blend for the lowest cost wheat mix (setting the fuel injection for maximum miles per gallon) versus the best blend for milling yield (setting the fuel injection for speed)? Or maybe it’s the best blend to maximize flour strength in baking (fuel injectors are set to limit technician involvement).
It goes without saying that moisture added at the mill is equally critical to profitability as moisture delivered in the wheat. The gauge in this case is finished flour moisture and wheat moisture to B-1. Gauging the mill’s success or opportunity can be done with online NIR equipment measuring flour moisture on a continuous basis, or it can be done manually by recording and comparing lab results of milled flour moisture to wheat temper moistures of the previous day. Adjustments must be made in moisture added at tempering for environmental changes such as mill temperature and relative humidity.
The mill roll floor is like the gas pedal in the car analogy. You can often get more wheat through the mill by pushing a little harder, but your gas mileage or yield may suffer. Understanding the balance between the wheat choice, the mill throughput and the yield potential is important. As one example, the value of 1% increase in milling yield from 75% to 76% would be worth just over $4 per tonne of flour sold today. This would be about $3 per tonne of wheat purchased. So to turn this “gauge data” into usable information, you might say that if a particular type of wheat allowed you to increase your extraction by 1%, you could pay up to $3 per tonne more and still break even on the purchase.
An opposing view would be to consider the cost of operating the mill using a wheat type that required a reduction in the load to B-1 in order to maintain the same yield. This might be equivalent to taking your car on a trip towing a small trailer with extra luggage. The fuel efficiency of the car would suffer even though the distance traveled would be the same if you weren’t towing the trailer. In this milling example, a 5% reduction in B-1 loading could raise the cost of milling the 1 tonne of flour by about $2.50.
Even packaging can have a set of gauges that the mill manager can use to evaluate performance. These gauges are over-pack, miss-pack, damage, moisture loss, shrink and labor hours per tonne of flour packaged.
As a place to begin, consider tracking the amount of flour recorded as produced on the mill flour scale to the amount of flour invoiced. Once the mill scales have been calibrated, the numbers should be reasonably close. If not, the mill is losing flour and is broadly defined as shrink. This is like a leak in the car’s gas tank, the worst thing possible for fuel efficiency. It could be that every bag that is packaged has too much flour in it, or customers haven’t been invoiced for the flour delivered. Either way profits are draining away.
FLOUR: DASHBOARD – PERFORMANCE
The mill’s quality assurance laboratory is to the mill what the tune-up technicians are to the modern engine. A consistent performing car needs regular tune-ups, and a mill’s flour consistency performance is just as important to measure. For the bakery customer, consistency of product quality might be of even greater value than the relative level of quality itself. As bakers push to improve their products and streamline their processes, they must receive flour that performs consistently day after day. This consistency comes in the form of water absorption (flour moisture), rheological properties such as dough tolerance and extensibility, loaf volume, as well as color and appearance.
Setting a standard of identity for each type of flour based on market demand
becomes the critical first step. The role of the quality assurance team becomes consultative in their ability to help mill operations deliver that same product daily. Specific flour performance specifications can be met through an infinite combination of wheat blends. For the wheat buying and commercial management teams, the question must be asked: “How do we accomplish this with the least expensive grist in a manner that is acceptable to the customer?”
Traditionally, this wheat class or flour selection and/or blend have been determined in satisfying a single set parameter, typically protein. However, we know that protein and its gluten contribution is only one factor affecting wheat blends. It is often the case that the Alveograph rheological measurements of strength and extensibility can be of equal importance. High protein flour with very high P/L value might be very strong, but with little extensibility its volume potential might be limited. In this case, a blend to contain some percentage of weaker, more extensible flour might be a better and more economical alternative.
With the ever-evolving science of flour additives, it is the laboratory’s role to understand how the complete realm of these tools can benefit the organization. Just as lower-cost flours might add missing elements of extensibility or other needed characteristics, additives in the right combination might further work to alter dough characteristics in hitting the right performance specification as a more cost effective solution. Most additives, including the range of oxidizers, enzymes and emulsifiers, can be managed and tightly controlled at flour load out, allowing the mill to capture the value they create.
The photo on page 92 illustrates an example where higher protein did not translate into greater flour performance. A lower-cost, lower-protein winter wheat flour using an effective and targeted additive strategy yielded greater loaf volume than higher-cost, high-protein spring wheat. In this case, the baker’s expected performance may be met in a cheaper way than sole focus on crude protein quantity.
Selling your flour at higher prices might always seem to be an “uphill” battle, but the opportunity almost always exists to do it by demonstrating more value to your customer. The baker is keenly aware that not all flours are created equal, even though they might lead you to believe they are in attempting to negotiate a lower price. As bakers consider the value of the flour, they first consider the flour’s water absorption capacity, which speaks directly to their resulting dough yield. Table 1 (page 93) describes a scenario in which the mill could charge a premium of up to $9.20 per tonne for a flour that would result in a 2% increase in water absorption over the baker’s normal expectation. This high water absorption may be achieved as a function of wheat type and source and/or additives applied in the mill.
Beyond the tangible value proposition of water absorption are a host of other factors valued by the baker. Inherently, most bakers will place some intrinsic value to matters of flour consistency from day to day as well as their perception of the mill’s level of service and responsiveness to questions and complaints. For many bakers around the world, their flour supplier continues to be their principal technology partner in bringing them the quality and performance they require to succeed. Within this, large divides of competitive advantage can be wedged between mill competitors with certain suppliers able to command market premiums.
EFFICIENCY EQUALS PROFIT
So, at what level of efficiency is your milling enterprise running? Given just the few dashboard indicators listed here, the cumulative effect of running at high efficiency versus low efficiency could be a difference of more than $30 per tonne of flour in net profit.
These efficiencies can be gained from wheat purchasing all the way through milling operations and then out to the market.
Having a comprehensive understanding of your mill’s performance capability, the true cost of inputs and the value of your products will guide you to make the right decisions for your operation every morning when you get behind the wheel of your business.
Kendall McFall and Vaughn Studer are managing partners of Engrain LLC, Manhattan, Kansas, U.S. They can be contacted by e-mail at email@example.com and firstname.lastname@example.org or by phone at 1.785.320.0071.