Milling financial improvement

by Emily Wilson
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Milling is not just about making flour; it’s about making money

Worldwide, flour mill managers, long known for their technical abilities, are facing mounting financial pressure to improve their mill’s profitability. One doesn’t have to look far to find a list of flour mills idled in the last year for failing to meet an owner’s financial requirements.

It goes without saying that the milling industry is extremely competitive. The president of a major milling company recently said, "Our goal is not to make flour; our goal is to make money. We are not millers; we are bankers. If our actions do not give sufficient return on our investment, we will refocus."

Having recently left the ranks of flour mill management, I know well the struggle that exists for millers. Bakers ask for consistency at a fair price. Millers invest in capacity-increasing technology to improve consistency and are met with lower sale prices and margins. Profitability has been sought from increased scale, while flour "values" are determined by component formula pricing with margins static at best.

Although there might be disagreements on how to accomplish it, millers all agree that the goal is to make money. Even bakers admit that a profitable milling industry is in their best long-term interest.

Where does profitability come from in modern competitive milling? Is it in product quality, milling efficiencies or plant logistics? I think the answer lies somewhere in the statement of the industry executive: Millers and mill managers need to view their work in a financial context.

STRATEGIES FOR PROFIT

The basis for a modern milling plant’s profit potential is dependent upon three broadly defined variables: delivered wheat cost, mill-feed values and flour freight. The sums of these factors typically define a mill’s potential for making money.

So what strategy can a local mill manager employ to help the company reach that elusive goal of profitability? My suggestion is to develop a "daily tour" of the milling business focused on the concept of "throughput," defined as the rate at which the company generates money through sales. By converting the "throughput data" gathered on this tour into information for use by the plant’s operating team, the manager will launch a strategy that improves financial performance.

MANAGER’S TOUR

While the manager’s tour can have an impact on operations in many positive ways, such as plant safety and sanitation, the purpose is to discover ways to improve the rate at which the mill generates money through sales. We need to look at the length of time from the point of the first expenditure until payment is received from the customer. (See chart.) This view of throughput measures the rate at which the milling company generates money through sales.

The value of this expanded definition of throughput is that the manager is focused on the money generated in the operation, versus a strict production view. With this in mind, the tour should have at least five stops: business office, flour loading areas, millrun loading shed, mill and cleaning house, and the elevator.

In the business office, first check on the billing cycle time. Ask how long it takes from the time a load of flour or millrun is shipped for the customer to receive an invoice. Ideally, the customer is invoiced the instant the order is confirmed as shipped. This means that within minutes of a shipment leaving the mill, the invoice is faxed or electronically transferred to the customer. Each day that an invoice is held up reduces the throughput.

Also inquire about the number of days customers take to pay an invoice. Direct conversations with customers paying outside the credit terms can help avoid misunderstandings or worse, write-offs. Again, the goal is money, not flour.

The second stop on the tour should be the flour loading areas. Here, inquire about the turn-around time from mill to customer for each truck or railcar.

What is the wait time at the mill prior to loading? What is the wait time at the customer’s prior to unloading? How much time is the truck driver forced to waste while waiting on lab approval? How much weight is in each vessel? Is the truck or railcar fully loaded? How long is a railcar placed on the siding prior to railroad pickup? All these measures may uncover areas for improving the throughput of the location.

In a bag operation, ask about the level of inventory relative to sales. How many days worth of flour is on hand? What is appropriate for the current level of business? Each day of inventory increases the mill’s cost of money and reduces profitability.

At the millrun loading area, the manager again should look at the weight and speed of loading versus the cost of demurrage and truck wait time. In addition to questions similar to those from the flour loading area, also look at the product.

Millrun typically has a much lower value per tonne than flour. Therefore, any fine flour-like material found in the millrun is likely an indication of a higher-valued product being devalued. This can happen when product is spilled or adulterated during manufacture and then dumped into the millrun bin for disposal. A simple sifting of the millrun over a standard flour sieve will help remove any subjective view of "fines" in the millrun.

Knowing the level of fines typical for one’s location helps determine the presence or severity of product devaluation. While this is not a pure throughput measure, it meets the definition in that an improvement would result in a greater amount of high-valued product to sell.

The mill itself is the next stop. The manager can ask about the mill’s throughput and yield, focusing on financial yield and capacity utilization. Financial or plant yield is the amount of flour sold versus the amount of wheat purchased. A good first break yield is required for a good financial yield, but by measuring financial yield, the manager includes wheat lost to screenings and flour lost to over-pack or spillage.

A large discrepancy between milling yield and the financial yield could indicate flour shipped and not yet billed — the worst of all possible scenarios.

There are several ways to assess the mill’s capacity utilization. Flour produced per scheduled day of operation is one measure. Flour produced per hour is another. Capacity utilization from a financial standpoint, however, would include flour produced as a percentage of the theoretical production on a 24-7 basis. This expanded view would include scheduled downtime due to lack of sales as well as downtime from breakdown or scheduled maintenance.

Finally, the manager should visit the elevator to evaluate the amount of wheat in inventory relative to the sales. Inventory is important, but too much inventory burdens the business with interest costs.

A mill manager has a very demanding job. Perhaps it is unrealistic to add a daily mill tour to the manager’s already full schedule. Involvement of all plant personnel and key vendors can help reduce the information-gathering burden.

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