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Cost Effective Procurement Methods of Food Ingredients

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by Shobana J , Senior Cost Modelling Specialist
5 December 2021

food ingredients procurement

The current COVID-19 pandemic has disrupted almost all of the industries at many levels. Hence, a study on procurement methods focusing on food ingredients has been made in order to provide cost effective methods to help in decision making. Such as, opting for a closer supplier location, choosing an alternate raw material, buying the right volumes etc. would reduce the cost of procurement. In a summary, even though the usual supply chain and procurement methods of existing manufacturers appears to be right, it is certainly disrupted due to the recent COVID 19 situation. Hence, it is best to revisit the choices they make during the selection of product type, supplier, materials used, location of the supplier etc. while making procurement decisions.

Introduction

The current COVID-19 pandemic is proving to be very costly and time consuming by all aspects, mainly in the manufacturing sector. There are many ways to overcome this delay in time and value management of the purchasing products. By choosing the right supplier, right raw materials and ingredients, product specification, along with the consideration of location proximity will reduce the cost of procurement of food ingredients significantly.

In industries such as food, where quality and taste is very important, that cannot be compromised while making the previously stated changes. Despite this challenge we can make a handful of strategic procurement decisions while making a purchase of food ingredient. The real time examples of the procurement decision making had been explained in detail with the help of some of the ingredients such as Vital wheat gluten, Yeast and Salt; one in each of the main, consumable and flavor inducing ingredients are considered for the study.

VITAL WHEAT GLUTEN

The US manufacturer of VWG had been analysed to find out that contracts works best in VWG procurement

  • The Cost of production of Vital wheat gluten is USD 1385 - 1425/MT, when produced using Hard red winter wheat. Whereas, if the same is estimated for vital wheat gluten using Soft red winter wheat, the cost is coming to around USD 1520 - 1565/MT in The USA due to the increased SRW wheat price. According to Bloomberg, US - SRW wheat price is 6-7% costlier than HRW wheat price during the month of May 2021, and the same is used in the model. Because of the products high dependency on wheat grain of 80-85%, it is understood that vital wheat gluten would follow the trend of wheat futures prices even though it falls under high protein market and not grains market. The SRW prices are in the rising trend from the begining of the year, which is expected to continue for next few quarters. Hence, by signing a 1 -2 year contract with gluten suppliers locking at the current price will prevent from buying at an increased price of gluten in future

  • On the landed cost, transportation cost contributes to around 10% of the overall cost, due to the current COVID 19 situation, freight rates are quoted high and are being highly volatile. This can be mitigated by having own logistics service or by having a yearly  contract, in order to avoid the weekly/ monthly volatile prices being charged during procurement.

  • According to the prices received from Purefield for VWG in USA pricing is currently running at around $.95-$1.0/lb, with issues in the global market expected to continue through Q2 of 2022.  As the current capacities are sold out, Currently spot buys in US, $3.20/lb for reference on smaller volumes; and Ardent Mills price would be $1.10/lb to the west coast and that $1.03/lb-$1.06/lb to the east coast for the same period. But, both the suppliers are facing supply crunch at the moment and it shall last until next 6-9 months. Hence, it is suggested to a VWG buyer to purchase on a contractual basis, to lock in the volumes and material prices when there is a surplus supply in the market. Usually, it is the beginning of the year, but it can be confirmed by discussing on volume availability with the suppliers.                                   

SALT – FLAVORING AGENT

The US manufacturers of Salt had been analysed to find out that location proximity of supplier and huge volumes would result in cost effectiveness

  • Among the salt types – food grade rock mined salt is the cheapest as this is the purest edible mineral salt made available in an industrial scale

  • Other salt types of like solar salt and vaccum salt are also edible but are costlier because of the harvesting time taken, and technology utilized in manufacturing, respectively. Hence, it is suggested to go with rock mined salt as confirmed by multiple US salt manufacturers and their dealers

  • Kissner group sells Sea salt in Canada at a comparatively lower rate compared to their counterparts in North America, as told by K plus S group

  • As told by ICL group, salt coming from Dead sea basin is proved to be costlier for both food grade and technical grade due to the location proximity and the related transportation charges. Logistics is almost double the product price. Hence, choosing a closely located salt suppliers would cut down cost drastically

  • Similarly, high volumes when sent in full truck load, gets charged the same as the less than container load mostly. It would lead to higher transportation cost per unit in the latter scenario. Hence, purchasing in huge volumes would reduce the cost

  • Like stated before, contracts and lock in period would prove cost effective even in salt as this is also seasonal product

  • Last but not the least dealers of big manufacturers also add margin to the product sold, which increases the prices. If possible, buying directly from the manufacturer will have lesser margin

YEAST

The US manufacturers of Yeast had been analysed to find out that the selection of raw material, and product type chosen for the end use would result in cost effectiveness in yeast procurement

  • Cost of production of yeast is around USD 0.254/LB for Cream yeast, USD 0.488/LB for Fresh yeast, and USD 1.537/LB for Dry yeast in the USA. Which is again usage of the right yeast in the right product will prove to be cost efficient. Wherever cream yeast can be used,, should be substituted with it as it is the cheapest of all types of yeast

  • Yeast cost of production varies by 13 - 48% based on the Molasses used. Sugarcane molasses being the least costliest, followed by beet molasses and corn syrup. As sugarcane is an important cost parameter, US Sugar Forecasted to Compare Jan-2021 through Jan-2022, and Sugar sources prices are expected to increase by 6% for Sugarcane. This is majorly due to the rebounce of the sugar market after COVID shutdown, and increased production output

  • Transportation is accounting to around 7%, 23% and 45% in dry, fresh and cream yeast respectively, to transport from local manufacturing site. Considering the transportation cost and production together, the choice of yeast type has to be made. For example, dry yeast production is costlier, but the transportation cost of it is, the lowest. Importing from Canada to USA would reduce the transportation by 30% on the cost as compared to other options considering the volatile freight forwarding market conditions in The USA currently

Conclusion

In a summary, even though the usual supply chain and procurement methods of existing manufacturers appears to be right, it is certainly disrupted due to the recent COVID 19 situation. Hence, it is best to revisit the choices they make during the selection of product type, supplier, materials used, location of the supplier etc. while making procurement decisions.

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