Guest Columnist

From Plant Loss To Quality, A Look At Cheese Plant Profit Optimization Trends

by Vernon J. Spaulding

Vern Spaulding is the Vice President of Data Specialists, Inc.
You can reach Mr. Spaulding at 262-723-5726; or by email: info@dataspecialists.com.

Since the introduction of DSI’s plant optimization program about three years ago, 25 dairy plants have been audited throughout the US. While the majority of these plant audits have focused on plant loss or “Shrink” and yield optimization, dairy plants have requested that we also focus attention on several other auxiliary cost optimization opportunities.

This article will focus on the top five major trends that have been derived from these 25 dairy plant audits and offer some insights on baselines that you may want to compare your plant’s performance levels against.

Trend #1: Plant loss or ‘Shrink’
This is perhaps the most sought after optimization focus point in the dairy industry today. Why? Because over 68 percent of a dairy plant’s total manufacturing costs focus on materials, specifically dairy liquids, and a 50 percent reduction in plant loss, (typically 50 percent reduction levels are achievable within a less than 18 month ROI), can represent up to 60 percent of a plant’s total cost improvement potential.

Cheese quality and associated downgrades cost cheese manufacturers a price differential per pound of cheese sold anywhere from 10 percent of the normal sale price to 90 percent if the cheese is deemed animal feed.

Plant shrink audits evaluate all loss points from intake through finished goods inventory and in some cases, customer returns. Loss levels as a percent of dairy liquid intake range from 1 percent for powders, to 5 percent for ice cream based on the number of change-overs.

Cheese plant shrink losses range from 1.23 percent to 4.57 percent, with 2.45 percent being average. Losses typically break down into the following categories:

• Intake Farm to Plant Loss: Range = 0.15% - 0.6% Average = .25%. Can be improved to 0.15% with proper tracking software and weight/composition verification strategies, pending milk procurement source.

• CIP—Water Pushes— Change -overs: Range = 0.43% - 2.87%. Average = 1.45%.

• Tank/Silo Empty: Foam in cream silos, and starter silos, (for those who do not use frozen starter sets) are the largest loss points. Range = 0.07% - 0.32%. Average = 0.23% Poorly calibrated level sensors, poor pump configurations, butterfat build-up on tank walls, ice build-up on inside of tanks and over-agitation are key focus points.

• Cheese Fines and Curd Droppings: Range = 0.13% - 0.58%. Average = 0.24%. Can be improved with better curd formation techniques, improved hoop fill/press techniques and improved cut and wrap processes. Many of these losses can be partially recovered if the droppings and fines can be packaged and sold as animal feed.

• Human Error/Other: Range = 0.11% - 0.39%. Average = 0.26%. This category includes human CIP errors, leaky valves and fittings, cooler spoilage, wet cooler whey loss, and other non-recoverable whey solids occurring in the whey processing stream.

Trend #2: Yield Optimization
Yield optimization typically begins with the basic Van Slyke formulation which is modified for various types of chesses like Mozzarella and Swiss.

While standard modification coefficients do exist, many plants are evaluating their 57 process parameters to determine which ones can have the largest impact on overall cheese yields. These are: seasonal milk variations, casein/fat ratio, rennet versus set time, curd cut (revolutions and cut speed and knife sharpness), and curd cook temperature and cook time.

More advanced cheese plants are looking at multi-variant predictive model control algorithms and are deriving their own Van Slyke formulation coefficients using basic linear algebra. Average yield gain from such programs or even switching from full fat Cheddar, (non-standardized cheese milk), to standardized cheese milk, ranges from 0.22% - 1.32%. Average gain = 0.43%.

While the improvement in yield gains can offset the costs associated with evaluating a cheese vat’s processes, the reduction in yield variance and improvement in product quality therein have just as large an effect on the bottom line. This leads us to Trend #3, cheese quality.

Trend #3: Cheese Quality
Cheese quality and associated downgrades cost cheese manufacturers a price differential per pound of cheese sold anywhere from 10 percent of the normal sale price to 90 percent if the cheese is deemed animal feed.

There really is no average as each plant has a variety of downgrade options and quality concerns pending the markets the cheese is sold into. Downgrade costs are very real however and emphasis on understanding and reducing process variations is the number one priority with respect to this trend.

Trend #2 and Trend #3 really utilize the same key process variation reduction principles that actually stem from yesterday’s Statistical Process Control, (SPC), which has evolved into today's Six Sigma. While the definition of a process that conforms to six sigma standards represents 99.9997 percent or three parts per million non-conformance, cheese production is far too complicated to achieve such numbers.

While the improvement in yield gains can offset the costs associated with evaluating a cheese vat’s processes, the reduction in yield variance and improvement in product quality therein have just as large an effect on the bottom line. This leads us to...cheese quality.

I have seen plants that utilize a focused process variation reduction program achieve close to 4 sigma or 99.4 percent acceptance levels. Improvements in cheese quality have also offered cheese plants new market opportunities where more “delicate” types of cheeses can be produced.

Trend #4 - Least Cost Formulations
Understanding the nature of cheese milk versus finished cheese composition, market pricing for dairy liquid and powder types per pound of dairy component like protein and butterfat, and protein casein derivatives with their impact on cheese quality and yield all factor into this fourth trend.

Least cost formulation is considered at larger cheese plants, (where more than 3 million pounds of raw whole milk are consumed each day). This is because the cost-rewards associated with “playing the market” on powder futures for NFDM for example is just too costly for lower volume cheese manufacturers.

There are no ranges or averages supporting the benefits associated with this trend as all the very large plants that we have evaluated which are talking about least cost formulations have not actually implemented them at this time.

I suspect that this may be due to the volatility of the liquid market along with the non-durable nature of dairy liquids. I also suspect that the introduction of various forms of dairy liquids and reconstituted powders, (along with their associated protein casein derivatives and possible denatured states), offer more risk to product quality and yields than the gains associated with lower landed price levels per pound of protein.

Regardless, true costing would be needed to support least cost formulations in order to properly define the true cost of a cheese vat and most ERP packages just cannot perform this function because they do not manage costs at the milk component level for each dairy ingredient introduced into a cheese vat.

Trend #5 - Distribution Analysis.
While many of you may be thinking that this trend focuses primarily on transportation costs, (which is of prime concern today and should not be played down by any means), this category involves looking at a cheese plant’s multiple channels to market and the costs associated with each channel.

This analysis begins with a chart that resembles a ladder with the left vertical bar representing the cheese plant and the right vertical bar representing the actual end consumer, with each rung of the ladder representing each channel to market. Some plants sell in bulk (640s or 40s or whole wheels depending on the type of cheese produced), and also cut and wrap single pound individually wrapped packages in cases under their own name or under a brand label.

These packages are sold through internal sales professionals, through brokerage firms, through outlet stores, through distribution houses, and/or all of the above in just one rung. Some cheese plants have up to a dozen distribution “rungs” within their company’s distribution and market access strategy.

With careful attention to net price per pound per channel or “rung” and careful attention to brokerage fees, sales commissions, merchandizing costs, distribution shipping costs, product returns, consumer complaints, etc., each channel is analyzed for net profit based on the costs of good manufactured.

Each channel is then evaluated for long-term sustainability based on new market direct and indirect competition, market growth rates, manufacturing cost trends, etc. in order to determine if the current channel structure of “ladder rungs” make sense in the long run.

These analyses are often performed in concert with a cheese plant’s most trusted brokers and the cheese plant’s sales team.

The resultant decisions can be dramatic and has included discontinuing products, adding new products, adding cut and wrap lines, even purchasing blocks of cheese from past competitors and performing internal cut and wrap operations.
Distribution analysis can either be performed as part of a more formal strategic planning session or as an independent activity.

In either case, this form of analysis cannot be accurately performed unless trends 1-4 have been evaluated in some fashion as misleading true production costs, quality capabilities, least cost formulation (or at least understanding the nature of your milk supply), shrink reduction and yield optimization will all effect the costs of production and the ability of a cheese plant to produce new varieties or more of a single variety of cheese.

While the future of the dairy industry appears to be very bright for US-based manufacturers, many companies are taking advantage of our current economic downturn to evaluate the long-term sustainability of their businesses.

With careful and logical evaluation of a cheese plant’s losses, yields, quality capabilities, formulations, and distribution, profit margins can be improved by as much as 3.0 percent to 7.0 percent EBITA.
This profit gain opportunity has generated the interests of many cheese plants’ senior stake-holders. r

Our thanks to Vernon J. Spaulding. Spaulding is the Vice President of Data Specialists, Inc. You can reach Mr. Spaulding at 262-723-5726; or by email: info@dataspecialists.com. Cheese Reporter will make this article available on its website: www.cheesereporter.com