At first blush, many food manufacturers’ business plans seem straightforward. Food manufacturers choose a mix of innovative food products, optimise costs and plan to sell as many units as possible. Unfortunately, the market for processed food is highly dynamic, so food producers are unlikely to produce consistent volumes of food products in fixed proportions over the course of an entire year. Let’s discuss winter, summer and the seasons in between in the context of food manufacturing.
What is seasonality for food manufacturers?
In most businesses, there are likely to be prevailing seasons. Very few businesses sell a product mix that is entirely unaffected by seasonal pressures; even wholesalers of core commodities such as sugar may notice small seasonal variations in either demand or supply. For food manufacturers that sell one basic product, or a set of related products, there is likely to be an on season and an off season. For example, a coconut yoghurt maker is likely to ramp up production in the lead up to summer and sell much higher quantities throughout summer than during the winter months. On the other hand, winter is likely to be peak season for a boutique hot chocolate maker.
Many businesses sell a varied mix of products and are therefore exposed to different seasonal variations. A larger frozen desserts company may sell higher volumes of ice cream and frozen yoghurt in summer and higher volumes of frozen oven bake pies in winter. Managing seasonality is one of the key reasons for food manufacturers to hold inventory.
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Dealing with seasonably low demand
Although the concept of seasonality is simple at first glance, effectively planning for and managing unstable demand and an unreliable supply chain is challenging for most businesses. Most businesses will be aware from previous years’ trading that cashflow is tight in the off season, but this does not necessarily mean that low cashflow is easy to manage! In spite of the best possible planning, low revenue during the off season will always compare unfavourably against fixed monthly outgoings.
Inventory costs can have an undue impact on a business during its off season. During the off season, any inventory that a business was unable to sell earlier must be carried through the season. Holding on to inventory involves a variety of hidden costs, such as the cost of storage, handling, insurance and (of course) loss and shrinkage. Maintaining a buffer of safety stock seems like a much weaker reason for holding inventory after taking inventory carrying costs into account. Thankfully, food manufacturers tend to carry relatively little inventory over from season to season owing to the relatively short shelf life of food in comparison to many other manufactured products.
Managing peak demand
The on season is often a more welcome challenge. Although business is booming, it can be difficult to balance customer demand and manufacturing logistics during the busy season. In winter, it can be difficult for an ice cream producer to justify running freezers for a whole shift. In summer, thriving ice cream producers typically lack capacity and may turn to double or triple shifts to keep up with demand. Managing inventory during this time can be difficult, although you may be willing to run triple shifts, your suppliers may not be able to supply enough raw ingredients to keep the production line running. These pressures are likely to be strong reasons for holding inventory as despite the carrying costs, holding extra inventory can be a smart move in peak season. Equally, your suppliers may have ordered in or produced a large volume of extra inventory for their own peak season only to find that their transportation provider has very little extra capacity for additional deliveries.