When you do not need Product Costing!

Switching sides about a year ago had me get an entirely new prospective on the interaction between Software, Software vendors, businesses and its users. Last week I had another encounter on my endeavor to find the right solution for a meat packer I am working with. The discussion surrounded the necessity of product costing, the software vendor playing it by the book “You do need product costing, don’t you?” vs. me: “No, I don’t”.

Even funnier, I could have been that guy insisting on traditional business economics by the book. Just a year ago I was preaching the same school of thought.

Working with users and companies in food shows a few things very early. One is, that they are really hands on people enjoying food, with most of them having a pretty tense relationship to technology. The other attribute I find, is pragmatism. They eventually do what works, almost like my kids and my dog. Written in a book or not, it doesn’t matter. Nothing wrong with this approach!

In this particular instances, we discussed two different approaches for the same problem leading to the same goal. The traditional way of product costing, where you try to follow costs through the process and keep allocating, reallocating and distributing until the costs are assigned to the products being sold giving you an estimated profitability for each line item or a sales order. The allocation processes have their weaknesses though, because they create numbers that do not naturally exist and therefore can lead to misinterpretation.

The particular case here, a meat packing plant, had extremely complex processes, where a cost allocation is next to impossible, and even if done, it would not provide a good management tool because the cost allocations would have an unacceptable margin of error in a business that is about pennies.

The approach this meat packer as well as most other meat packers are taking is the ‘daily profit and loss statement’. Interesting enough, you can get to very similar results much faster, much more accurate. Some segmentation into different cost centers give you even a better undrstanding on what is happening inside your organization. A very good and reliable management tool to measure profitability of customers, items, sales people and other business drivers, aka “key performance indicators, KPI’s”.

It is interesting for me to see that every software package I have seen has very much the same approach to product costing and profitability. I served as product manager for one an industry specific software package and had the chance to change it to the better. I did not. I was unable to understand what customers really wanted, because I was too much focused on what my software did, and the message the company I was working for has been representing.

It seems that we are in an environment in food, where most software vendors do not really understand what food processors want and need. On the other side, I don’t see many food processors to articulate very well what they want and make sure that they get it. The large food processors gave up a long time ago, opting for in-house software development. Food specific standard software therefore only exist in the small to midsize businesses.

I will keep you posted on the innovations I see and about the solutions that exist that strike the right balance between technology, being ‘by-the-book’ and the pragmatism that makes food processors so successful. I think herein lies the key to successful business software that can stand out of the commodity markets and truly make a difference for companies in the food supply chain.

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