Lately I had multiple discussions with meat packers of different sizes about cut-out optimization models. Most companies have pretty ambitious visions on what a system can do for them, and to say it upfront, there are no computer systems to date to my knowledge that can truly solve the process of cut-out optimization.
The challenge is pretty clear. A meat packing house, regardless of species, needs to run at 90% capacity to be profitable as long as they are producing commodity meat. Commodity meat is a large portion of the meat packing industry today and just a very few mostly smaller meat packers provide very specific product attributes under a brand that commands a premium. Angus Beef is one of them, but even that gets a little commoditized with programs such as Certified Angus Beef, since there are quite a few meat packers that produce a meat cut portfolio with CAB as part of the offerings.
Dropping far below capacity makes a meat packer lose money, so most organizations will drive as many animals through the harvesting facility as capacity allows and sometimes even more by adding another Saturday shift. Another aspect is that the incoming supply is only controllable to a degree. As we have right now a shortage for slaughter cattle in North America, companies try to get whatever they can to fill the capacity. Grades and other attributes can largely only be estimated until they get graded. These estimates, however accurate they are, depend on available supply. Taking it all together, there is very little room on the inbound side of animals that can and that will be optimized.
The demand side is an entirely different ballgame. Meat commodities do not really differ from other commodities such as stocks, metals, grains or other publicly traded goods. The market determines the value of these commodities. The lower I set the price of the commodity, the more demand it will face. Looking at it from the supply side, you can surely assume that the shorter you are in the supply, the higher the price you can ask for.
The supply in the packing house is driven by its inventory levels. The higher they are, the more likely it is, that product is going to be sold at a discount. Cut-out optimization therefore needs to start with inventory optimization. This means that you need to make sure, first and foremost, that you have a detailed understanding of your inventory levels against you already committed sales orders. This view includes that you need to manage age restrictions well enough, so that you do not have too high inventory levels at any time while still serving your client base with the freshness they demand. Once you have this aspect under great control, you need to incorporate your cutting and deboning plan, to gain additional visibility on your inventory position in the future. This is than where cut-out optimization can help to improve profitability.
Meat processing facilities have more so than any other type of business an enormous flexibility on the type of product they can produce. Not only different attributes on the incoming side can create a huge variety of the types of meats, also the different cut patterns that can be chosen to break a piece of meat and pack it in boxes is huge. Each of these cut patterns creates a unique set of primary products as well as secondary and by-products. Each of these codes bears a certain value according to market and this value is changing as the market changes. The further out in time we go, the more unpredictable the market becomes. Price forecasting of these commodities is therefore questionable, and companies choose to sell ahead only based on formulas that derive the sales price based on current market. By taking that position and commit further out already a portion of the expected supply, they also reduce the supply and therefore increase the value of the remaining goods coming out of the house.
Cut optimization is basically the science of what you do with these remaining goods. Meat packers have to sell the entire animal fresh to make a good profit. Price forecasts based on the goods allow to choose, which cut-pattern will most likely create the biggest profit. We also need to keep in mind, that the meat packing house can decide up to the last minute, normally for the next day’s production, what cut pattern they choose and how they break them up. Before that time, no real decision needs to be made, which means the entire variability of the cut-out optimization is actually happening at the sales desk. The sales desk needs to sell a product mix, that allows them to sell the whole animal at the highest market value.
Companies a lot of times think that optimizing internal activities have a major impact on profitability. I think they are wrong. As least cost formulation has its significant impact only if it changes buying patterns and therefore reduce the costs of the materials, cut optimization can only have a significant impact if we manage the sales process better. The external activities are the ones that create an impact on the bottom line, not what we do in-house. in-house optimization only provides a small fraction of the return.
There is software out there that supports some of these activities, that provide tools for pricing managers and production schedulers. SignalDemand, a company out of San Francisco is one of the companies that is working on the market price optimization aspects, while CSB-System is one of the companies that manages the product availability question and provides the operational controls to manage the actual supply, available product to sell and the controls for sales departments to sell what they have and what they will get.
This is my last posting for the next couple of weeks. I will enjoy some time largely disconnected from the internet and hope that all readers of my blog enjoy the summer.