Expected vs. Actual

Last week’s blog post provoked quite a response. If you remember, we talked about optimization procedures and cost management of your own fleet. Some had difficulties understanding why companies install $6,000 or more in terms of equipment on their trucks and cars to monitor these.

Historically, most companies in food are trying to control and monitor their costs as part of their accounting system. This is the old and traditional approach, and I find that most companies have a hard time letting this approach go. Solutions like these recognize the fact that ever lower costs of hardware and ever increasing costs of doing business enable organizations to have a closer look at their costs. 10 years ago, we were looking at route optimization systems to decrease costs by balancing routes better, cutting down on driving times and mileage driven, but companies learned quickly that this is only half of the equation. Route Optimization modules did not ensure that the driver is actually driving the optimized routes, that he is only spending the time needed to unload at their stop points on the way, and that they do not make any unscheduled stops. So you may optimize something that nobody adheres to.

There have been different approaches in organizations to more effectively control and monitor costs. “Activity Based Costing” was a buzzword in the 90s that companies tried to implement, but failed to execute on, largely because the approach required to capture many actual data they weren’t able to capture. In the 2000′s we saw the emergence of “Balanced Scorecards”. The pendulum swung essentially back, comparing some operational data with financial data in simple benchmarks with a simple target, but these methods have limited value either. Due to the nature of balanced scorecards, you compress a lot of data and must work with long term averages, so that there are always spikes that show, but are maybe related to regular business activities.

Companies need to increase the level of granularity of cost monitoring further and further. The current cost equation for companies in food make actual cost monitoring which have been historically cost prohibitive today easily justifiable if not mandatory to stay competitive. I sometimes chuckle when I go to my local fast food chain where the cash register displays that I was served in 18 seconds, but for these guys, the labor component during order taking must be a significant enough component to manage the costs of a fast food store. I honestly don’t believe that this makes even a single percent of the costs of a fast food joint, but it easily makes up more than a percent of the manageable costs of a fast food joint.

Looking at food manufacturing organizations all across North America, I see a lot of organizations recognizing this fact, trying to mitigate the changing cost landscape be developing ever more and ever more complex MS-Excel Spreadsheets or blowing up their chart of accounts to a degree that nobody really understands it anymore, except perhaps the person who created it. The worst of it all is, that either of these solutions approach the variance question between actual and expected in summarized fashion, in the example of freight costs perhaps based on the total freight bill. The problem with that approach is, that you cannot really analyze the reasons why you have any variances, because the actual data are not detailed enough, they won’t tell you that your trucks may burn 2 Gallons of additional gas, because the driver waits with the door open for unloading or takes unscheduled breaks.

Companies need to think differently about their expected vs. actual. A level of detail in expected data, whether these are transportation costs, bill-of-materials, cut-yields or anything else will not help if you do not have the same level of detail in your actual data collection. Companies need to learn you can monitor almost any actual costs and any actual activity in an organization, that these solutions are more and more cost justifiable and that the bottleneck in the manageability of organizations is not their accounting software, it is their ability to collect detailed actual data to analyze, slice and dice and compare expected vs. actual.

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