Understanding Margin Pressure: Where Food Manufacturers Can Stop the Leak

Every food manufacturer knows margin pressure. Fewer know exactly where it’s bleeding out.

Deductions, billbacks, and short pays often grab the spotlight, but they’re merely the final symptoms of damage that occurred much earlier. To explore the root causes of these issues, we consulted Drew Shields, solutions director at iTradeNetwork Inc.

With over a decade of experience in analytics, finance, and enterprise systems within the food and beverage supply chain, Drew collaborates with manufacturers, distributors, and foodservice operators to enhance forecasting accuracy, pricing execution, and margin performance. His insights assist manufacturers in identifying where margin leaks originate, defining components of an auditable workflow, and distinguishing proactive margin protection from simple quarter-end cleanup.

Where Do Invisible Margin Leaks Begin?

Drew Shields: Invisible margin leaks begin where processes are disconnected and data fragmented. When pricing, contracts, and item data reside across multiple systems, it becomes challenging to detect mismatches early in the supply chain. For instance, a food manufacturer may negotiate a promotional price with a distributor for a group of SKUs and update the pricing in the distributor agreement without consistently updating their internal systems. This misalignment can culminate in billbacks as the distributor attempts to recover financial discrepancies, leading to inefficiencies and margin erosion.

To mitigate these risks, manufacturers should maintain pricing and contract data in a unified, regularly updated system. This proactive approach could surface issues earlier and diminish the chances of minor discrepancies escalating into deductions, billbacks, or disputes.

Signs of Drifting Data

DS: Drifting typically starts long before actual discrepancies in contract terms, item data, or pricing are recognized. Miscommunication often serves as the catalyst. Several parties may hold fragments of essential information shared through different channels. It’s not always an individual failure; rather, it reflects disconnected systems and processes.

AI-powered platforms provide a solution to these challenges. They can scan various communication sources, like emails and PDFs, to extract and analyze essential line-items automatically. This automated data consolidation mitigates system and partner drift, streamlining efficient communication and reducing the potential for errors.

Improving Upstream Processes

DS: If manufacturers focus on refining one upstream process, it should be the management of manual purchase orders. The current system often relies heavily on manual entry of countless emailed, faxed, and verbal orders, which introduces inefficiencies and potential errors that can significantly impact product quality and shelf life.

Integrating AI in order management can convert this friction point into a continual flow. Automation can digitize orders, directly integrate collected data into OMS systems, and provide buyers with quick confirmations. Eliminating manual processes helps maintain product freshness and reduces the burden of delivering damaged or spoiled items, which ultimately decreases short pays and claims.

Creating an Auditable Workflow

DS: An auditable workflow encompasses mapping each detail of trade and spending to eradicate error-prone order intakes. Standardizing input data with automation ensures clarity and accuracy in pricing, rebates, and claims formatting.

For example, when a packaged food manufacturer signs a contract with a distributor, every order, invoice, product ID, and quantity can be automatically translated into OMS data leveraging AI. When the distributor submits a rebate claim, the system can easily determine the liability based on previously acquired data, allowing for accurate financial calculations and tracking.

Detecting and Preventing Leakage

DS: Manufacturers can gauge their success in preventing leakage when issues are identified earlier in the supply chain. This entails employing modern platforms to unify information and facilitating data flow into manufacturer workflows.

By leveraging automated controls, organizations can catch discrepancies before they escalate into claims or disputes. Recognizing these errors upstream leads to measurable improvements in the supply chain and, over time, positively reflects on profit and loss statements.

Whereas quarter-close cleanups might focus on clearing claims post-factum, a robust leakage prevention strategy emphasizes optimizing performance throughout the value chain to avoid issues from arising initially, empowering manufacturers to pursue sustainable financial growth.