A sector that produces almost 11 million tonnes of feed and is calculated at between 22 and 25 billion rand, the South African animal feed industry faces a number of challenges, with the maintenance of good profit margins and acceptable levels of plant and equipment utilisation now critical factors in ensuring the survival of these organisations.
Braam Koekemoer, ERP lead: technical and pre-sales at Datacentrix, an integrated ICT solutions and services provider and Sage ERP X3 partner, explains that a number of recent local and international market conditions have caused instability within the industry, giving rise to a complex and changing environment.
“The current exchange rate volatility makes it very difficult to accurately forecast feed costs and prices,” he explains. “In addition, lower volumes of birds are being produced by the local poultry farming industry due to a lack of regulation around the import of chicken meat. This in turn has had a direct impact on animal feed production, with import duties and control issues causing additional difficulties.”
Further pressures include spiralling energy costs, which are showing a continuous increase above inflation levels, and labour forces demanding double figure salary increases.
“Unfortunately, feed manufacturing managers cannot control these external factors,” Koekemoer explains. “What they can – and should – however do is to focus on the internal factors that can be controlled.”
From an information systems perspective, a feed mill manager’s job covers a number of areas, including:
- Customer order management and customer service;
- Purchasing and raw materials receiving, production, packing and bulk outloading;
- Inventory management;
- Compliance, tracking and traceability;
- Formulation, labelling and quality; and
- Pricing, costing and quotations.
“Customer orders and service ultimately drive the feed manufacturing business. Without customers, your business will not exist. The feed industry market is highly competitive, and therefore these companies need to provide excellent customer service at all times.”
Inaccurate sales orders, incorrect sales pricing, erroneous delivery dates, as well as insufficient credit management, are all typical issues that have a direct impact on customer order management and customer service.
Adds Koekemoer: “On the other hand, for customers to get what they want, at the best price and an acceptable quality on time, it is crucial to ensure that the procurement and receiving of raw materials, the planning and execution of production, as well as the loading and dispatching of feed, are all properly managed.”
He explains that inventory is probably the single biggest working capital investment of any feed mill. “Physical inventory and the inventory management systems are frequently the areas most affected by ineffective management. An organisation can have the best customer service and a cutting edge formulation system, but without the correct inventory, it will reach a dead end.”
Here, challenges such as the improper management of stock levels, expired stock due to inefficient stock rotation, unacceptable valuation and quantity variance issues, and inaccurate stock valuations can all be caused by a lack of inventory management.
“An increasing challenge over the past few years has been the recall of pet food due to contaminated raw materials. The real question here is, what do you recall if you can’t trace the problem? With a proper tracking and traceability system, the process for locating the problematic products and issuing a recall warning is much easier.”
The biggest procurement, receiving, production and bulk outloading concern is that users are reluctant to maintain lot numbers at the receiving point of raw materials. Either existing systems do not have lot number functionality, management does not realise the importance of lot control, or the existing system can handle lot numbers, but batching and “loadout” systems don’t have the ability to handle lot numbers. At the same time, lot numbers that are automatically applied according to a “first-in-first-out” principle, but are not verified, can lead to a situation where system-generated lot numbers differ from physical lot numbers, with no access to recall information.
Feed formulation is driven by required formula specifications and the actual nutritional value of raw materials. Inaccurate information on raw material nutritional values can be catastrophic, as the end result will be a formula that is completely out of specification.
One step that can be taken to support feed mill managers in the day-to-day management of their businesses is to implement a reliable Enterprise Resource Planning (ERP) solution, with reporting tools that can provide real time information for quick decision making.
“A quality information system can play a pivotal role in the formulation process,” says Koekemoer. “The actual raw material nutritional values are recorded and passed through to the formulation system, which guarantees an accurate basis of formulation. An analysis of the feed will then ensure that it complies with the required specifications.”
Labelling, or tagging, is a legal requirement of Act 36 of 1947, and it is good practice that both packed and bulk products are accompanied by a tag that states the product, packing, feeding instructions, additive warnings and manufacturer information. Non-compliance exposes the feed manufacturer to legal actions.
Pricing plays a key role in the retention of customers within the feed industry and the sustaining of profit margins. On the other hand, accurate costing will also contribute towards more precise profitability.
The biggest challenges in this area include delays in price increases and decreases, a lack of visibility around process recoveries, such as pelleting and bagging, meaning that they cannot be posted to the general ledger automatically, and non-existent pricing per item, price lists per customer, price letters and quotations. In addition, cumbersome, manual quotations and overhead costs not reflected in inventory valuation can also be problematic.
“The consequence of not tackling the challenges outlined above can be disastrous for an animal feed manufacturer,” Koekemoer concludes. “However, by timeously addressing these issues, organisations stand to gain a number of benefits, including high customer satisfaction and retention, lower costs and stock losses, improved margins and smoother operations. They will also enhance governance and compliance levels, and eliminate brand erosion.”