Optimising ROI whilst Balancing Stocks, Seasonality and FFA levels
In the world of cocoa, challenges are brewing. A combination of factors – shortages of cocoa beans and soaring prices – has created a perfect storm. This demands a strategic approach to ensure businesses can weather the storm and maintain reasonable ROI levels amid market turbulence.
Cocoa processing companies face a dual challenge:
- The pressing need to allocate the scarce commodity to maximise profits amidst limited supply
- The escalating costs of raw materials demand an optimal approach towards inventory management
Balancing these aspects is crucial in optimising ROI in a volatile market with constrained revenue and escalating costs.
The complexity increases when considering constraints like minimum demand obligations (you can’t just stop supplying key products to strategically important customers), diverse quality and flavour profiles of cocoa beans by origin, and the perishable nature of this ‘fruit’, requiring strict monitoring of Free Fatty Acid (FFA) levels for production.
Strategic Imperative: Maximising Profitability
Maximising profit from scarce resources is challenging, but achievable. By creating a relatively ‘simple’ model that incorporates market demand, margin per unit of bottleneck capacity, and overall demand constraints, businesses can effectively navigate these challenges.
Where many companies struggle, is in translating this strategic plan into an actionable plan that can withstand real-world variations and disruptions. Sales & Operations Planning (S&OP) and Material Requirements Planning (MRP) need to be tightly aligned to maintain the delicate “profit maximising” balance set out by the planners and prevent value leakage caused by sudden market fluctuations, unexpected sales orders, etc. And this is where it often goes wrong.
Additionally, when supply shortages occur, the overall pressure on businesses escalates, resulting in what we would call “disruptive demand behaviour” or “sandbagging.” This behaviour, characterised by market players hoarding supplies in anticipation of scarcity, invariably triggers a bullwhip effect, capable of derailing even the most carefully crafted strategies.
ROI: Working on the Numerator and the Denominator
To maximise your ROI, you obviously have to work on maximising your profits (this is your numerator), which can be done by using the abovementioned profit maximisation model. But you can also limit the working capital employed (your denominator in the equation). Efficient inventory management is not just about reducing working capital and storage costs; it is about ensuring that the supply chain can operate effectively with minimal stock required. It’s akin to enhancing a car’s engine efficiency to cover the same distance with less fuel. Similarly, we strive for consistent profits while using fewer cocoa beans to keep our supply chain operative.
Success Stories: Lessons from Diverse Industries
Having tackled similar challenges in industries facing structural shortages such as steel, electronics, chemicals, but also cocoa and even blood plasma, we have honed a two-pronged approach to address this effectively:
1. Profit Maximisation Model
If there was no profit maximisation model present yet, we would help the client to rapidly bring a model together that would allow the planning team to simulate the different scenarios and propose an optimised plan. More importantly, we would combine this with both…
- implementation of a robust set of S&OP policies and processes
- adopting an adequate demand planning / MRP logic that allows to absorb variations in demand better (we notice that a Demand Driven logic here can be very helpful).
This approach has proven to boost profits by 20-50% while enhancing planning resilience.
2. Inventory Optimisation
By identifying and addressing the key drivers of inventory along the value chain, businesses can significantly reduce the need for materials and minimise the risk of obsolescence of cocoa beans. During a project we ran with one of the leaders in the cocoa industry (see case study below), we demonstrated how a strategic overhaul of inbound supply processes, seasonal buying patterns, and product segmentation led to a substantial reduction in inventory needs (inventory reduction of >50%) and of the FFA-related risks (reduced by >75%)
In summary, the cocoa industry’s current challenges offer an opportunity for innovation and strategic transformation. Through smarter planning and holistic value chain management, businesses can not only weather adversity but also enhance ROI and thrive in the long run. Let’s raise our cup of hot cocoa and toast to resilience and profitability in turbulent times!
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