Temporal Segregation, a Dynamic Procedure to Manage Raw Material Quality Variation in Feed Mills

How do you explain to your financial director the return on investment of a laboratory operation in feed mills?  More than explaining, how do you calculate it? How often and when should you change formulas based on lab reports? Can you segregate raw material quality if you don't have enough silos to spare? And above all, why should you care even to answer any of these questions?

Depending on the species your feed mill produces for and the region of the world you are operating, feed costs may represent from 60 to 75% of all operational costs to produce animal protein.

Raw material purchases would mean more than 90% of your operating costs if your business is an independent feed mill.  Both for the feed mill and farming operations, their success is in the hands of a formulator. Just reflect for a moment.  Who manages the most significant cost of a feed mill operation is not Human Resources, financial department, or procurement.  Nutritionists and formulators are the ones who define which and when ingredients should be purchased, in what conditions, and in what specifications. 

Procurement, financial, and quality departments will guarantee that the purchasing is efficient, but the decision and management of this asset are in the hands of nutritionists. The stocks of ingredients will be used at their discretion and not based on what the procurement director defines. In daily practice, nutritionists define their company positioning strategically, not the CEO. Formula specifications will determine if they are competitive or premium brand sellers.  Even if the command for a competitive position comes from the boardroom, the safety margins and lack of information at the formulation department will lead to a premium-rich product, derailing sales and marketing efforts and leading to a luxurious product being sold in a competitive segment.  Initially, premium formulas suffer from unstable quality, disappointing expectations, or reflected in poor animal performance.

In a series of articles, I will try to clarify the relevance of knowing to answer the above questions.  Such knowledge can be transformed into actions by the formulation and quality departments.  These actions can produce cost savings and competitiveness in animal and feed mill operations.  These articles are organized in the following order and will appear exclusively in FeedMag. 

  1. Value of lab analysis in feed production
  2. Raw material quality natural variation and its impact on formula cost
  3. Temporal quality segregation method, silo-free quality segregation for financial impact

You may benefit from this concept if you have a NutriOpt contract*.  Please contact your Trouw Nutrition representative, and we can organize an exclusive call at your convenience.

*A NOA or NIR calibration contract is required for the operation of the concept outlined in this series of articles

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Value of lab analysis in feed production

From a routine operational point of view, a feed mill depends heavily on ingredient specification references to make frequent decisions.  Lab reports help nutritionists define a basket of ingredients to work with and how to combine them for a desired feeding program. 

Quality control and procurement departments depend on lab results to guide supplier selection, reception or rejection of incoming ingredients, final product quality control, certification, guarantees, and dispute handling. Every professional feed mill has its chemical lab and modern equipment capable of analyzing ingredients (Near Infra Red, X-ray fluorescence spectrometer, High-performance Liquid Chromatography, and Gas Chromatography, for example) or externalizing these services to commercial labs via contract.  To give you a glimpse of how strategic a laboratory is for a feed company, take the example of Nutreco.  Their quality system, Nutrace, runs 6,000 daily analyses to check raw material quality in their global Trouw Nutrition and Skretting operations.  (For more information on Nutrace, click on this link)

Based on its contribution, one would expect that the following question is easy to answer: "What is the return on investment of a feed industry lab?". Suppose you ask a quality manager, a nutritionist, a feed salesperson, or a feed mill CEO. In that case, they will probably confirm the strategic role of quality control or investments in laboratory development, capabilities, and certifications.  Some of them might even know how much the investments are. Surprisingly, few might know how to calculate its return on investment. Before jumping to conclusions, remember that we discuss a laboratory serving a feed mill operation. Suppose I am not evaluating a laboratory connected to a feed mill in an integration.

The obvious way of estimating the return on investment in animal nutrition and feed quality is by measuring it via animal performance. The question I posed above, "What is the return on investment of a feed industry lab?" excludes the animal component of the calculation. 

Why?  In any business activity, it's wiser to appropriate each unitary operation's value for its purpose.  In other words, in our example, the operational expense of a lab is usually charged to the feed mill.  The feed mill pays the analysis cost, which, in turn, may charge the farm operations via the feed cost if they are part of an integration. On the other hand, suppose we are making investments, expanding activities, or deciding to outsource lab services for a commercial feed mill, which is not part of an integrated company with animal farming and processing. How do we appropriate value and justify the costs of a lab?

These questions have become relevant in the past ten years as the technology of Near Infra-Red (NIR) equipment has improved dramatically, and their costs have decreased at the same rate.  Nowadays, it is possible to have this technology mobile, and technicians and nutritionists may carry their lab in their bags for the equivalent cost of a computer. (For more information, check out NOA  via this link)

As the efficiency of these machines became comparable to traditional lab analysis, laboratory managers had a dilemma to answer. What is the justification of conventional chemistry, and what are the value drivers for their operation? What's more, how much do we get back for each unit of money invested in laboratory activity?

To answer this question, we first must understand why analysis is required in a feed mill as a quality control check. Excluding the cases of fraud and error, natural ingredients present an intrinsic variability in their specs. If we take cereals like corn and wheat or oilseeds like soybean and canola, their nutritional specifications will naturally vary from grain to grain.  This implies that samples or lots of these grains will present the same pattern.  It means that even cargo originating from a given region or supplier, despite their pre-defined contract specifications, will yield a specific variation among batches when analyzed for their physicochemical specifications.  For example, a contracted supply of soybean meal at 48% protein will still deliver cargo with protein content varying from 46 to 50%. As the contract was negotiated at price points of 48% protein, it means that for those volumes where protein analysis was lower, the feed mill was losing money, as they paid for 48% protein and received less. On the other hand, the feed mill was making money for those volumes where protein analysis was above 48%, as they paid for 48% protein but received more.

-" Wait a minute! On average, the feed mill was even, and financially, the lower volume spec soya and higher spec soya balance each other out! " - I hear you saying to yourself now. Is it so?

The procurement team or the financial department will give you that explanation, as they calculate contracts in bulk.  For instance, a supply contract is composed of a bulk volume that is delivered in several cargos. The delivery may take several weeks or even months to complete.  In this way of estimating value, on average, the supplier will deliver the nutrients as contracted, and the low soya protein of some cargo will be compensated by higher soya protein in other loads.  The problem is the time dimension. As the ingredient specs vary as shipments arrive, nutritionists must make appropriate corrections to compensate for lower or higher specs of ingredient natural variability as they come to production. Let's take the example above again. As a lot of soybean meal is arriving, and this cargo is lower than expected in protein content, the nutritionist must compensate with other raw materials, extra soybean meal, or more synthetic amino acids to fulfill their final formula specifications. This correction has a cost impact, and the final formula will reflect that cost impact. Even if future soybean meal cargo is higher in protein content, the modification must be executed now, and the financial consequences will be passed on to the cost and pricing definition of that formula at that moment. On the other hand, as high protein content soybean meal cargos arrive, the nutritionist should also compensate appropriately for their formula; otherwise, excess protein will be delivered, and money will be lost. In either case, as the nutritionist has the information on raw material quality variation, it is in her interest to implement appropriate corrections to avoid breaking the contractual specifications with their clients, having claims due to legislation, or problems in animal performance. On the other hand, if specifications are above contractual terms, the nutritionist still wants to protect her company by not delivering more than what was paid. The above example indicates that the time dimension of procurement and financial departments differs from that of a feed mill's quality, formulation, or sales departments. The individual cargos and the natural quality variation of ingredients may affect daily operations and cash flow in ways that are not always visible or reported in the accounting books.

How much money is it?  We also asked that question ourselves. For now, I will indicate the financial impact of corn quality variation for a feed mill. Let's take the following situation: corn price at EURO 250/MT, volume consumed per year at 100 000 MT, and standard quality variation at 1,6.  In this case, the total budget expenditure in corn would be EURO 25 million (corn price x volume), and the financial impact of natural variation would represent EURO 695 000. In the following discussion, I will explain further how this calculation is done and how we transform nutrient variation into financial measurement. This understanding will enable you to grasp why a lab has value to a feed mill operation and how we can measure its return on investment. Above all, you will be able to understand why it's so important to have as many sample analyses as possible to guide decisions on formula changes as ingredient quality varies.