How To React To Higher Demand

Will:
All right, everybody. We are back with another episode of Safety Stock get excited. It is Friday. It is July 15th. Dan Magida. How are you doing, sir?

Dan:
I’m doing great. July 15th

Will:
Payday for a lot of people.

Dan:
Oh yeah. Friday payday,

Will:
Friday payday. And Dan, we got a spicy episode.

Dan:
Ooh. I like the spiciness.

Will:
There we go.

Dan:
Is Peter you on this then?

Will:
No, Peter, U’s not here, but you know, there’s another form of spiciness in the form of McCormick. And we’re talking about how they’re expanding production across the board to meet the surging demand of what they’ve seen. And Dan, I think the interesting thing here is that you, you have a lot of people that during the pandemic, they stayed home. They like cooking at home and McCormick has seen some of the benefits. And so some of the things we’re gonna talk about today is what they’re doing to meet this surging demand and what you can do as a brand. And you’re growing, you’re seeing a lot of production needs, what you can do with your suppliers, what you can do internally and try to figure out, do you have enough capacity to meet that growth potential you have as a brand? So Dan, why don’t you first off share with our listeners, what McCormick is doing right now, based off all the demand they’re seeing for their products.

Dan:
Frank’s red hot. One of their probably biggest portfolio products is boosting production, adding capacity, and two plants in the, in the us just to meet that demand. They’ve also opened up another, I guess, flavor solutions facility in in England and is also working to expand that in the north America footprint. But what they’ve seen as you mentioned earlier is just demands really high and they’re realizing the benefit of just manufacturing capacity to increase their resilience. So back in 2000, they transitioned to 24 hour operations just to handle that increase in demand. They do talk about there’s some headwinds there with higher material costs and transportation costs, but just because the demand’s still high for home cooking now we’ll see if that, and that’s probably gonna stay like that. You’d think, I mean, well, inflation’s what 9.1% year over year. And then 1.1 0.3% from last month, which is called Meg. If people are still gonna cook from home as opposed to going out cuz it’s still cheaper to cook from home than it is to eat out, especially New York city. It’s still cheaper.

Will:
Yeah. And here, you know, McCormick has a couple of interesting things that relatively recently they purchased Shula and Frank’s red hot, two of the best hot sauces out there. And what they’re seeing is as they are needing to increase production here, they’re actually able to do it within their own manufacturing plants. That’s a good thing because obviously they can control some of the cost factors that go into it. Labor that comes into play, their CapEx that they’re using on production lines. And then ultimately they’re in charge of their raw material pricing, knowing that they have a diverse amount of suppliers and they can ultimately decide what that total cost of goods is going to be as they output it to retailers. I think Dan, when you think about as a brand, depending on where you are in your journey as a company, you may or may not have control over all of those factors. If you’re a brand and you’re a DTC brand, you’re producing a consumer, good. You’re looking at it now and saying, I’m seeing, I’m doubling my growth. I’m having hyper growth. One of those immediate questions that you wanna be asking to yourself as you’re looking at your numbers and saying is my current supply, able to keep up with what I’m seeing and you should be having those conversations with whoever’s supplying. That is good to both on raw materials and ultimately your contract manufacturers or your in-house production capabilities to see, can they keep up with you?

Dan:
Yeah, I think it also opens a, a interesting question and I believe McCormick falls under more of those vertically integrated supply chains. Correct. as opposed to a lot of the companies that we work with who are just starting, that you’re more horizontal, you have a lot more steps in the process and a lot more like kinks, I guess you call kinks in, in the road that you just need to iron out. Make sure everything’s there. One thing from experience is, is we try to make it as vertical as possible in certain steps. So like if you have a filler, but then you gotta ship it to a co-packer just for specific packouts can you maybe combine those two at some point? So it’s just AAL less of a transportation and labor cost and bring it all in house and saves you time. So I would look at what your product is that you’re producing, how complicated is it? And then can you condense that and shorten that because scalability is what becomes the most driving factor as you reach profitability in, in, in your growth trajectory.

Will:
You’re right. And you know, from two companies I worked with before they, they both had two philosophical differences on how they approach this. The first one would, as they’re looking at capacity, they always wanted to have three months of production or stock available at any point in time in order to meet up with different levels of demand. Obviously that gives you a little bit more of a window in terms of changing your capacity availability to where you’re not looking to run out of stock, you know, more quickly, if you have a sudden surge, the other one tended to be a little bit more of a just in time model where they’re putting a lot of the CapEx and capacity utilization work front to where they’re saying, okay, we’re gonna spend a lot of money more front and we are then going to be able to handle these different ebb and flows as things come in and we will plan for 20% normal capacity surge, and then even an extra 20 in terms of your surge capacity to hit certain peak times.

Dan:
Yeah. I mean raise a good point. Cuz we did something. I did something similar too on the cap X side where you obviously, if there’s CAPA the factory X capacity, you wanna ask those questions either as you’re onboarding or as you’re growing, cuz they’ll see, hopefully you provide a forecast to your manufacturing partner. So they have an idea of what your growth is. Cuz scheduling can get complicated at times with plants cuz you’re not most likely the only customer there. And there’s a lot of SOPs. They have to file cleaning for one can take time as well. And there’s part maintenance. But the big thing for cap X is if you wanna grow and add capacity, who’s gonna be responsible for that, for that cap X. So I did something similar where we bought the cap X, but we didn’t own it because we don’t wanna be responsible for the maintenance on the machine cuz we don’t have people there. And we don’t know, we’re not the operators. So you don’t wanna own the CapEx if you’re still, if you’re not like vertically integrated own your own facility, but do some sort of buyback where like after X units are used, you get dollars taken off. So you, of course you have this upfront cost here, but that doesn’t actually impact your margins as much. Cuz it’s a separate cost. Like one’s R and D than one is more of a unit economics. But also what it does is it gives you a first right to refusal to hopefully use that line. So like if you’re in a bind and you’ve forwarded this equipment, you’re gonna get prioritized and then run. And that only helps as well. Now your machines may be used for other customers, which rightfully it should because the factory is not gonna be like, this is just yours, if we’re responsible for maintenance, but it gives you that level of comfort and that you’re gonna be treated right. Because you’re, you’re, you’re invested in the factory and they’re invested in you as well.

Will:
Yeah, I think a good rule of thumb to take away is that I, if you make up 50% or more of the capacity on a weekly or monthly, yearly perspective on a line at a factory in terms of expansion, you should not be paying for you. Shouldn’t be paying for CapEx. You should be employing some type of buyback, some type of tation in it. You know, of course doing some level of volume guarantee, but you don’t need to fork over your own money. And while we think of that, where you don’t have to fork over your Mo money is by subscribing and listening to safety stock. Ooh, if you have any interesting tidbits that you wanna share with us of interesting stories where you’ve been involved in surging demand and you’ve had to do something creative for capacity constraints to reach out to us at hello@anvyl.com and let Dan know what’s your favorite spices. Hey,

Dan:
If you wanna fork over money and sponsor some ads on safety stuff, we’re more than happy to take that

Will:
Money. We had a great Friday. We look forward to.