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The following appeared as part of an annual report sent to stockholders by Olympic Foods, a processor of frozen foods. “Over time, the costs of processing go down because as organizations learn how to do things better, they become more efficient. In color film processing, for example, the cost of a 3-by-5-inch print fell from 50 cents for five-day service in 1970 to 20 cents for one-day service in 1984. The same principle applies to the processing of food. And since Olympic Foods will soon celebrate its twenty-fifth birthday, we can expect that our long experience will enable us to minimize costs and thus maximize profits.”
AOA: A report claims that cost of frozen food processing will come down as the companies learn to do things better and more efficient. The report has cited an analogy of colour film processing cost and time reduction. Further it cited that long experience of the company will enable it to reduce the costs and thereby generate more profits. While I understand as the processes become more industrialized the cost of production will come down but I see there are number of flaws in the way the report has concluded on cost reduction. I’ve listed and expanded the flaws in the subsequent paragraphs.
First, the report makes a general assumption that the cost will come down when you learn to do things better and efficient. The report fails to give any specific data points supporting this statement. While I agree that as you learn you become better and more efficient but it need not necessarily decrease cost of processing. It may be that one has learnt that there was a major QA process missing and the product was deficient which neither customer nor the company identified. To add a new QA process for a product, a company may have to add more resources, equipment and logistics. Clearly, learning is leading to efficiency but increasing the cost of process
Second the report assumes that the processes involved in color film and frozen food production are same. On what basis the report has compared? Is there any evidence which report could have shared to bring this analogy? The report does not even call out how learning and efficient ways has lead to cost reductions in printing. What I know about colour printing cost reduction is that when there was monopoly the industry demanded high prices. As the competition has increased printing industry was commoditised and only to retain market presence, the companies have started reducing printing prices or by adding more resources to reduce time to process. Clearly I don’t see any efficiency improvement in the production cost. May it went up but the industry could not reflect in the price because of competition. Lastly and more importantly, the report assumes that greater the experience greater the productivity and thereby more reduction in costs. However, it misses that more experienced staff also demand higher wages and bonus. They also demand additional safety provisions and new equipment to improve the productivity. Motivating an experienced staff has tremendous costs involved. Therefore one cannot assume that experience will automatically reduce the costs.
To conclude, the report could have justified enough on its cost reduction plan by demonstrating some metrics on how their processes are improving and how the costs are reducing. I’m sure there will be many processes that could be fine tuned overtime and it can reduce the cost of operation significantly by a simple change but the report fell short of calling them out. The report could also have mentioned how the company is keeping its experienced staff motivated and what productivity gains plan it has agreed with the staff. This would have bolstered its overall plan and give more confidence to investors on cost reduction and profit improvements.