A food manufacturer wins a major grocery contract. Orders start coming in, the factory is busier and revenue is ahead of plan. At the next board meeting, the chief executive has good news on sales. The finance director has a harder story to tell. Overtime is up, waste has increased and the new business is contributing less profit than expected.
The contract was priced on the assumption that three products would run in long batches, with orders confirmed far enough in advance to plan production. In practice, the retailer orders smaller quantities across the range and adjusts volumes closer to delivery. The manufacturer sells roughly the volume it expected, but the factory makes it in more batches, with more changeovers and cleaning. Some of the work moves into overtime to keep other customers’ orders on schedule.
The commercial team is protecting an important new relationship. The factory team is getting orders out on time. Each is doing what the business has asked of it. The gap sits between what was agreed with the customer and what it costs to deliver week after week.
For a private equity backed food business, understanding that gap matters. It changes the decisions the board makes about where to grow, where to invest and what it needs from its leadership team.
Find out what the business is making on the extra sales
A useful place to start is with one customer account. Take the original quote and compare it with a representative period of actual orders, production and deliveries. Look at the net price after rebates and promotions, the mix of products the customer bought, and how the order pattern affected the factory schedule.
The figures can tell quite different stories. The customer may be buying more of the least profitable product in the range. The promotional calendar may require extra shifts because demand is concentrated in a handful of weeks. A product that looks attractive on a standard cost sheet may tie up the only line that can make a more profitable product. Each points to a different decision.
It also helps to distinguish the costs of getting an account up and running from the costs likely to recur. Extra trials, training and lower yields may be part of the launch. If the same costs are still appearing once production has settled, the economics of the account deserve a closer look. That distinction is particularly important when the investment plan assumes margins will recover as volume grows. The team should be able to explain exactly what improves with scale. It might be longer production runs, better ingredient buying terms or the ability to move work onto a dedicated line. Each of those benefits depends on something specific happening.
Ask what the factory has to give up
Spare capacity can make a modest margin contract worthwhile. Putting work through a line that would otherwise be idle can contribute towards overheads. The calculation changes when the contract competes for the busiest hours on a constrained line or requires the same people and equipment as more profitable work.
Take a chilled manufacturer running several recipes on one line. A new retailer wants a broader range with frequent deliveries to manage shelf life. Each product may make sense on its own. The range as a whole could leave the factory with a schedule full of short runs, fewer opportunities to produce similar recipes together and more work at weekends. The practical question is how much profit the business makes from the production time it has available, including the work it has to move or turn down.
This is also where a case for capital investment can get ahead of itself. A new line might solve a genuine capacity problem. If the pressure comes from frequent last-minute order changes and small batches, the business should test what a better order pattern would achieve before committing to more equipment. Where the investment case depends on a single customer, the board should understand how firm that volume is and what else the line could make if the account develops differently from plan.
Decide what the customer relationship is worth
There can be good reasons to accept a lower margin for a period. A new account might give the business access to a retailer it has been trying to work with for years. It might open up a category where the manufacturer has the expertise to win a larger share. A business bringing a new site into operation may value regular volume while it builds demand elsewhere.
What matters is whether the commercial case still holds once the team has seen how the account behaves. If the plan depends on adding more profitable products, what has the retailer said about extending the range? If it depends on longer runs, when is demand expected to reach that level? If it depends on better terms at renewal, what gives the manufacturer grounds to secure them?
Those questions make the customer conversation more concrete. A price increase may be one option. So might agreeing longer order notice, consolidating deliveries or simplifying a range where several variants sell in small quantities. Some changes could suit both parties. A retailer that is dealing with inconsistent availability may welcome a more predictable order cycle if it improves supply.
The board can then agree how long to support the account on its current terms and what would prompt a review. That gives the commercial team room to develop the relationship while making the cost of doing so visible.
Look at the decisions the leadership team is rewarded for
In many businesses, sales is measured on revenue and new listings, operations on service and factory efficiency, and finance on the overall result. The difficulty shows up when one team can meet its target by making another team’s job more expensive.
For example, a retailer asks for an additional product ahead of a range review. The sales team sees a chance to secure more shelf space. Operations can make it work by moving existing production, but that creates overtime and puts another account’s delivery at risk. By the time the impact shows up in the monthly numbers, the new product is already in the range.
The chief executive can change how that decision gets made. Before the commitment goes to the customer, commercial can set out the opportunity, operations can model the impact on the production plan, and finance can show what the business would make under realistic assumptions. A named executive can then decide whether the opportunity justifies the cost and review the result once orders are flowing. The same approach helps when an existing customer asks for a promotion, a shorter lead time or an increase in range.
It also gives the board a better way to judge progress. Alongside sales and headline margin, it can look at which customer accounts are improving, what drove the change and whether the growth the business is pursuing fits the capacity it has.
Write the executive brief around the work that needs doing
When margins disappoint, a Commercial Director appointment can seem like a natural response. It makes sense where the business needs someone who can renegotiate terms, improve the mix of work coming into the factory and have difficult conversations with major retailers. Where pricing and customer terms are sound but the site struggles to deliver at the expected cost, the stronger case may be for an operations leader who has improved throughput, reduced waste and maintained service and food safety through a period of growth.
In some businesses, the chief executive needs stronger financial insight at account or product level so the team can see the trade-offs before signing a contract. In others, the executives already have the right experience and need clearer authority to act across functions. Working out which of those situations applies gives the board a much more precise brief.
It also makes for better interviews. Ask a commercial candidate about an account they grew profitably. What did they learn about the cost of serving it? Which terms did they change, and how did the customer respond? Ask an operations candidate to describe a time when a new contract put pressure on a site. What happened to yield, overtime and service? How did they work with the commercial team when the original production assumptions proved optimistic? The detail tells you what they can bring to the business when similar decisions come up again.
The next major contract is a practical test. Before the price goes to the customer, can the leadership team explain what it will take to deliver the work, what the factory will have to make room for and how much profit the business expects to keep? Once the contract is live, can it spot a change in those assumptions early enough to act? For a board deciding whether its leadership team can deliver the next phase of growth, that is a more revealing conversation than the sales forecast alone.