CPN

Consulting

SmartMix -
Commercial

NOVEMBER / 2016

CPN Consulting CONFIDENTIAL. This document contains trade secret information. Disclosure, use or reproduction outside Cargill or inside
Cargill, to or by those employees who do not have a need to know is prohibited except as authorized by Cargill in writing. © 2014 Cargill, Incorporated. All rights reserved.
www.cargill.com © 2013 Cargill, Incorporated. All rights reserved.
 Introduction I
 There are so many possibilities for dismantling a chicken and choose which
markets/customers/products are advantageous meet and which ones are
not profitable, that only a powerful planning tool can take into account all the
variables and lead to the best decision.
Whole
bird
Middle
East
Breast

Leg Europe

Wings
Japan

Feet

China
Giblets

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 Poultry
Industry
Raw-Materials

Final Products
The poultry industry has the potential to generate a large amount of final products through a single
1 raw material, with different types of chicken and average weights.

2 Strong interdependence between products and generation of compulsory products.

A planned production mix becomes a critical success factor for the business, considering its
3 characteristics of production diversity and interdependence, along with the production structure.

The adoption of a clear methodology and tool for defining the production mix is required to
accelerate the industry’s response to realignments ahead of the market trends and other
critical uncertainties.

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 Introduction II
 Poultry slaughter houses are examples of “joint production” activities.
 All the main products offered in the market are originated from a single raw
material, live chicken.
 “Joint production” is a different production system, which implies difficulties
with regard to product costing.
 “Joint production” can be explained as "a common production flow to a certain
point, called the point of division, and which results in a multitude of products"
(NEVES, 2000).
 Joint products are always related to each other, consequently increasing
production of a particular product will increase the production of others
that appear in the same process, although not necessarily in same proportion.

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 With many parts we make a car

With one part, several products are made

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 Introduction III

 After the initial point of division, the products will have added value through
the different production processes, independently.
 In the poultry industry, the correct determination of unit production costs is a
difficult or impossible task, regardless of the costing principle used.
 To abandon the concept of "individual cost of goods" becomes the only
way to manage profits and, consequently, the real contribution of each
product to the composition of the overall profitability of the company.

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SmartMix is a planning tool

Planning tool to optimize the mix of

products (market) according to bird
type and sizes (field), processes
capacities (plant) and market
restrictions, in order to maximize
total margin.
SmartMix uses Linear Programming
method.

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 SmartMix considers tree key areas:

Understand the field side: Understand the capacities Understand customer’s

and limitations of the plant needs and demands:
Availability
Plant Capacity Demand
Weight
Condemnation and Losses Prices
Weight distribution
Yield Sales Cost
Live cost
Process Cost Market restrictions
Yield

OPTIMIZATION = BEST MIX OF PRODUCTS

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 How SmartMix works
Flock weight distribution

Number of birds

Peso
Weight

Total weight distribution

Number of birds

Peso
Weight
Demand

  Product weight range

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 How SmartMix works
Primary
Bird Types Parts Final Products Markets
Products

Wing 30+ Fresh

Wing 30+
Wing Marinated
Wing
With Frozen
Giblets Wing
Yields
(AW, costs, CV)
Leg

Wog Feet
Domestic
Feet B
Feet Export

Yields Feet A
(AW, costs, CV)

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Focus on the right metrics
Best yield not necessarily = highest profit
Plant yield
14.00 85.00
(%)
84.60
84.00
12.00
11.88
83.00
10.00

82.00
82.00 8.86
8.00

81.00

6.00
80.00
EBITDA / 80.00
4.00 Sales turnover(%)
Price 79.00
3.57 3.41
3.01 3.22
2.00
78.00

0.00 77.00
Current 20% Flexibility 30% Flexibility

Sales Price (R$/kg) Plant Yield (%) EBITDA/Turnover (%)

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 Expected Results

 According to previous experiences, for 10% flexibility in the sales mix

its expected around 1% gain in gross revenue

 Simulating strategic scenarios we can quantify:

 Your gains for capacities and facilities increase
 Ideal average weight of live chicken to maximize your mix gains

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 Shadow prices concept
The shadow price associated with a particular constraint tells you how much the
optimal value would increase based in the amount of resources available.

In other words, the shadow price associated with a specific resource tells you
how much more profit you would get by increasing the amount of that
resource by one unit.

SmartMIX calculates the shadow prices for you!

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 What’s the impact of knowing shadow prices of
different SKUs and product mixes in the price
negotiation?

Price Net Sale Lower Upper Shadow

Market Product
(USD/kg) (USD/kg) (kg) (kg) (kg) (USD/kg)
Food Service FROZEN LEG QUARTER 1,2 1,08 110.000 110.000 0,311
Auto Service FROZEN LEG QUARTER 1,1 Effort
0,99 to increase
10.000 sales 10.000 0,254
Food Service FROZEN BREAST FILLET 2 1,86 80.000 80.000 0,145
Auto Service MARINATED WING - TRAY 1,7 1,33 3.000 3.000 0,026
Auto Service WHOLE BIRD 1,08 0,91 60.000 60.000 0,022
Auto Service FRESH BREAST FILLET 1,8 1,67 Reduce
20.000
sales20.000 -0,016

Positive shadow price means: more sales leads to an increase of the mix profitability.
Negative shadow price means: more sales leads to a decrease of the mix profitability.
In this example, it´s clearly better to try to sell more frozen
breast in food service market instead of fresh breast for auto
service
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 What’s the impact of knowing shadow prices of
different SKUs and product mixes in promotions?

Market Product Price Discount Amount Extra Amount Shadow Price

TEGUCIGALPA POLLO CON MENUDOS X 30 25,40 -2,25 316 2.814 5,14
SUPERMERCADOS & FOOD SERVICE POLLO MITADES IQF 40 UN 24,56 -2,05 5.596 2.490 2,62
SAN PEDRO SULA POLLO CON MENUDOS X 30 22,00 -0,88 1.755 497 2,12
SUPERMERCADOS & FOOD SERVICE POLLO CON MENUDOS X 30 23,30 -0,81 53.624 20.000 3,28
SUPERMERCADOS & FOOD SERVICE POLLO IQF 1/4 INDIVIDUAL MIXTO 26,75 -0,45 1.714 500 4,11
SAN PEDRO SULA Pollo IQF ¼ Gnel, Mixto 23,55 -0,27 19.448 3.000 1,68
LA CEIBA Pollo IQF ¼ Gnel, Mixto 28,45 -0,24 29.443 4.000 6,26
SAN PEDRO SULA Pollo IQF ¼ Gnel. 5 pollos 26,20 -0,21 56.032 4.230 4,00
DISTRIBUIDORES & MATERIAS PRIMAS Pollo IQF ¼ Gnel, Mixto 21,70 -0,20 23.025 3.500 0,85
SAN PEDRO SULA POLLO IQF 1/4 INDIVIDUAL MIXTO 23,74 -0,19 29.227 1.425 1,24
SUPERMERCADOS & FOOD SERVICE Pollo IQF ¼ Gnel, Mixto 23,54 -0,18 5.177 500 1,54
SAN PEDRO SULA POLLO SIN MENUDO AMARILLO 23,95 -0,10 49.690 2.500 1,78
LA CEIBA POLLO SIN MENUDO AZUL X 20 28,50 -0,06 80.530 2.500 6,05
SUPERMERCADOS & FOOD SERVICE POLLO SIN MENUDO AZUL X 20 23,78 -0,05 134.324 3.500 1,52
DISTRIBUIDORES & MATERIAS PRIMAS POLLO SIN MENUDO AMARILLO 21,78 -0,05 91.071 3.000 0,63
DISTRIBUIDORES & MATERIAS PRIMAS POLLO SIN MENUDO AZUL X 20 21,50 -0,04 78.659 3.000 0,39

Base Scenario Promotion Scenario

The shadow price´s
Avg Price (USD/lb)
values is 1,087
1,082
how much you earn for unit sold.
It mens
Sales Cost (USD/lb)you can ajust
0,109 your discounts
0,109 for maximize you profits.
Production Cost (USD/lb) 0,026 0,026
Profit (USD/lb) 0,947 0,951

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 What is the benefit of investments in capacities
increase?

Capacity shadow prices lead to better investment

decisions.

Shadow
Process Current Usage Max Capacity
(USD/kg)
Tray 15.000 15.000 0,281
Cut 400.000 400.000 0,104

Investing in Tray will lead to a USD 0,28/kg improvement on

the mix profitability!

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 SmartMix is focused in increasing
total margin
SmartMix may lead to an increase in plant yield
SmartMix may lead to a decrease in costs
SmartMix may lead to an increase in revenue

Out of scope of SmartMix

SmartMix DOES NOT improve live weight accuracy and uniformity

SmartMix DOES NOT represent inventories
SmartMix IS NOT a control tool – it is a planning tool

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Benefits from using SmartMix as a
planning tool

 Product mix profitability optimization

 Tool to better drive contract negotiations
 Aligned marketing and sales efforts
towards the best profitability
 Better processing plant yield control
leading to higher yields

CPN Consulting © 2014 Cargill, Incorporated. All rights reserved.

 Additional benefits

 Better understanding of the production process

 Better understanding of trade-offs: production X process X sales
 Valuable information provider for studies related to strategic changes
 Identify plant´s bottlenecks
 Identify opportunities to better match the live production with
profitability
Support the evaluation of market strategies

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 General Overview of SmartMix’s Activities

Implementation Key activities Key results

Understanding and Understanding the production’s Initial representation of the

1 production data collection structure process

Prepare production data Replicate real production from Execution of production

2 and volume scenarios past periods in SmartMix simulations

Prepare economic analysis and

3 Economical Scenarios
simulations
Execution of economic simulation

Economic analysis about potential

Strategical Scenarios and Strategic round discussions
4 final training User training for SmartMix
earnings
Implementation of final version

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 Schedule Definition

Implementation Month 1 Month 2 Month 3 Month 4

Understanding and
1 production data collection
First trip*

Prepare production data

2 and volume scenarios
Second trip*

Third
3 Economical Scenarios
trip*

Strategical Scenarios and Fourth

4 final training trip*

*Each trip is 1 week long

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CPN Consulting © 2014 Cargill, Incorporated. All rights reserved.