What do GLP-1s have to do with operations? More than you think

Over the last several years, GLP-1 drug use in the United States has grown from virtually zero to a meaningful share of the adult population. Recent surveys show that roughly 1 in 8 U.S. adults (about 12%) are currently using a GLP-1 medication, a figure that has more than doubled in just over a year (according to KFF, a nonpartisan U.S. health policy research organization).

What began as a niche pharmaceutical development has quickly driven a structural shift in food & beverage consumption – with early data suggesting lower per-capita calorie intake and increased protein and fiber consumption, while pressuring discretionary and impulse-driven categories.

Adoption is expected to continue to increase as delivery mechanisms improve, insurance coverage broadens, and price points decline. The impact on consumption and product mix will therefore become more pronounced.

For manufacturers, the question is no longer whether GLP-1s will affect consumption, but how their business should respond to sustained changes in volume and/or mix.

Naturally, companies negatively impacted by GLP-1s will focus initially on top-line focused strategies such as product development, marketing and M&A. However, operational implications should not be ignored as even modest declines in per-capita consumption can have outsized P&L consequences. Operational efficiency therefore will be a critical lever for protecting your P&L against reduced fixed-cost absorption and increased competitive intensity as manufacturers fight for share, while providing valuable fuel to drive top line investments.

How to get started

Each manufacturing site will have its own unique challenges that will necessitate specific solutions, but operational excellence tools and methods are tried and true across facilities and product categories. We recommend that manufacturers:

• Adopt a 3-year operational excellence strategy that aligns with the company’s vision, and specifies the results operations must deliver to achieve your strategic plan (e.g. 3-4% annual reduction in COGS)
• Define annual savings targets by site and by category (e.g. procurement, labor, scrap, inventory reduction etc.)
• Assign owners by category and task them with identifying specific projects to achieve the savings targets
• Create the project management and governance structure to track performance against targets and facilitate corrective measures if/when savings are not hitting the plan

Focus on the big rocks

When prioritizing savings initiatives, we recommend focusing in the following 4 areas:

1. 1. Procurement. Raw and packaging materials represent a manufacturer’s largest cost item by far (typically ~50-60% of revenue). As such, procurement is the area with the biggest bottom-line improvement potential and thus should be a core element of any operational excellence strategy. Food & Beverage Manufacturing’s Six-Million-Dollar-Person: The Chief Procurement Officer – Saphineia
   2. Reduce raw and packaging material waste. Inventory control is the opposite side of this same coin. Just as there’s a lot of money at stake in procurement, there is significant risk associated with not managing inventory effectively, as scrap, overfill, quality defects and product expiries have a dollar-for-dollar negative impact on EBTIDA. Inventory losses are often hard to spot and track as they can occur anywhere along the supply chain, from item set-up to material receipt to scrap and ultimately through the shipment of finished goods. Most F&B manufacturers have potential to generate significant savings in this area. Inventory Loss: The Hard-to-Track P&L Killer – Saphineia
   3. SKU Profitability. Pricing one’s products is one of the most important activities undertaken by a business. Yet most middle-market F&B manufacturers do not have good systems for tracing costs to SKUs and therefore do not have a sufficient understanding of their unit costs. This leads to mispriced products and sub-optimal business decisions. The volume challenges introduced by GLP-1 provide a good opportunity to do a deep-dive into costs by SKUs. Once companies do this work, they frequently discover that a large portion of their SKUs do not contribute much to earnings or flat out lose money. Do you know your costs? – Saphineia
   4. Line efficiency. Lastly, overall equipment effectiveness (i.e., OEE) in the middle market is commonly well below 50%. Downtime on a single line can cost over $1,500 per hour, and unlocked capacity can be worth multiples of that amount. Thus, small improvements can have a big impact. Is enhancing operational efficiency a key pillar of your value creation playbook? If not, it should be. – Saphineia

Conclusions

Here’s the good news; for most food & beverage manufacturers, cost of goods sold represents roughly 70–80% of revenue and 6x to 8x annual EBITDA. This provides an ample reservoir of cost savings opportunities. As a result, small increases in efficiency have disproportionately large impacts on margins.

It goes without saying, if your company’s portfolio aligns with emerging consumption trends, you will be clearly advantaged. But even beneficiaries of changing consumption trends will face challenges operationally (The Protein Boom: Operational Readiness for Middle-Market Manufacturers – Saphineia).