Understanding costs and saving money should be as easy as ABC

Adelaide-based business and engineering consultants 2XE have bought to light some valuable news for the Australian wine community’s bottom line.

In a recent project, funded by Wine Australia, to undertake a life-cycle cost analysis of wine processing, it revealed the enormous potential of what is known as activity-based costing (ABC) as well as some large holes in just how much many wineries know about what their production costs actually are.

In fact, CEO Nick Palousis would go so far as to say it is ‘one of the biggest knowledge gaps we’ve seen in the sector’.

‘For a sector that’s under serious cost pressures, to have businesses that don’t have a complete grasp on where their biggest costs are coming from is concerning’, he said. ‘Wineries are dealing with thin margins, and competition – they need to be running a tight ship.’

For the project, 2XE adapted the principles of ABC, which were first developed for manufacturing industries, to apply to wine businesses.

Data from 11 participating wineries was collected for 16 winemaking-related ‘activities’ – from receipt of grapes to finished wine (but excluding indirect activities such as marketing). The data was then used to construct a model for the wine sector. It revealed which processes consume the most resources (e.g. labour, energy etc.) and, in turn, consuming money. This then highlights where changes to processes could increase profits.

A tailored ABC model was prepared for each winery, showing mean costs per kilolitre (kL) of wine for activities such as bottling, barrelling and maturation. The aim was to create a framework that could be customised to suit the needs of each and every wine business.

Wine Australia is now assessing proposals to develop a user-friendly ABC tool that would make ABC easily accessible for all wine businesses.

Nick said ABC represented a different way of looking at costs and their implications. ‘Typically, a winery would take its balance sheet and look at the things an accountant usually audits – such as labour, electricity and materials – and try to reduce costs one line-item at a time’, he said.

‘But that’s quite a constraining approach. It doesn’t tell you much about where in the process resources are being consumed. You have to look at what processes are consuming resources, rather than just looking at the cost of line items.’

Nick and his team were surprised, for example, that many wineries understood the cost implications of bottling, but very little about barrelling, which could be very significant when all the factors, including wine loss, depreciation and labour required for barrelling were taken into account.

The final report, which can be accessed on the Wine Australia website here, highlights a number of ways in which understanding activity costs can help wineries target their efficiency projects towards activities that have the greatest opportunity for increasing profit.

‘For example, the total cost per kL of wine pressed is significantly different when comparing different techniques such as basket press, bag-press and screw-press’, the report says. ‘Also, the way a press is used varies the cost of production per kL. For example, a winery with a bag press using automated pressing cycles may use less labour than one with a bag press that requires continual monitoring and adjustment.

‘Likewise, a winery that can schedule and separate red and white batches on different days can minimise cleaning and increase labour efficiency compared with a winery that presses reds and whites on the same day.’

The project and report also highlighted a lack of consistent and reliable methods for pricing wine loss and costs associated with matter other than grapes in overall production costs.

‘Few wineries involved in this project had considered the actual cost of wine loss or identified it as an operating expense that can decrease revenue’, the report says. ‘Costs associated with matter other than grapes (MOG) can act to greatly reduce production capacity and increase resource use including transport costs, crusher/destemmer block issues, labour for disposal costs and interruption to workflow, but this cost is often not recognised.’