Achieving optimal yields and efficiency in european meat processing

The European red meat processing industry is under pressure. Consumers are increasingly turning away from beef and pork toward poultry and plant-based alternatives, prompted by health and environmental concerns as well as the proliferation of meat alternatives. Increasing regulatory requirements, including more attention to food safety, are raising costs that red meat processors cannot pass on to consumers. Meanwhile, wages are increasing in this labour-intensive business. As a result of these and other trends, the processing industry is seeing deeply reduced profit margins and greater consolidation. These challenges, combined with technological development, have created big incentives for red meat processors to invest in automation. Those that have done so have trimmed labor costs, improved yields, and cut food waste. Automation has also facilitated the production of higher-quality meat and made jobs safer.

European consumers ate a total of 60.7 million tons of beef, pork, poultry, sheep, and veal in 2018, but Europeans are eating less of it overall. Total consumption of beef and pork is expected to stay flat through 2030. Growth in meat production has declined from 1.6 percent a year (2000 to 2015) to 0.6 percent a year (2015 to 2019) and is forecasted to fall in 2020 to 2028 to about 0.2 percent a year. This decline is seen across meats. Economic growth in the European Union has been sluggish, and real disposable incomes have increased just 0.9 percent a year in the last ten years, making meat less affordable. In addition, population growth in Europe is expected to be between 0.0 and 1.0 percent a year; any growth in eating meat will be from population growth rather than increased consumption per capita. And the challenges go beyond economics and demography—the agriculture industry faces resource issues, including land availability, water scarcity, and other impacts of climate change on farm productivity.

In the medium term, however, the spread of African swine fever throughout China and Southeast Asia has created an opportunity for the European pork processing industry. China’s populations of hogs and sows are estimated to have decreased by about 40 percent year-over-year as of May 2019 because of the disease. As a result, Chinese pork imports rose 40 percent in the January to August 2019 period compared with the same interval in 2018, and year-over-year prices of hogs and piglets increased more than 35 percent. The recovery of production capacity could take approximately three years. Producers lacking the efficiency, right freezing capacity, or licenses for export to China continue to struggle, while the more efficient at-scale producers are better positioned to capture this opportunity.

At the industry level, labor issues are pressuring companies’ cost bases. Meat processing is heavily dependent on labor, with workers accounting for 10 to 15 percent of company costs. In the face of increasing labor shortages and high worker turnover, wages are rising as well. And regulations to improve food safety, worker conditions, and animal welfare have also led to higher costs. As a result, EBIT margins in the European red meat processing industry declined by 33 percent between 2010 and 2017, reaching a record low of about 2 percent in 2019. In response to these trends, the industry has consolidated. Now many companies are building the scale to invest in automation. A shift toward more automated production techniques will shape the beef and pork processing industries over the next five years. The most technologically advanced regions in Europe are expected to reach about 25 percent level 3 automation by 2023, up from 10 percent in 2019.

The benefits of automation for the red meat processing industry are evident but realizing them will require CEOs and other senior executives to think carefully about where and how much to invest. High-tech automated equipment is expensive, ranging from €25 million to €50 million for a fully automated pork production line. CEOs may very well need board approval to move ahead with such purchases. Automation of the red meat processing industry will continue apace, given the market and economic forces at work. Those that put off automation will find themselves at potentially fatal cost disadvantages. However, to take full advantage of the automation, executives must understand its impact on yields and labor-machine cost trade-offs as well as consider committing to working with equipment suppliers to get early access to more advanced technology.

QUESTION 1 [30 MARKS]

1.1. Examine productivity in the red meat processing sector and analyze the effects of automation from this
industry’s standpoint. Your response should offer a critical discussion on how automation influences this sector, citing pertinent contextual examples.  (15)

1.2. Given the challenges outlined in the case study, which extend beyond economic and demographic factors to include resource issues like land availability, water scarcity, and the effects of climate change on farm productivity in the red meat processing sector, offer recommendations on the objectives that industry stakeholders need to prioritise to improve performance and profitability.

Answers to Above Questions on Operations Management

Answer 1: An analysis of the red meat processing sector indicates that the productivity level has significantly affected in the recent years because of a number of reasons. Some of these are identified as the regulatory pressure, changes in the taste and preferences of customers, issues with managing the labour and the economic conditions of the consumer as well. In addition to these factors, automation can be used in the red meat processing industry in order to address the challenges faced by it.