Is Your Fill Control Optimised or Simply Average?
Though Average Quantity Law replaced Minimum Quantity Law as far back as 1979, many companies still fail to take full advantage of one of the best pieces of Government legislation to be introduced during the last 40 years, thereby minimising unnecessary wastage in overfill and exposure to risk.
Every manufacturing process suffers from variation. Food and drink is no exception. Prior to 1979, under the old Minimum Quantity Law, all the process variation within product filling systems had to be above the product quantity declaration to play safe. Failure to meet the minimum quantity regulation, even on a single pack, could bring a prosecution from Trading Standards.
Given that every process suffers from some degree of variation, it was eventually considered unfair to packers for them to bear the total cost of this inherent variation.
So, it was decided to split the cost of variation between the packer and the consumer. Consequently, some packs would be overfilled and some would be underfilled so long as the production batch as a whole met the ‘Three Packers’ Rules’, which stand at the heart of Average Quantity Law.
Some companies still use excessive variation as a reason not to introduce Average Quantity Law, but they are missing the point entirely as they stand to gain the most from Average Quantity Law. Also, with the introduction of Average Quantity Law, there was no longer a Minimum Quantity Law for most pre-packaged goods. That didn’t stop some companies from continuing to pack to ‘Minimum Quantity’ as they called it, which simply meant that they were giving more product away in overfill, whilst giving themselves no greater protection in law.
But there is one group of packers who stood to gain enormously from the optimisation of fill control, alcoholic beverage packers/bottlers, because on the one hand they have to satisfy Trading Standards by not underfilling (three Packers’ Rules again) and, on the other hand, HMRC who want the excise duty on overfill. If any readers have already had a brush with HMRC, you have my sympathy. Firstly, they don’t need to prove anything in order to raise an assessment and they are incentivised by the UK government each year to raise as many assessments as possible (for Excise Duty, VAT or other) on the basis that they get paid commission on all the assessments that they can ‘make stick’.
Secondly, ‘making an assessment stick’ is not their problem. It is the packer’s responsibility to prove HMRC wrong through their own documented records or to pay the assessment.
Just for fun, let’s have a look at some numbers.
Suppose that you are a medium-sized whisky bottler producing say 10 million cases per annum. The industry standard for a case is 9 litres (based upon 12 x 750ml bottles) though most standard bottle declarations have now been reduced to 700ml to reduce costs.
Actual Cost and Risks of Even Small Levels of Overfill
10 million cases at 9 litres per case equals 90 million litres. At just 1ml of overfill (one fifth of a teaspoonful per litre), on average, this equates to 90,000 litres per year given away. As whisky has to be matured in oak casks for at least 3 years, before it can truly be called whisky, it must be worth at least £1 per litre at the time of bottling, so that represents a giveaway cost of around £90,000 per annum on such a volume, per average 1 ml of overfill.
A luxury product such as a 20-year-old single malt has a value of at least 10 times the basic product, for 2 reasons. Firstly, the increased storage years, during maturation, obviously increases the product value. Secondly, during the maturation process, each cask can lose up to 2% of its volume per annum through evaporation (the so-called angels’ share), naturally increasing the value of the remainder.
Lost Profit Opportunity
Giveaway on aged product therefore also contains the lost profit opportunity in that, once the 20-year-old has been filled, it’s gone. If there is no more 20-year-old single malt available, then every litre used in overfill carries the original production and storage cost as above, plus the lost profit opportunity (what profit could have been made from each extra bottle sold if it hadn’t been given away). What this amounts to, of course, will be a direct function of the ml per litre overfilled, multiplied by the number of ‘20-year-olds’ actually bottled in the batch. That’s to say that for every 1,000 bottles produced, with an average of 3ml per litre given away, there will be a lost profit opportunity on 3 x 1 litre bottles which could not be produced due to giveaway.
Exposure to Risk
There is also a darker side. Risk. Back to HMRC. HMRC don’t care whether it’s a basic whisky or a 50-year-old single malt, they are only interested in the Excise Duty on the alcohol. Naturally, they have a legal right to the duty on the filled spirit but they are also entitled to the duty on overfill. So how could this stack up? Returning to our earlier calculation of 90,000 litres per annum, given away per average 1ml of overfill, most home market (UK) whisky contains an alcohol volume of 40% and currently carries a duty of £11.40 per litre. This could compute to a potential assessment of just over £1 million based upon the same volume of overfill (on average) and HMRC have the power to raise an assessment to cover the previous 6 years. Scary enough yet? Try 5mls of average overfill per litre (still only half of 1%). In either of these scenarios, or endless others closer to home, you can do the maths on the cost, lost profit opportunity and computation of risk.
The above, highlights just one, often overlooked area of loss and potential risk within the manufacturing process. In the coming months, we will explore many others and challenge the toxicity of the comments and beliefs that stop Continuous Improvement in its tracks, such as ‘We Have Always Done it This Way’…
Share your thoughts to Info@harfordcontrol.com or give us a call on +44 (0) 1225 764461