On the production side of your business there is an almost overwhelming number of techniques, tools, and tricks you can employ to turn out a first rate product that keeps your customers coming back and can satisfy your desire to produce the best bread you can. Most of you will no doubt be spending much of your time perfecting your processes and methodologies to improve not only the quality of your breads but to streamline (read: ‘make more profitable’) your production. It appears to us, based on much time spent in bakeries of all sizes, that a little known technique is going underutilized: ‘unit costing’. And while this article will focus on ingredient unit costing, bear in mind that these same principles apply to other metrics such a labor/unit cost, etc. One of the reasons we think this topic is germane to the current bakery marketplace is many of you are either faced with rising ingredient costs or are considering the introduction of organic products to your offerings. And, as we all know, organic ingredients come at a substantial premium to their conventional counterparts.



In this article we will look at the unit costing framework (which is remarkably simple) and apply it primarily to the decision of whether or not the price of organic ingredients should prevent you from adding them to your product mix. You will see, by the end of the article, that not only do we think adding organic breads is indeed a good idea (you’ll be capturing some of the purchasing dollars of those making a conscious decision to buy organic) but you will also see that even though the ingredient costs are higher you can sell these breads with better profit margins. And we’ll give you a tool to analyze your costs as you consider this option.



As this article is being written bakers in the US are being faced with rising raw ingredient costs. Everything from oil and sugar to salt and flour is on the increase. Some of you may have seen increases of a $1 or more per 50# bag (or $2/cwt if you are purchasing bulk flour). Obviously this hits your bottom line hard and many bakeries feel they are unable to raise their prices for fear of losing business. Well, the simple fact is, you have to raise prices, but maybe not as much as you think. With ingredient cost increases you have to step away from viewing your ingredient costs as they appear on the invoice from your supplier and instead start focusing of how those increases affect the cost of an individual unit of bread (or pastry, etc). For illustration purposes we are going to use a simple baguette formula to investigate the impact of fluctuating ingredient costs. Here it is:

flour	100#	100%
water	66#	66%
salt	2#	2%
yeast	1.7#	1.7%

The simplest formula in the world (but that’s all that’s needed to make a world class baguette).



Next we are going to lay this formula out and associate some prices with each of these ingredients. In figure 2 you can see that for each ingredient we have assigned a cost based on the price of a typical sized unit that might be delivered by your supplier (ie a 50# bag of flour). You can also see that we have then transformed each of these raw costs into price per pound (obviously price per kg or g works as well). Then, using simple math, we calculate the cost per pound of each item in the amounts need to produce our entire batch of dough.

So we now know how much it costs us to make this batch of dough (as far as the ingredients are concerned): $18.95 and we also know how many pounds of dough we made: 169.1#. Now, we want to look at the scale weight for each unit produced in this formula. A typical weight for baguettes might be 14oz (or .875 pounds). So how many .875 pound loaves can we get from our batch of dough? Divide unit weight into the total weight of the dough and you’ll have that answer: 193. So, now we know how much it costs to make the dough, and we know how many units we can get from that batch. Divide the cost by the number of units and you have the ingredient cost per unit. That is one of the most valuable numbers you can know and becomes part of the over production cost once you factor in labor, lease, and energy.



Now, what happens if we are faced with a price increase of $1/50# bag. That’s a pretty tough increase to swallow. Given our formula above, it works out to ‘only’ to a penny per loaf. In a vacuum you could absorb that for awhile, but with all your other costs going up you really can’t afford to. At some point you are going to have to raise your prices so you can cover not only the ingredient increases but all your other expenses as well.



With that discussion we were looking a defensive position (increases outside our control). Let’s turn now to looking at producing an organic item and see how we fare knowing full well that the organic flour could be as much as $10.00/50# more than conventional. First of all, the only cost that is going up with the production of organic breads is the ingredients. Your labor stays the same, lease, insurance, etc. Also, if you start by adding simple breads to your organic offerings, the only ingredient that needs to be organic is the flour. To claim ‘organic’ you must have at least 95% of your ingredients be ‘certified organic’. Looking at our baguette formula above the flour and water get us to 96.3%. So we are covered there.



Now, we are going to introduce a quick tool we hacked together to help you get a handle on unit costs. Follow this link and you will be opening up a simple unit cost calculator. With it, you are able to put in your flour cost and unit scale weight and see how those two variables affect the unit cost of your breads. Go ahead and try it out. First, put in your current flour cost and scale weight for your baguette (everyone makes a baguette). Then go and put in a new organic flour cost. If you don’t know one, add $10 per 50# and see what it does.



So now that you have played with the unit cost calculator at least two things should be clear. The first is that by adding $10/50# you have doubled your unit cost. But that probable means your baguettes went from cost $0.10/loaf to $0.20/loaf (in terms of ingredients). Therefore if you wanted to offer an organic baguette all you would have to do to cover your added costs would be to charge $0.10/loaf more. But here is the real magic. People will pay a premium for organic breads (all organic food for that matter). So let’s say you were charging $2.25/baguette. Your organic seeking customers no doubt would probably pay at least $2.95 for an organic baguette. So your ingredient cost has gone up $0.10/loaf but you have increased your price $0.70/loaf with no other additional costs.



But there is more. Many bakeries that offer organic versions of their bread find that smaller loaf sizes work better in keeping parity in pricing between their conventional breads and those that are organic. So go back and play with the unit cost calculator and this time reduce the size of the baguette from 14oz to 12oz. You’ll find that you can lower your ingredient costs.



After this discussion we hope it is clear that you should not fear adding organic breads to your bakery’s line-up as they can meet a new and growing demand and be more profitable than your conventional breads.