Smart Cookie Newsletter - Issue #8

^{The Efficiency Trap: Why Your Net Margin Is Only Half the Story}

How bakery owners can unlock true profitability by focusing on systematic efficiency over isolated metrics

If you're like most bakery owners I work with, you've been told to watch your net margin percentage and COGS percentage like a hawk. And while these metrics matter, focusing on them in isolation is like trying to bake a perfect croissant by only measuring butter temperature—you're missing the bigger picture that determines success or failure.

After 25+ years in this industry and working with dozens of bakery operations, I've seen too many owners get trapped by "good-looking" numbers that mask serious inefficiencies. Today, I want to show you why systematic efficiency is your real path to profitability—and how two bakeries with identical net margins can have vastly different financial health.

^{The Misleading Metrics Problem}

Here's the issue: net margin percentage and COGS percentage are lagging indicators. They tell you what happened, not what's driving those results. More importantly, they don't reveal whether your operation is truly efficient or just accidentally profitable.

Consider this real-world scenario I encounter regularly:

^{But look closer at their cost structures:}

• Bakery A: 40% COGS, 30% Operating Expenses

• Bakery B: 50% COGS, 20% Operating Expenses

Same profitability, completely different operational realities.

Bakery A likely has:

• Efficient production processes and ingredient management

• Higher labor costs due to complex products or inefficient scheduling

• Potential over-investment in facilities or equipment

Bakery B probably shows:

• Ingredient waste or poor purchasing practices

• Lean operational overhead

• Risk of quality issues due to cost-cutting in materials

While both hit 30% net margin, Bakery A is positioned for sustainable growth. Bakery B is walking a tightrope—any increase in ingredient costs or decrease in sales volume could devastate profitability.

^{The Efficiency-First Approach}

Instead of chasing individual percentages, successful bakery owners focus on interconnected systems that drive efficiency:

1. Production Flow Efficiency: Batch optimization that minimizes changeover time

Ingredient prep systems that reduce waste

Equipment utilization that maximizes throughput per labor hour

2. Inventory Velocity: Faster inventory turns reduce carrying costs and waste

Strategic purchasing that balances bulk discounts with storage capacity

Real-time tracking that prevents overproduction

3. Labor Productivity Systems: Cross-training that eliminates bottlenecks

-Scheduling that matches labor to demand patterns

-Task standardization that reduces errors and rework

4. Customer Value Optimization: Product mix analysis that emphasizes high-margin, high-velocity items

-Pricing strategies that reflect actual cost plus desired profit

-Sales systems that increase average transaction value

^{What Efficiency Looks Like in Practice}

The most profitable bakeries I work with don't just track COGS—they measure:

• Dollars per labor hour across different production areas

• Inventory turns by category (ingredients, packaging, finished goods)

• Waste percentage by product line and time of day

• Equipment utilization rates during peak and off-peak hours

• Average transaction value trends by customer segment

These metrics reveal where systems work together versus where they create friction.

^{Your Next Steps}

1. Audit your current systems for interconnectedness. Do your purchasing, production, and sales systems communicate effectively?

2. Measure efficiency ratios beyond percentages—track dollars per labor hour, inventory velocity, and waste by category.

3. Identify your most significant constraint. Is it production capacity, labor efficiency, or sales conversion? Focus improvements there first.

4. Test systematic changes rather than isolated tweaks. Adjust multiple variables together and measure the combined impact.

Remember: efficiency isn't about doing things cheaper—it's about doing things better. The bakeries that thrive in the long term are those that build systems where every component enhances the others.

Keep rising,

Jimmy MacMillan

Principal Chef, Consultant, Successful Bakery

P.S. If you found this helpful, forward it to another bakery owner who could benefit from it. Growing together makes us all stronger.