Dr. Charlie Hall Ellison Chair in International Floriculture Texas A&M University...

Dr. Charlie HallEllison Chair in International FloricultureTexas A&M [email protected]

How to Increase Your Profits Through Benchmark Analysis

Dr. Paul A. ThomasProfessor & Extension Specialist

University of [email protected]

Today’s Topics

Topic Presenter

Information gathering Both

Importance of benchmarking Charlie

Operational benchmarks Paul

Financial red flags Charlie

Productivity (labor) benchmarks Paul

Strategic profit model Charlie

Crop production metrics Paul

Key financial ratios & working capital

Charlie

Sales & marketing metrics Paul

Managing costs Charlie

Tools for improvement Paul

Resources Both

Is this your first time at Farwest?

1. Yes2. No

Yes N

o

73%

27%

Years in business?

1. Less than 12. 1 to 53. 6 to 104. 11 to 205. More than 20

1 2 3 4 5

0%

11%

67%

20%

2%

What is your age?

1. Under 302. 30 to 493. 50 to 654. Over 65

7%

55%

38%

0%

1 2 3 4

Marketing channels?

1. Wholesale grower only

2. Wholesale and retail grower

3. Retail grower only

4. other

Wholesa

le grower o

nly

Wholesa

le and retail g

r...

Retail gro

wer only

other

43%

6%

24%28%

Operating season?

0%

0%

1 2

1. Year-round2. Seasonal

Type of business?

1. Sole proprietorship

2. Partnership3. S-corporation4. C-corporation

26%

23%29%

23%

Sole proprietorship Partnership S-corporation C-corporation

10%

14%

6%

39%

31%

Business composition?

1. Greenhouse only2. Greenhouse and nursery3. Greenhouse & florist4. Greenhouse & vegetable5. Other

10%

10%

15%

19%

20%

26%

Square feet of bench space?

1. Less than 50,000 ft2

2. 51-100,000 ft2

3. 101-250,000 ft2

4. 251-500,000 ft2

5. 501-1,000,000 ft2

6. More than 1,000,000 ft2

Which of these problems is most threatening to your business?

1. Low output or slow crop growth

2. Undercapitalization3. Poor pricing4. High labor cost5. High materials cost6. Waste or overuse 7. Poor cash flow8. Other9. Don’t know

5%

11%

8%

19%

5%

6%

17%

18%

12%

Today’s Topics

Topic Presenter









Charlie




Resources Both

How have the economic conditions (and the weather) played out for the green industry?

Hypercompetition!

My best anecdotal estimates:

About 15% of firms have already exited the industry.

About 35-40% of those left are holding steady (flat sales).

About 40-45% have had declining sales and are just hanging on.

The last 15-20% or so have increased sales (& profits) during this time period.

Hypercompetition strategies

innovate and reduce costs within the supply chain.

tweak existing or develop new value proposition(s).

have enough financial capital to outlast competitors.

When times are tight,cash is king!

The imperative: Keep score!

Major score keeping areas include:

Financial – e.g. return on assets, sales volume, and gross profit.

Operational – e.g. labor utilization rates, quality and safety measures.

Educate employees about the correlation between these metrics and profit.

Importance of benchmarking

Companies who benchmark achieve 69% faster growth and 45% greater productivity than those who don’t.

PWC Trendsetter Barometer Survey

You can’t manage what you can’t measure!

Types of benchmarking

Time series analysis – comparing your own firm’s performance against a previous time period (previous quarter, this quarter last year, etc.)

Cross sectional analysis – comparing your firm’s performance against similarly-sized firms in the industry.

OFA Bulletin May/June 2008

Today’s Topics

Topic Presenter









Charlie




Resources Both

Adopting Operational Benchmarks

For Long Term Success

2009 OFA ShortCourse

Credits: Thank you Wen Fei and Steven!

New York Greenhouse Business Summary and Financial Analysis. Pub. EB-2003-12

Wen-Fei Uva and Steve Richards, 2003

What I will cover:

Labor EfficiencySales and Marketing

Crop Production

Why Look At Operational Benchmarks?

• Many financial parameters are based on operational expenses and outputs.

• Small improvements in outputs, sales and reduction of losses (shrink) can have significant impact on financial outcomes.

• Operational benchmarks are essential to management and staying on track!

How many weeks is your operation open for business?

1 2 3 4 5

5%11% 13%

7%

64%

Answer Number

1. 11 (Spring Only)

2. 22 (Spring/Fall)

3. 52 (Full Year)

4. 26 (Half Year)

5. 44 (Eleven Mo.)

How many full time employees do you have?

1 2 3 4 5

10%

25%

41%

11%14%

Answer Number

1. One

2. 6

3. 12

4. 24

5. Over 24

How many supervisors manage those employees?

1 2 3 4 5

20% 20%

29%

17%

14%

Answer Number

1. One

2. Two

3. Three

4. Four to Five

5. Over 5

How do you pay your “worker bees” ?

1 2 3 4 5

94%

0%4%

0%1%

Answer Number

1. Hourly Wage

2. Piece Work

3. Task Unit

4. Sub-Contract

5. Familial Slavery

Small Changes Add Up!

Several simple changes may

bring you back to profitability.

Change in Profit to a 1% Increase in:

ParameterYield

Production Increase

Labor Hours

Labor Cost (Wage)

Equipment Investment

Management Cost

Packaging Costs

Fuel

Interest Rate

Change+ 26.90 %

+ 24.63 %

- 7.17 %

- 5.25 %

- 4.18 %

- 3.93 %

- 2.28 %

- 2.18 %

- 0.97 %

Source: Kirschling and Jensen, 1974

Crop Production Metrics

• Units Produced / Person, Team, Line

• Units Per Hour / Person, Team, or Line

• Waste Units / Person, Team, or Line______________________________________

• Percent Loss by Crop or “% Shrink”

Number units Invoiced / Number units produced.

Example: 45,906 sold / 58,424 produced = 0.786 = (1 - 0.786) = 21.4% shrink!

Dollars and Sense

• Examples: (5% shrink) Grow 1,000 - 4 ½ annuals Selling price = $3.99 Gross revenue = $3,790.50 Cost of growing = $2,650 Net profit = $1,140.50

Profits reduced by$199.50 or 17%

Roberto Lopez, Purdue Univ. and Brian Krug, Univ. of New Hampshire

Dollars and Sense

• Examples: (10% shrink) Grow 1,000 - 4 ½ annuals Selling price = $3.99 Gross revenue = $3,591 Cost of growing = $2,650 Net profit = $941

Profits reduced by$399 or 42%


Dollars and Sense

• Examples: (15% shrink) Grow 1,000 - 4 ½ annuals Selling price = $3.99 Gross revenue = $3,391.50 Cost of growing = $2,650 Net profit = $741.50

Profits reduced by$598.5 or 81%


Today’s Topics

Topic Presenter









Charlie




Resources Both

What are the red flag warning signs signaling those in trouble?

Are you having difficulty meeting your bills in a timely manner, indicating cash flow problems?

1. Yes2. No

Yes N

o

65%

35%

Are you experiencing a shrinking market for your product?

1. Yes2. No

Yes N

o

57%

43%

Are you frequently losing customers?

1. Yes2. No

Yes N

o

89%

11%

Is there an increase in customer complaints, revealing that your business is failing to meet their needs?

1. Yes2. No

Yes N

o

93%

7%

Do you find that inventory levels are climbing faster than sales, and you are building up more inventory than sales warrant?

1. Yes2. No

Yes N

o

60%

40%

Is your company highly leveraged and thinly capitalized? Does your bank have more at stake in your business than you do?

1. Yes2. No

Yes N

o

69%

31%

Do you have essentially a one-person management team? Is your company overly dependent upon any one person?

1. Yes2. No

Yes N

o

49%

51%

Is your business suffering from poor management communications? Are decisions not being disseminated down from the top?

1. Yes2. No

Yes N

o

50%50%

Are you making decisions based on poor or inadequate managerial information (e.g. on sales levels, growth and aging of accounts receivables, inventory turns, etc.

1. Yes2. No

Yes N

o

64%

36%

Is your company very late in producing financial statements?

1. Yes2. No

Yes N

o

56%

44%

Are you experiencing sales growth but no growth in net income?

1. Yes2. No

Yes N

o

70%

30%

Do you have a tight grip on expenditures, or is your company committing to expenditures before cash is in hand?

1. Yes2. No

Yes N

o

37%

63%

Today’s Topics

Topic Presenter





Productivity (labor) benchmarks

Paul




Charlie




Resources Both

Benchmarking Operational Metrics

Each operational metric is based on, and will tie into, the financial metrics to be used by your company.

Labor metrics are assessed by work unit / process

Benchmarking Operational Metrics

External benchmark metrics are useful for establishing company to company comparisons, if you can find benchmarks for a industry segment similar to yours.

Internal or “historic” metrics are the most useful guides for assessing improvements to efficiency, organization, production flow and marketing.

Example: Ask Yourself....

• Is my transplant line managed effectively?

• Is my shipping department efficient?

• Are my sales team leaders meeting goals?

• Am I meeting company conservation goals?

• How much room do I have for improvement?

Example: Transplant Line MetricsWhat Do I Need to Know?

• Line production per day or per hour.

• Productivity per person, per day or per hour.

• Overall labor cost / hourly cost

• Number of labor hours utilized by crop.

• Loss (shrinkage) at transplant line by crop.

Productivity Assessment

020406080

100

Pos 1 Pos 2 Pos 3 Pos 4

Line 1

Line 2

Line 3

Line 1

Line 2

Line 3

In-Series Task Process

Do You Seed Or Transplant Using Human Labor?

Yes : Ju

st my...

Yes : 2

-10 W...

Yes : 10-15 W

o...

Yes : 1

5 + W...

No – I’m

autom...

5%

51%

5%

19%21%

Answer Number

1. Yes : Just my family

2. Yes : 2-10 Workers

3. Yes : 10-15 Workers

4. Yes : 15 + Workers

5. No – I’m automated!


76 75 74 66

020406080

100


Line 1

Line 2

Line 3

Line 1

Line 2

Line 3


Poor Pace Setter

Poor Line Manager62%

52%

28%


020406080

100


Line 1

Line 2

Line 3

Line 1

Line 2

Line 3

Independent Task Process

Do You Regularly Track Employee Efficiency?

Never

2-4 times a ye...

Month

ly

Weekly

Daily

42%

30%

8%7%

13%

Answer Number

1. Never

2. 2-4 times a year

3. Monthly

4. Weekly

5. Daily


020406080

100


Line 1

Line 2

Line 3

Line 1

Line 2

Line 3

Independent Task Process (Piece Work)

Profit Killers

Best Employee!Horrid Placement !

So What?

Let’s assume we have a production goal of 12,000 units / day. (4000 units per line…or 500 units / hour)* Hourly wages are paid @ $10.50 per hour.

Line 1 = 4,000 * 0.28 = 1,120Line 2 = 4,000 * 0.52 = 2,080 5,680 per day Line 3 = 4,000 * 0.62 = 2,480

12,000 / 5680 = 2.11 (days) * 8 hr = 16.9 hoursLine efficiency is only 47.3% !!!!!Cost = 12 employees * $10.50 * 16.9 = $2130.00

*Based upon previous performance standards!

So What? …………..5680? Can we do better? Probably! Let’s assume we can impart a 20% increase in

productivity (units) by rearranging personnel in the lines: Yield = 8040 Units

Let’s also assume we can increase productivity by 20% by re-training or replacing poorly performing employees: Yield = 10440 units

12,000 / 10440 = 1.15 * 8 = 9.20 hours to complete the job!

12 employees * $10.50 * 9.20 hours = $1159.00

$2130.00 – $1159.00 = $971.00 savings ….(in one day!)

21 3 4In Out

Production Line Management

Where Do Your Place Your Slowest Worker?

At the end of ..

.

In th

e front o

...

At whate

ver p

o...

0% 0%0%

15

Answer Number

1. At the end of the line with the manager at the end point.

2. In the front of the line with the manager at the front.

3. At whatever position has the weakest employee

Where Do Your Place Your Slowest Worker?

A. At the end of the line, with the line manager positioned at the end point.

21 3 4In Out

Manager Here!

This allows the manager to monitor overall output, the slow employee and line pace!

Are We Done?

• What if I cleaned house and eliminated a transplant line? Can I do the whole job for the same money in the same # of days?

• Could I actually get rid of one supervisor’s salary?

Do you think it would be more efficient to eliminate one

transplant line?

1 2 3

64%

18%18%

Answer Number

1. Yes

2. No

3. Don’t know.


0.0020.0040.0060.0080.00

100.00


Line 1Line 2

Line 3

Line 1

Line 2

Line 3

Independent Task Process

Positions to be eliminated!


0.0020.0040.0060.0080.00

100.00


Line 1

Line 2

Line 1

Line 2


66%

68%

Reconfigured In-Series Process = 67% average efficiency(assumes training, and effective management implemented)

Eliminating a Transplant Line?

Two lines operating at 67% efficiency yields 8040 units per day.

12,000 / 8040 = 1.49 @ 8 = 11.94 hours

8 Employees * $10.50 * 11.94 hours = $1002.28

Our previous best was $1159.00…We can get the job done for $157.00 less by firing four employees and only running two transplant lines!!!!

……..and we free up a supervisor!

Benchmarks?

In this example you would set your new benchmark at 67 % efficiency and explore!

Track production (by task) to get perspective.

Reward managers that exceed a benchmark

Troubleshoot if productivity fails to reach a benchmark at any point in the future.

Tracking Benchmarks Visually

0

10

20

30

40

50

60

70

80

90

100

Snaps Pansies Dianth Vinca Salvia Begonia

Line 1

Line 2

Task

Pro

duct

ivity

per

line

Transplant Operations

???

If the production issue cannot be fixed……What should I do?

Incre

ase assi

g...

Decre

ase # uni...

Incre

ase # uni...

Fire

the m

anag...

61%

17%17%

6%

Answer Number

1. Increase assigned cost

2. Decrease # units goal

3. Increase # units goal

4. Fire the manager!

Today’s Topics

Topic Presenter









Charlie




Resources Both

What is different about the high performing firms?

10,000 hour rule

The key to success in any field is simply a matter of practicing a specific task for a total of 10,000 hours.

Source: Outliers, Malcomb Gladwell

How do they spend those 10,000 hours?

They analyze resources & capabilities to determine competitive advantages.

They tear apart the value chain and reengineer to reduce costs (lean flow).

They implement effective financial management practices (benchmarking, etc).

How often does your company review its financial situation?

1. Daily2. Weekly3. Monthly4. Quarterly5. Semi-annually6. Annually7. Every few years8. Never

4%

18%

43%

0%0%

9%10%

16%

Who do you most rely upon for financial information?

1. Accountant2. Bookkeeper or

own system3. Consultant4. Banker or lender5. Owner(s) or

yourself6. None of above

14%

48%

0%

37%

0%2%

Financial Ratio Analysis

Applying analytical techniques to financial statements and other relevant data to produce information useful for decision making.

Three Issues :

Financial analysis:

Focus

In general, each financial ratio is closely related to one of these three fundamental issues.

Profitability, Liquidity, Safety (Solvency or Risk)

One of the most important tools of financial analysis is the:

Profit margin

Asset turnover

ROI (ROA)

= x Leverage factor

= ROE

Strategic Profit Model

Net profitNet sales

x Net sales

Total assets

Net profitTotal assets

x Total assetsNet Worth

Net profitNet worth

x

Spreadsheet version of the strategic profit model

ROIC of selected industries

ROIC > Cost of capital = value created

Nursery grower 3.9% / 24.1%

NY Greenhouse growers 7% / 40%

ROIC = (net income – dividends)/capital

Design/Build Firms 14.2%

Maintenance Firms 16.3%

The bottom line…

Today’s Topics

Topic Presenter









Charlie




Resources Both

Operational Profitability

• Net Income per Square Foot per Week Net Income / GH Sq. Ft. X Weeks in Operation

This adjusts income / sq. ft. for different lengths of operations.

$0.034 per sq. Ft greenhouse space / week

Operations

• Labor As A Percent of Sales Total Labor Cost / Total Variable CostsThis is an indirect measure of labor efficiency and cost efficiency.

$159,890 / $589,980 = 0.22 or 22.0%

• Operating Expense Ratio Total Variable Costs / Total RevenueThe average % of sales price needed to cover direct costs of crop.

$440,768 / $589,890 = 0.71.7 or 71.7%

Production Efficiency Metrics

• Worker Equivalents. Total # of labor hours / year divided by 2760 (55h per week)

This accounts for part-time labor and temporary workers.

(8 wkrs x 51wks x 40hr) + (19 pt-wkrs x 36 wks x 20hr) =

(16,320 hours + 13,680 part hours) = 30,000 hours

30,000 hours / 2760 hours = 10.8 worker equivalents!

New York Greenhouses averaged 8.9 FTE Worker Equivalents for the average 40,000 sq. ft greenhouse.


• Net Income per Worker Equivalent Net Income / Number of Equivalent Workers

This measures how well labor is used to generate net income.

$8,065.00 per worker equivalent is average.

• Sales per Square Foot Total Sales / Sq. Ft. Production Space

This establishes how well use is used to generate sales

$14.00 is the average for NY Greenhouses


• Square Feet per Worker Equivalent Sq. Ft Production / Number of Equivalent Workers

This is an indirect measure of worker efficiency / responsibility.

8,502 sq. ft per FTE worker

• Greenhouse Area per Operator Total Sq. Ft. Space / Production Managers

An indirect measure of how efficiently the greenhouse is managed1.2 FTE-Managers per 40,000 sq. ft operation

Today’s Topics

Topic Presenter









Charlie




Resources Both

Current Ratio = Current Assets ÷ Current Liabilities

Ideal level? – 2 : 1

A ratio of 5 : 1 would imply the firm has $5 of assets to cover every $1 in liabilities

A ratio of 0.75 : 1 would suggest the firm has only $0.75 in assets available to cover every $1 it owes

Too high – Might suggest that too much of its assets are tied up in unproductive activities – too much inventory, for example?

Too low - risk of not being able to pay your liabilities.

Current ratio

Quick (acid) ratio

(Current assets – inventory) ÷ liabilities

1:1 seen as ideal

The omission of inventory gives an indication of the cash the firm has in relation to its liabilities (what it owes).

A ratio of 3:1 therefore would suggest the firm has 3 times as much cash as it owes – very healthy!

A ratio of 0.5:1 would suggest the firm has twice as many liabilities as it has cash to pay for those liabilities. This might put the firm under pressure but is not in itself the end of the world!

Financial ratios 4 Growers

Ratio Calculation ValueCurrent Ratio Current Assets/Current Liab 2.0 or >Quick Ratio (Cash+AR) ÷ Current Liab. 1.0Debt to Equity Total Liab ÷ Net Worth 1:1EBIT to Total Assets EBIT ÷ Total Assets 2+% > CoCTimes Interest Earned (EBT + I) ÷ Interest 6-8XCash to Currrent Liab. Cash ÷ Current Liab 10-20%Sales to Working Capital Net sales ÷ (CA - CL) varies

Asset productivity ratios

Average Collection Period AR ÷ (Credit Sales ÷ 365 days) 1.3x termsInventory Turnover COGS ÷ Average Inventory variesInventory Holding Period 365 days ÷ Inventory Turnover variesSales to Fixed Assets Net Sales ÷ Net Fixed Assets varies

Employee productivity ratios

What is Liquidity?

Liquidity – One of the most important things we will talk about today. Banker’s analyze it by first looking at your working capital.

Working Capital = Currents Assets – Current Liabilities Every business has a minimum WC

requirement for two reasons:1) To pay bills on a timely basis2) To provide a proper collateral margin for

your line of credit

Hat tip to Barry Sturdivant, Bank of The West

Typical Balance Sheet

Current Liabilities

Long-Term Liabilities

Net Worth

Current Assets

Fixed Assets

Long-Term Investmentsand Other LTA

Assets = Liabilities + Net Worth

Company with Adequate Working Capital

-- Seasonal increase & decrease in A/R & Inventory. Corresponding increase & decrease to revolving line of

credit used to finance seasonal increase to trading assets and later get repaid from collection of A/R.

(Fixed Assets & Long-Term Investments)

(Long-Term Liabilities)

(Net Worth)

Working Capital

What happens if working capital level is inadequate?

Banks need one or both of two things:1. Have the RLOC brought to a zero

balance; and/or2. Have the RLOC remain within

borrowing base parameters.



(Net Worth)

Working Capital

(1) -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- (3)

(2)

1. Working Capital You Need

2. Working Capital You Have

3. RLOC isn’t getting paid, or Trade isn’t being paid on time.

How do you know if your working capital is inadequate?

You can’t pay bills on a timely basis

You don’t have enough availability on your line of credit

How is a working capital deficiency corrected?

Working Capital can only be impacted by changes in the long-term portions of the balance sheet and how they affect the cash level.

Option #1: Sell fixed assets and use cash to pay creditors or invest in additional trading assets.

New Level of Fixed Assets

(sell $1MM of fixed assets and use cash to pay down the line of credit)


(Net Worth)

Old Level of Working Capital

New Level of Working Capital

Old Level of Fixed Assets

Option #2: Incur additional term debt

Fixed Assets

Old Level of LTD

(Net Worth)

Old Level of Working Capital

New Level of Working Capital New Level of LTD

1) This option simply moves short-term debt to the long-term section of the balance sheet.

2) To do this you must have term debt borrowing capacity which is determined by profitability, cash flow, collateral and net worth position.

Option #3: Increase Net Worth

Net Worth can be increased in these ways:1)Sell part of your company to an investor2)Inject your own cash3)Generate additional earnings



(Net Worth)

Working Capital

Option #4: Decrease your WC requirement

This is done by lowering your investment in trading assets. In other words, instead of building your working capital level, you lower your working capital requirement to meet your level.

1)Increase Inventory Turnover

2)Increase A/R Collections

Fixed Assets

Level You Have

Level You Need (Long-Term Liabilities)

(Net Worth)

A few last words on working capital A lack of cash will get you into trouble

before a lack of earnings. Although you should take trade discounts,

be careful not to do so at the expense of not having cash when you need it most.

Banks are less likely these days to bail you out during the production and shipping season with an increase (even temporary) to your line.

If banks do come to your aid, it will likely involve fees and a rate increase.

Conserve Your Cash!

Delay non-strategic investments. Refinance what they can. Exercise the full length of credit

terms. Sell unused assets (if possible). Apply for credit long before it is

needed. Reduce estimated tax payments. Review insurance premiums. They aggressively manage

working capital (liquidity).

Today’s Topics

Topic Presenter









Charlie




Resources Both

Sales and Marketing Metrics

How Many Employees Work As Sales Reps For You?

1 2 3 4 5

78%

16%

3%2%2%

1. One – Three

2. Four – Six

3. Seven- Nine

4. Ten to Fifteen

5. Over 15

Answer Number

Salesperson Performance

0

10

20

30

40

50

60

70

2001 2003 2005

Mike

Roger

Pam

Year

Gen

erat

ed S

ales

$

1,00

0

Who Was The Most Consistent Sales Person?

Pam Roger

Mike

92%

0%8%

Answer Number

1. Pam

2. Roger

3. Mike

Salesperson Performance

0

10

20

30

40

50

60

70

2001 2003 2005

Mike

Roger

Pam

Year

Gen

erat

ed S

ales

$

1,00

0

Pam is !

Graphs alone are hard to interpret!

Who Would You Fire If You Had to Cut Back?

Pam Roger

Mike

2%

91%

8%

Answer Number

1. Pam

2. Roger

3. Mike

Tracking Temporary Effects

0100200300400500600700

Janu

ary

Febr

uary

Mar

ch

April

May

June

July

Augu

st

Sept

embe

r

Oct

ober

Nove

mbe

r

Dece

mbe

r

2007

2006

2005

Tho

usan

ds o

f D

olla

rs

Drought / Watering Bans

Two, Cool, Sunny

Weekends

Three rainy Weekends

Southern Living Promotion*

Sal

es

Rainy Weekends

Customer Metrics

• Units Rejected by Customer / Week

• Customer Complaints / Week

• Follow-up Customer Contacts Made

• Consecutive Years as Customer

• Percent of Total Sales per Customer This is best used by wholesalers who sell to

large clients. More than 35% to any one customer is not good!

Sales Metrics

• Percent New Customer Total new customers / Total customers that year This is a direct measure of customer base growth

21 / 74 = 28% New Customers

• Percent Customers Dropped / Lost Total New Customers / Total Dropped Customers

This is a direct measure of customer turnover.

17 / 74 = 22% Customer Base Loss

Net Increase In Customer Base: 5%!

Sales Team Metrics

• New Contacts / Week Total number of new contacts / Number of weeks of sales

event. … or number of sales weeks / year.

This is a direct measure of sales team efficiency.

• Customer Value Ratio Number of Orders / Dollar Value of Orders

This is an indirect assessment of overall customer value. You can also apply this metric on a per customer basis to evaluate customer base.

Remember, we want customers - not costomers!

Marketing Metrics

• Market Impact (Sales per dollar spent) Total Sales / Market Program Costs

Sum of advertising, sales expenses, etc. divided into total sales generated for that particular program. Track every event!

Remember, a marketing program can be divided by market segment, product line, etc. You can track by segment to measure effectiveness that might not show up in overall market assessments!

Marketing Must Have Strategy!

Marketing Benchmarks Allow You to Evaluate

The Effectiveness of Your Strategy and Your Implementation

http://how-to-write-business-plan.com/wp-content/uploads/2008/05/marketing-plan-example.jpg

Marketing Metrics

• Program Contact Efficiency Total Program Costs / # Customers Contacted

• Program Customer Yield Program Costs Per Buying Customer

• Program Product Yield Program Costs / Individual Product Line Units Sold

Marketing Metrics

• Sales per Worker Equivalent Sq. Ft. Production Space / Number of Equivalent Workers

This establishes how well use is used to generate sales

$101,981.00 wholesale gross income / FTE

• Hired Labor Cost as Percent of Sales Cost Of Labor / Total Sales Income

This establishes how well use Labor is used to generate sales

24.1 % is average for NY Greenhouses.

Do You Track Shipping Costs, Routing & Driver Efficiency?

1 2 3 4 5

0% 0% 0%0%0%

15

Answer Number

1. No, Don’t Have Time

2. Fuel Costs Only

3. Routes & Time

4. Driver Efficiency

5. Yes - All Three

Are My Shipping Costs In Line With Other Businesses?

The national average for shipping costs is 1.5% of Total Sales. In the greenhouse industry, we average between 2.0 and 2.5%

What’s Included In Transportation Costs?

• Maintenance & Repairs• Freight Bills• Rental Fees• Gas / Oil • Driver Wages• Insurance• Licenses, Fees• Tolls, Tickets• Taxes

Transportation and Shipping Costs are Rising Rapidly

• Transportation Expense Cost of Shipping and Transportation / Total Sales Income

This establishes how well use transportation and

shipping technology is used to generate sales

2.0 % is average for NY Greenhouses.

Total shipping costs have increased 87% in the last 5 Years, and predictions are that costs will increase another 30% in two years.

Shipping Metrics

• Gallons Fuel Used / Week / Driver

• Miles off Route Distance / Week / Driver

• Percent On-time Delivery / Driver

• Percent Follow Up Orders / Driver

Shipping Metrics

• Route Efficiency

Dollars spent per mile

Dollars spent per unit load value

Load value per mile driven

Load value per hour driven

Number of client visits per day

Dollars spent per number clients on route.

Conservation Metrics

• Gallons Water Used / Week

• KWH Electricity Used / Week

• KWH Used Per Dollar Gross Income Generated / Week

• Gallons Heating Fuel Used / Week

• Gross Value In Truck per Shipment

• Per Mile Cost per Dollar Gross Revenue

Do You Track Water Use?

1 2 3 4 5

0% 0% 0%0%

15

Answer Number

1. No

2. Via Water Bill

3. Via Flow Meter

4. Via Computer

An In-Line Flow Meter

Human Resource Metrics

• Percent Turnover by Unit

• Percent Turnover Company-wide

• Total HR Expense Accrued Per Employee

• Number of Accidents / Injuries / Disciplinaries

Do You Track: Employee infractions, Sick days, Turn-over?

1 2 3 4 5

0% 0% 0%0%0%

15

Answer Number

1. No

2. Sick Days

3. Infractions

4. Turn-over/year

5. 2 to 3 of the above

Today’s Topics

Topic Presenter









Charlie




Resources Both

Control Costs!

Costs establish the price floor.

Everyone’s costs are different!

Growers have to calculate the costs for their firm!

…or be eaten alive!

Variable Costs - LABOR

“Potting” process generally accounts for 20-25% of total direct labor.

“Care as needed” cultural practices account for about 25% of total labor.

“Harvesting and shipping” process can consume up to 50% of direct labor.

Look for the repetitive, tedious, time-consuming tasks and look to automate!

Every time you touch a plant,

it costs money!

Source: J. Bartok, GPN, June 2003.

Variable Costs - LABOR

The Rising Cost of Gettin’ By

• Retail consolidation• Fewer buyers• Oversupply

• Product tags/labels• JIT delivery, setup & care• Barcode/pre-pricing• Returnable shipping

equipment• Pay-by-scan• Take back unsold product• Consistent pricing• Continuous volume

replenishment• Rising input costs (e.g. fuel)• Labor availability

• Retail price pressure• Lowball competitors• Oversupply

• Rising fuel costs• Labor costs (wages) and

availability (H2B)• Increased costs of

materials (top soil, mulch)

• Increased workers’ compensation rates

• Cost of health care insurance

• Increased equipment costs

• Regulatory compliance (air & noise)

The Cost-Price

Squeeze

“These staggering costs have us scared to death”

“We are surviving, but profit-wise, it’s a squeeze.”

“Costs of energy, labor, fumigants, pots, polyethylene, delivery – everything is going up. It’s really beginning to hurt.”

Quotes from article in a trade journal.

MAY 10, 1979!

Emotional reactions to rising costs?

Other cost control measures!

Costs establish the price floor. Lower break-even point – go lean. Analyze employee productivity. Lock in energy contracts at lower

rates. Look at long-term distribution

options. Buy in pre-finished and turn the

margin. Do NOT cut marketing expenses!

Today’s Topics

Topic Presenter









Charlie




Resources Both

Using Virtual Grower

Tools to Help You Make Decisions:

Virtual Grower

RET Canada

Microsoft Excel

Quickbooks

Academic Software

NC State

Rutgers

Ecke’s

Have You Heard Of and Used Virtual Grower?

Yes but N

ever ...

Yes – Trie

d It...

Yes – Se

veral ...

Yes – U

se It

O...

Never H

eard of...

0% 0% 0%0%0%

15

Answer Number

1. Yes but Never have

2. Yes – Tried It Once

3. Yes – Several Times

4. Yes – Use It Often

5. Never Heard of It

It’s Easy To Input Data

Calculated Costs by Month

Generates Reports

Features Virtual Grower 2.0

Allows you to estimate energy costs

Allows you to verify crop / heating schedule

Allows you to play what if on technology upgrades and retrofits.

Allows you to measure / track system efficiencies and weather / cost per hour metrics.

One Little Problem

• Our “Example” is based upon data provided to you on Page 47. Table 34. See “Heating Fuel” = $53,073.00

• Please note that in 2001, the price of No. 2 heating oil was 97 cents / gallon. The 2009, price was 207 cents / gallon. To make this example more “real,” we corrected the fuel cost to reflect price increases.

• The cost of fuel for an average NY Wholesale firm would now be just over $112,000.00 We used a model GH in Virtual grower with a final heating fuel cost of $108,724.00 That should be close enough!

Example

New York Greenhouse: 40,000 sq ft - Old Steam BoilerHeating Schedule Sep 1 to May 1 (60F-72F)Heating Efficiency: 69%Air Exchanges: 1.30 exchanges / hour

No Heat Curtain!

Fuel Types and Prices New York - Oil 2 at $2.07 / gallon

Total Heating Costs: $ 108,724.00Cost per Square Foot: $ 2.17Maximum BTU Draw : 4,340,579 btu’s

Now let’s install a modern Hot water boiler:

Example

New York Greenhouse: 40,000 sq ft - Modern Heating Schedule Sep 1 to May 1 (60F-72F)Heating Efficiency: 78%Air Exchanges: 1.30 exchanges / hour

No Heat Curtain



Now let’s install a good quality heat curtain:

Net change: $12,545.00

Example

New York Greenhouse: 40,000 sq ft - Modern Hot WaterHeating Schedule Sep 1 to May 1 (60F-72F)Heating Efficiency: 78%Air Exchanges: 1.30 exchanges / hour

Energy Curtain Installed!



Net change: $27,814.00

Total Savings = $40,359.00

Annual Heat Curtain Impact

Heat Curtains cost $3.00 / sq.ft. ($120,000.00)

What If We Really Did This?

$27,814.00 Energy Savings With Heat Curtain

($15,912.00) Cost of Loan (10 Years @ 6.00%)

______________________________________

$11,902.00 Annual Operations Savings

Spreadsheet version of the strategic profit model

Subtract $11,902.00

Improving on Established Benchmarks

The Process Required To Improve Benchmarks

• Define• Measure• Analyze• Plan• Improve• Control

Lean Flow, Six Sigma, DMAIC

Photo


• Establish Planners (Teams)• Set Team Leaders• Hold Kick-off Meeting – Define Project• Define Metric Segments and Teams• Set Baseline Goals / Metrics Record Keeping!!!!• Establish Timeline for Reports

Define and Organize


• Document Operations / Product Flow• Define Product to Process Relationships

Transactions, Inventory, Labor, Grow Schedule

• Quantify Scrap, Loss, By Products, Rework• Document Hidden Processes

Approval stops, bottlenecks, paperwork,

• Define customer-driven capacity• Create new SOP’s, Quality Metrics, Output Metrics

Measure & Collect Data


• Identify process cells or families• Calculate resources and time for process• Define working groups by task• Create optimized flow pattern• Validate process design• Review future capacity vs business strategy

Analyze Plan


• Document process, Change layout• Train supervisors working in the process• Implement an employee feedback protocol• Implement employee flexibility & training plan• Create SOP’s and Visual work standards• Verify process meets sales expectations

Improve - Make Physical Changes


• Reinforcement training / certification• Verify SOP’s implemented at ea. cell / station• Establish metric reporting responsibilities• Implement control via Charts / Graphics• Evaluate upper management compliance• Maintain control of daily operations / work

Control and Maintain

Lessons From Lean Flow

AreaScheduling

Production

Lead Time

Batch Size

Inspection

Layout

Empowerment

Inventory Turn

Flexibility

C.O.G.S.

TraditionalForecast - Push

Speculative Stock

Long

Large

Spot Sampling

Functional

Low

3-4

Low

Rising

Lean ProcessCustomer Order - Pull

Customer Order

Product Specific

Small

100% at Source

Continuous Flow

High

5-7

High

Lowering

Today’s Topics

Topic Presenter









Charlie




Resources Both

Resources

Resources• Virtual Grower – Energy/Production Software• http://www.ars.usda.gov/services/software/download.htm?softwareid=108

• RET Canada – Energy Software• http://www.retscreen.net/ang/home.php

• University of Florida – Financial Resources• http://hortbusiness.ifas.ufl.edu/publications.php

• Cornell University – Benchmark & Financial Software & 2003 Publication• http://hortmgt.aem.cornell.edu/programs/hortbusiness.htm

• Financial Calculators• http://www.financialcalculators.com• http://www.bplans.com/business calculators/

http://www.ars.usda.gov/services/software/download.htm?softwareid=108

http://www.retscreen.net/ang/home.php

http://hortbusiness.ifas.ufl.edu/publications.php

http://hortmgt.aem.cornell.edu/programs/hortbusiness.htm

http://www.financialcalculators.com/

http://www.bplans.com/business_calculators/

Ellisonchair.blogspot.com

For more information:Ellisonchair.tamu.edu

Dr. Charlie Hall Ellison Chair in International Floriculture Texas A&M University...

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