Performance benchmarking boosts profitability

Benchmarking is used extensively in a range of industries to compare performance parameters and financial results among competitors or within components of an enterprise. Benchmarking is of value in assessing performance and evaluating expenditure in significant cost areas including feed, labor, fuel, transport, utilities and packaging material.

History of U.S. Benchmarking

Following the divestment of the Ralston-Purina and Cargill integrations during the 1960s and early 1970s, a large number of independent but relatively large egg operations emerged to supplement smaller operations serving regional markets. Extreme competition arising from cycles of oversupply created the need for efficiency. Control of costs became a principal determinant of profitability in markets characterized by seasonal variation in price and cycles of overproduction occurring at two to three year intervals.

The late Richard Chilson established a series of costing systems based on computerized templates. These were designed to collate and tabulate production and to present financial data to appropriate levels of management with benchmark comparisons against standards for individual flocks or complexes. Depending on requirements, some systems could be integrated and extended to incorporate financial evaluation and comparison ranking against anonymous competitors.

Chilson Systems was acquired in 2006 by AgriStats, Inc., currently the dominant force in computerized benchmarking systems for the broiler industry. This take-over has the potential to transfer advanced technology used in the broiler industry to assemble, tabulate and rank subscribers.

CAT2 was formed in the mid-1990s to address efficiency in food processing by developing and customizing management information software. The products of CAT2 represent the needs of a commodity oriented industry concerned with internal company comparisons concentrating on breed standards and cost differentials among complexes.

Egg Management Series

Computerized data collection and management information systems should be modular and capable of adaptation to suit the needs of egg producers, who as a group are more diverse in their structure and operations than broiler integrators. The Egg Management Tool Series offered by CAT2 includes the following components:

Layer Information Manager, records the production parameters of pullet rearing and egg producing flocks and displays data in tabular and graphic form with reference to either breed or company standards.

Layer Forecasting Module, generates a projection of egg production by grade for designated units or complexes.

Layer Costing Module, prepares profit and loss statements for flocks based on input costs, production and unit revenue.

Order and inventory Control Module, correlates client orders and controls inventory for efficient DSD and FIFO rotation of stock. Systems are based on bar code identification of products.

Appraisal of Benchmarking

Egg producers in the United States are concerned with generic shell products, egg liquid and more recently, emerging specialty presentations. Since generic production dominates the market, the revenue for the various grades is determined largely by regional supply and demand considerations. Predicting hen numbers in the various regions should influence management decisions regarding expansion, placement, molting and depletion.

Both the USDA and Don Bell of the University of California at Riverside issue forecasts of production. Consolidation within the industry has the potential to rationalize production to eliminate cyclic fluctuations and achieve prolonged stability in profitability.

Reliable cost information is complementary to production forecasts as both cost and revenue determine profit.

Don Bell makes available monthly updates of feed and other costs reflecting the major regions. It is essential to monitor feed, labor and vehicle costs which influence the relative return from producing in low-cost areas with transport to regions in a supply deficit.

Two Levels of Application

Benchmarking, irrespective of the system used, can be applied at two levels. Quarterly or periodic reviews by executive management identify trends relating to placement, performance and price. Decisions can then be made as to placement programs and short-term allocation of resources. Summarization and "rendering down the figures" is critical to understanding costs and markets in relation to company strategy.

At the operational level, accurate and reliable data allows managers to compare performance and controllable costs among complexes and to relate the impact of pullet depreciation, feed, processing, packaging and distribution against both internal standards and possibly against competitors. A middle-level manager at a large national broiler integrator warns against the danger of both being overwhelmed with data and being "too close to the figures" especially when confronted with monthly reports.

Many of the managers interviewed indicated that benchmarking is most useful when used to explain exceptions and to help with understanding the cause of deviation from company, strain or industry standards. Reasons for discrepancies are derived from analyses of data to develop appropriate corrective action. Size of operations, configuration of housing, ventilation and cage installations all influence cost. In a recent example, a large integrator noted significant differences in cost between two almost identical in-line complexes approximately five miles apart. Examination of production data showed consistent inferiority in egg production and egg mass in one complex. Given close similarity in house design and equipment, a common feed supply and identical disease challenge, an intensive review of possible causal factors was undertaken.

Water consumption was found to be different between the two complexes and this was attributed to airlocks in the supply system of the affected unit due to defects in design and maintenance of well pumps. When appropriate modifications were made, performance on this complex improved.

Interpretation

Benchmark comparisons, whether internal or among companies, must be subject to interpretation to ensure validity and to understand the specific differences in management or operating environments. Factors influencing performance may include the age and standard of maintenance of complexes, in-line or off-line configuration, regional ingredient costs and disease challenges.

Generally, managers in the egg industry are influenced to a lesser degree by benchmarking systems than their counterparts in broiler production. Short-term comparisons of ranking may introduce distortions in decision-making which ultimately may be to the detriment of company profitability. Sub-optimization through establishing artificial transfer costs and compartmentalization of interrelated units in the production chain can produce distortions which may adversely affect the bottom line. Attempting to minimize the cost of pullet rearing is a frequently encountered situation.

Producing uniform pullets of acceptable weight at transfer which have been effectively immunized will contribute to optimal egg mass during the laying cycle. Producing a "cheap" pullet may be reflected as a competitive advantage in benchmark comparisons of pullet cost among complexes or competitors but a "high" ranking on this single criterion may, in fact, detract from overall company profitability.

Decisions relating to biosecurity, suppression of rodents, comprehensively vaccinating against SE, IB and ILT may increase costs but contribute to higher overall profit. Since feed is the most significant cost component of egg production, careful attention to nutrient specifications, allocating appropriate feeds to flocks according to age, environmental conditions, daily intake and level of production, can be guided by valid comparisons between and among complexes. Establishing bonuses based on narrow performance criteria invariably leads to sub-optimization and detracts from both teamwork and the bottom line of a company.

Benchmarking Trends

Most of the large integrators will continue to develop internal systems based on available commercial software which can be used to identify both advantageous and deleterious practices based on realistic and achievable standards. Comparison between and among competitors is usually less productive, especially if there is bias in selection of the companies or if there is confounding in either collection of data or unexplained differences in the structure and operating environment of the subscribers to a program.

It is inevitable that benchmarking may become more focused and specific, concentrating on conservation of energy, processing efficiency, distribution or further processing. As with the broiler industry, benchmarking will continue to evolve from simple cost comparisons to profit models which relate to return on investment.

Benchmarking is a beneficial approach to developing productive programs and policies in a competitive industry. The structure of computerized data collection packages and their interpretation are pivotal to both strategic and operational management decisions.