Adopting Operational Benchmarks For Long Term Success

1. Adopting Operational Benchmarks For Long Term Success 2009 OFA ShortCourse

2. Credits New York Greenhouse Business Summary and Financial Analysis. Pub. EB-2002-03 Wen-Fei Uva and Steve Richards, 2002

3. How many weeks does your operation do business? 30 • 11 (Spring Only) • 22 (Spring/Fall) • 52 (Full Year) • 26 (Half Year) • 44 (Eleven Mo.) Answer Number

4. How many full time employees do you have? 10 • One • 6 • 12 • 24 • Over 24 Answer Number

5. How many supervisors manage those employees? 10 • One • Two • Three • Four to Five • Over 5 Answer Number

6. How do you pay your worker bees ? 10 • Hourly Wage • Piece Work • Task Unit • Sub-Contract • Familial Slavery Answer Number

7. Small Changes Add Up! As we saw in Charlie’s profit analysis, even small changes can add up to significant increases in profit! Making management and procedural changes to your production operation is no different. Several simple changes may bring you back to profitability.

8. Sensitivity of Changes in Profit to a 1% Increase: Change + 26.90 % + 24.63 % - 7.17 % - 5.25 % - 4.18 % - 3.93 % - 2.28 % - 2.18 % - 0.97 % Price Per Plant Yeild Production Increase Labor Hours Labor Cost (Wage) Equipment Investment Management Cost Packaging Costs Fuel Interest Rate Source: Kirschling and Jensen, 1974

9. Benchmarking Operational Metrics Each operational metric is based on, and will tie into, the financial metrics to be used by the company. Labor metrics are assessed by work unit / process

10. Benchmarking Operational Metrics External benchmark metrics are useful for establishing 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.

11. Example: Ask Yourself.... • Is my transplant line managed effectively? • Is my shipping department efficient? • Is my sales team meeting goals? • Am I meeting company conservation goals? • How much room do I have for improvement?

12. 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 hourly cost • Number of labor hours utilized crop. • Loss (shrinkage) at transplant line by crop.

13. Productivity Assessment In-Series Task Process

14. How many employees work for you? 30 • One – Three • Four – Six • Seven- Nine • Ten to Fifteen • Over 15 Answer Number

15. Productivity Assessment In-Series Task Process Poor Line Manager 62% 52% 28% Poor Pace Setter

16. Productivity Assessment Independent Task Process

17. How many employees work for you? 30 • One – Three • Four – Six • Seven- Nine • Ten to Fifteen • Over 15 Answer Number

18. Productivity Assessment Independent Task Process Horrid Placement ! Best Employee! Profit Killers

19. 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 = 1,120 Line 2 = 4,000 * 0.52 = 2,080 5,680 Line 3 = 4,000 * 0.62 = 2,480 12,000 / 5680 = 2.11 days * 8 hr = 16.9 hours Line efficiency is only 47.3% !!!!! Cost = 12 employees * $10.50 * 16.9 = $2130.00

20. So What? …………..5680? Can we do better? Now 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 12 employees * $10.50 * 9.20 hours = $1159.00 $2130.00 – $1159.00 = $971.00 savings ….(in one day!)

21. Where Do Your Place Your Slowest Worker? A. At the end of the line, with the line manager positioned at the end point. B. In the front of the line, with the line manager positioned in front of the line. C. At whatever position has the easiest task. In 1 2 3 4 Out

22. 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?

23. Do you think it would be more efficient to eliminate one transplant line? 15 • Yes • No • Don’t know. Answer Number

24. Productivity Assessment Independent Task Process Positions to be eliminated!

25. Productivity Assessment In-Series Task Process 66% 68% Reconfigured In-Series Process = 67% average efficiency (assumes training, and effective management implemented)

26. 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!

27. Benchmarks? Set your benchmark at 67 % efficiency. Track production (by task) to get perspective. Reward managers that exceed this benchmark Troubleshoot if productivity fails to reach this benchmark at any point in the future.

28. Tracking Benchmarks Visually Transplant Operations ??? Productivity per line Task

29. If the production problem cannot be fixed……? 30 • Increase assigned cost • Decrease # units made • Increase # units made • Fire the manager Answer Number

30. Charlie’s Turn

31. 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. 45,906 / 58,424 = (1 - 0.786) = 21.4% shrink!

32. Operations • Labor As A Percent of Sales • Total Labor Cost / Total Variable Costs This is an indirect measure of labor efficiency and cost efficiency. $176,322 / $588,037 = 0.315 or 31.5% • Operating Expense Ratio • Total Variable Costs / Total Revenue The average % of sales price needed to cover direct costs of crop. $425,562 / $588,037 = 0.762 or 76.2%

33. 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 ptwr x 36 wks x 20hr) = (16,320 hours + 13,680 part hours) = 30,000 hours 30,000 hours / 2760 hours = 10.8 worker equivalents!

34. Production Efficiency Metrics • Net Income per Worker Equivalent • Net Income / Number of Equivalent Workers This measures how well labor is used to generate net income. • Sales per Square Foot • Total Sales / Sq. Ft. Production Space This establishes how well use is used to generate sales • Sales per Worker Equivalent • Sq. Ft. Production Space / Number of Equivalent Workers This establishes how well use is used to generate sales

35. Production Efficiency Metrics • Square Feet per Worker Equivalent • Sq. Ft Production / Number of Equivalent Workers This is an indirect measure of worker efficiency / responsibility. • Sales Per Square Foot* (This is not net income!) • Total Sales / Sq. Ft. Production Space An indirect measure of how well the greenhouse generates income

36. Cost Efficiency Metrics • Overhead Costs per Square Foot • Total Overhead Cost / Sq. Ft. Production Space • An indirect measure of greenhouse operation cost efficiency. • Overhead Costs per Square Foot per Week • Total Overhead Cost / (GH Sq.Ft. x # of Wks in Operation) • A direct measure of how much overhead cost should be assigned to each square foot production space / week.

37. Cost Efficiency Metrics • Total Cost per Square Foot • Total Cost / Sq. Ft of Greenhouse Production • This is an indirect measure of operations cost efficiency. • Total Cost per Square Foot per Week • This is an indirect measure of operations costs spread over production area for the weeks the greenhouse is in operation…

38. Operational Profitability • Net Income per Owner Hours Worked • Net Income / Number Hours Worked by Owner This is an indirect measure of owner’s return on management. • Net Income per Square Foot. • Net Income / Number of Worker Equivalents Indicate the dollar amount each sq. ft. of production space generates • 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.

39. Inventory Metrics • Average Age of Inventory (Can be days, weeks, months, FIFO? LIFO?) • Number of weeks product was stored • Cost Per Day Per Square Foot • Total Warehouse Costs / Sq. Ft Warehouse Space • Inventory Turnover C.O.G.S. / Average Inventory Age Cost of Goods Sold …. Guess we better ask Charlie!

40. Charlie’s Turn

41. Sales Team Metrics • Ratio New Customer To Total Customers • Total new customers / Total customer that year This is a direct measure of customer base growth • Ratio New Customers to Customer Dropped • Total New Customers / Total Dropped Customers This is a direct measure of customer turnover.

42. 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!

43. Tracking Temporary Effects Southern Living Promotion* Rainy Weekends Three rainy Weekends Two, Cool, Sunny Weekends Sales Thousands of Dollars Drought / Watering Bans

44. How many employees work for you? 30 • One – Three • Four – Six • Seven- Nine • Ten to Fifteen • Over 15 Answer Number

45. Salesperson Performance Generated Contacts Year

46. 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 Remember, a marketing program can be divided by market segment, product line, season or by some other special metric of effort organization.

47. Marketing Metrics • Program Contact Efficiency • Total Program Costs / # Customers Contacted • Program Customer Yield • Program Costs Per Buying Customer • Program Product Yield • Program Costs / Product Line Units Sold

48. 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!

49. Shipping Metrics • Gallons Fuel Used / Week / Driver • Miles off Route Distance / Week / Driver • Percent On-time Delivery / Driver • Percent Follow Up Orders / Driver

50. 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.