Pinch points – every facility has them. They are the areas in your existing operations where efficiencies die. Daydreaming about new robots, innovative irrigation systems or a new rotary parlor can be fun, but in today’s dairy industry, cash reserves and line of credit availability are not as abundant as they have been in the past.
Thus, unless you find yourself in a financial position that affords you the option to remodel, significantly retrofit your existing facilities or build from the ground up, producers need to look at their own current facilities for areas of opportunity and improvement.
Whether it’s overcrowding in pens, barn capacity issues or milking cows walking too far, every facility has opportunities for improvements. Recognizing and addressing these areas can pay huge dividends to the long-term success of your operations.
As almost anyone in the industry knows, today’s dairy producer wears many hats. Being on top of every aspect of the operation has become increasingly difficult, and keeping up with each day’s challenges lends very little time to quantifying the impacts of these pinch points.
Because of this, identifying and focusing on alleviating the strains of operational pinch points has often become secondary to each day’s tasks. Over time, this means pinch points become the norm, and dollars end up falling through the cracks each month.
While the responsibility to eliminate these pinch points remains on the producer, I recommend producers combat this time crunch by also encouraging employees and consultants to speak up when they see pinch points during their workdays.
Veterinarians and nutritionists should be spending a significant amount of time on-site and in the pens, communicating with employees and observing the operations each visit. By working together and sharing concerns and ideas, these pinch points will quickly come to light.
Once a pinch point has been identified, it’s important to quantify its impact on the overall financial and operational performance of the dairy farm. To understand the impact of a pinch point, here are some questions that need to be answered:
- Is it negatively affecting what we are doing?
- Why are we doing it this way in the first place?
- If we make a change, will it negatively impact another part of our operation?
- What other options do we have?
- Is there a solution and, if so, is that solution feasible?
In my experience, these types of questions are best addressed in a management-style meeting with the producer, veterinarian, nutritionist, accountant and outside consultants all participating. Very rarely does an operational change impact only one aspect of the overall operation, so every decision should be made with the entire dairy in mind.
Partial budgets may have a role in these discussions, but I would encourage producers to invest the time and effort into complete budgets which include every aspect of an operation. Likely, this process will not be perfected right away, but it will improve over time the more it is used.
The idea of “feasibility” may mean different things to different people. For example, lenders often evaluate potential deals on an accrual basis – meaning depreciation and herd replacement costs play a significant role in deciding whether an idea is feasible or not. Many dairy producers, on the other hand, may evaluate an option by how it affects the monthly cash flow seen in the checkbook.
Outside investors often evaluate investments using metrics such as return on investment, debt service calculations or adjusted EBITDA. With such a range of definitions, setting and understanding your feasibility goals will go a long way in helping decide the best course of action among options and eventual solutions.
When an issue is noted but a feasible solution is not found, tracking and monitoring the issue becomes increasingly important. Issues do not tend to just go away over time. In fact, the longer an issue remains, generally the more it impacts the overall operations, and the cumulative impact to the bottom line grows each day. In many ways, these issues are like sports injuries.
For example, if you play football on an injured foot, you’re more likely to do long-term damage and possibly injure another body part. A dairy operation is the same way. If a pinch point or issue is not addressed, over time it will cause additional strain in other areas of the operation.
For example, insufficient cooling can negatively affect breeding during the hot summer days in California. If not addressed, this may lead to large fluctuations in herd numbers throughout the year, causing overcrowding in certain pens and in the barn.
At other times of the year, milking cow numbers may be down by 200 animals. These types of swings and volatility in herd numbers and herd demographics have huge impacts to both the bottom line and the operational efficiencies of any dairy.
Last, choose the option that will have the greatest return for the investment it requires. Of course, no dairy producer has unlimited financial funds. Financial constraints play a huge role in the decisions producers make and limit many facility investment and improvement options.
Because of this, understanding the long-term operational impacts and financial returns of any investment is incredibly important in evaluating the best use and return for the dollar.
With margin fluctuations and limited resources available, the ability to maximize efficiencies in every area of a dairy operation will ensure the ongoing and long-term success of your dairy. While this requires extensive time and effort, the returns may be the difference between a struggling operation and a thriving one. 
Lee Kootstra is an agribusiness consultant with Frazer LLP, an accounting and consulting firm with offices in Brea and Visalia, California.
-
Lee Kootstra
- Agribusiness Consultant
- Frazer LLP
- Email Lee Kootstra
