There are many factors that can reduce a dairy’s profit margin and, with today’s financial situation, each cow must earn its keep. Herd information and data provide a wealth of information of financial results and performance.
Managing cows and crops day-to-day leaves little time to think about the overall operation and inefficiencies in the system. Identifying these inefficiencies is important for enduring changes in the industry and price volatility. Achieving high output per cow with low costs is hard to do and is a characteristic of highly profitable herds.
Take a step back and evaluate your farm. Do you have the adequate number of animals? This will depend on your farm objectives and cash flow. Are you meeting your demands, or is the current size limiting your growth? How is your herd’s productivity? Do you have the adequate number of cows? Production efficiency can be improved through changes in reproduction, feed, milk and reproduction.
Labor efficiency is another important area to look at, especially in times of low milk prices. Having the correct number of people and managing labor efficiently will help manage costs and productivity. Labor efficiency is nothing more than the amount of work done by a full-time equivalent worker.
For example, let us assume you have an adult who works 40 hours per week for 50 weeks (with two weeks’ vacation per year). This equals to 2,000 work hours for each full-time equivalent (include paid and unpaid labor, like family members).
To calculate the total milk sold per worker, calculate the total full-time equivalent on the farm per year. First, divide the total hours paid needed for producing crops and dairy operation by 2,000 hours. Then divide the total pounds of milk sold by the total full-time equivalent per year. Ohio State University Extension suggests the total pounds of milk sold should be retrieved from your milk checks.
Total pounds of milk sold / full-time equivalent hours
= 9 million pounds milk sold / (20,000 hours / 2,000 hours)
= 900,000 pounds of milk sold per worker
As pounds of milk sold per worker increases, so does net farm income. The labor efficiency for large freestall barns should be greater than 1 million pounds of milk sold per worker. According to the University of Kentucky College of Ag, labor in a farm makes up about 15 to 20 percent of farm expenses.
To determine your labor costs, utilize the pounds of milk sold per worker. Labor turnover may end up costing 150 percent of the employee’s salary. Hiring, training and managing the right people can save the farm a ton of money.
Lean improves efficiency
The lean methodology was developed by the Japanese manufacturing industry. Simply stated: Lean maximizes customer value through the continuous improvement of any process while minimizing waste. It’s based on the ideas of “continuous incremental improvement” and “respect for people.” This methodology has evolved over the last 50 years and now can be applied across any business or operation.
By adopting a lean operations approach, dairy farms can navigate through tough milk price times, stabilizing spending and earnings. Experts say the goal of lean is to eliminate waste and, when done correctly, it can create huge improvements in efficiency, productivity, cycle time with lower costs and improved competition.
To be successful, lean production needs to become part of the company’s culture. Managers and employees must develop a lean eye and follow the five P’s model:
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Purpose – What benefit will the product provide the customer in return for profit?
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Process – How does the business reach its customers and its daily internal operation needs?
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People – Who works within the operation and the end users or target market?
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Platform – What tools and technologies does the operation have at its disposal, like software, database, etc.?
- Performance – What evaluation metrics will be used? What measurement can ensure the operation is fulfilling its original purpose?
Waste elimination is an effective way of increasing efficiency and profitability. Processes either add waste or value to a good or service. Taiichi Ohno, Toyota’s chief engineer, categorized seven forms of waste of unproductive practices. These are an important part of lean production.
The cost of waste reduces profit margins, drives costs up, reduces quality and decreases customer satisfaction. Here are the seven forms of waste; try and visualize them in your dairy farm operation:
1. Transportation – Moving product between different operations costs time, possible damage and unnecessary waste of energy. (Cows, equipment, etc.)
2. Inventory – Producing more than what will be sold and purchasing more than you need. This might be hard in farms, as output is difficult to control. Inventories of supplies should be kept to a minimum.
3. Motion – Excessive movement of machines and employees. It can cause injuries, extensive processing time because of walking and delays in communication.
4. Waiting – Flow of operations has to be smooth and continuous. Time is wasted when one process is halted while waiting until another finishes.
5. Overproduction – In farming, this could be unsold crops or animals due to poor planning.
6. Over-processing – Providing unnecessary excess value to the customer or utilization of overly elaborate and expensive equipment when a simple machine would do the job.
7. Defects – Product does not meet the requirements, and customers are dissatisfied. Not meeting milk quality standards could be considered a form of waste.
Lean does not mean cheap. It means doing things simpler to realize the efficiencies of reducing waste (and hence cost). If you decide to go lean, you might be able to fine-tune your operation, improve efficiency, help mitigate risk and add to your bottom line.
To get started, find a change agent, a leader who will be responsible for the lean transformation. A lean six sigma expert will provide you with the guidance and know how to elevate your game to achieve your goals. Search the web for local six sigma experts in your area.
They don’t need to have an agricultural background to consult with your farm. In fact, their objective point of view might just help you find even more inefficiencies you had not previously considered. 
References omitted but are available upon request. Click here to email an editor.
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