Revenue per employee. It is a widely known and used metric in evaluating businesses, both within a company and across companies in the same segments of industry.
Somehow, in the dairy industry, it is little used. We focus on milk production and parameters around the cow. There is a key missing element to this focus. Everything that happens in a cow’s life is touched by a human first. I often tell clients there are not cow problems but problems caused by people, as nearly every disease or cow problem has a human attached.
In past articles, I have written about rethinking employees as an asset and not a cost, and about how employees touch nearly every dollar of revenue (+90%) and over 80% of the expenses. Yet we as an industry do not use key metrics that are employee-focused. Nearly all are cow- or feed-related.
Revenue per employee is an easy-to-calculate ratio and is commonplace in industries outside of agriculture. Google it once and see. Revenue per employee is the result of dividing the revenue per time period by the average number of full-time-equivalent (FTE) employees for the same time period. An example for dairy may look like this. Assume the following variables: 1,000 milking cows at 85 pounds per day, a 30.5-day month, $19 per hundredweight (cwt) milk and 12 FTE employees. (This includes the owner who works and takes a draw from the dairy.)
First, we calculate the estimated number of hundredweights produced on the dairy in a month:
(1,000 cows x 85 pounds per cow) / 100 (to convert to hundredweights) = 850 cwt per day. 850 cwt per day X 30.5 days = 25,925 cwt per month
Then we calculate estimated monthly revenue:
25,925 cwt per month x $19 value per cwt = $492,572
Finally, we divide estimated revenue by the number of employees to arrive at revenue per employee:
$492,572 estimated monthly revenue / 12 total employees = $41,047 in revenue per employee
Another way to adapt this to the dairy industry is to use milk sold per time period divided by the number of FTE employees for the same time period. This ratio will not have the influence of fluctuating milk prices and may be more adaptable to the dairy industry, as most dairies do not have a sales team nor are actively selling milk into the marketplace, but instead have a contract to deliver milk to an entity who then sells it on their behalf.
Milk sold per employee would look like this for the same example dairy:
25,925 cwt of production / 12 total employees= 2,160 cwt of production per employee
We now have a number or metric to evaluate. What does it mean and how does one use it? Revenue or milk sold per employee is a measure of efficiency. It tracks people’s productivity. How well are the company’s employees doing at being productive? If employees are highly productive, this usually translates into higher profits for the company. It also indicates the company is utilizing its investment in human capital wisely. What impacts this ratio? High employee turnover rates tend to lower the ratio.
Time and therefore productivity is lost on efforts to recruit, hire, onboard and fully train new staff. Existing staff are covering for open positions. New hires make more mistakes and are less efficient in their work, and some “things” just do not get done. More critically, though, the tasks or thoughts needed to get the company to the next level tend to be put off as a company puts out fires and just gets the day-to-day done.
What is a company with a higher ratio doing to move the number up? They are leading in a way that employees want to stay, thus keeping their institutional memory. Thereby, lowering hiring costs, improving productivity because staff are well trained. They are using new technology efficiently in place of employees; employees are using existing technology wisely or more efficiently.
We are just starting a new year. How about this year be the year to add this metric to your key performance indicators? How can you start this? I suggest you go back to January 2020 and every month write down your total milk shipped (or sold) monthly, then determine how many FTE employees you had each of the 12 months of 2020. Then do the math. You now have a 12-month rolling metric. When January 2021 is complete, add it to the spreadsheet. I like to evaluate this ratio in two ways.
First, look at the trend over the rolling 13 months. Compare January to January and the trend over the 13 months. Second, look at the last three months; Are you trending up or down?
The next question, as it should be with any metric you are using, is to ask why. Why does the ratio move up or down? Dive into this. The numerator in the equation is revenue or milk sold. Therefore, if either are dropping, then the ratio will lower. If the denominator goes up, you will have added staff, and the ratio will decline as well. Look at which number changed (milk sold or employees) and ask yourself if you know why. Ask yourself whether this is reasonable. Find out why milk sold went down or fully understand why staff were added and when there will be a return on that investment in human capital. What is or has employee turnover been? (If you need to calculate that number, see “How to make employees an appreciating asset, not a cost” in Aug. 25, 2020 Progressive Dairy issue.)
Are employees using your current technology to its fullest advantage? What training can you do to increase efficiency? Do you have the right people in the right seats for your business to operate efficiently? Do you need a business coach to assist you in the evaluation of your efficiency, someone who is not as attached to the operation as you are? If the trend continues to decline, then hard questions must be asked or profitability will continue to decline. At some point, a decision to reduce staffing levels or find ways to increase efficiency, milk sold, or milk price will need to be enacted.
What about an increasing ratio? This is usually a good problem to have. It shows your productivity or efficiency is gaining ground. This should translate into increased profits. If not, again, it is time to ask: Why? If you are seeing an increased ratio, it is still important to ask why. It is key to understand why the operation is being successful; you want to keep doing what got you there and repeat. However, it can signal an overworked staff. At some point, your ratio will indicate your staff is working long hours, and this can only go so far before there are consequences to being overworked. Evaluating this along with using what you see and hear will guide you to understand at what ratio level it is time to hire additional staff. Waiting until staff leave or their productivity declines due to overwork is reacting later than is appropriate.
A few words of caution. If the operation changes from Holstein to Jerseys, this needs to be considered, as it will impact the number of pounds of milk sold. Likewise, if milk price takes a major swing either up or down, or a contract decision greatly changes the price and therefore the revenue, take this into account as well. Otherwise, you may be too easy or too hard on the employee productivity question and make incorrect assumptions. Comparing across dairies is a common practice among dairy operators. Using this ratio to do so is appropriate. But only if one understands what they are comparing to. Size of operation affects the ratio, as does the style or type of dairying.
When comparing, it is key to understand both operations that are being held up to each other to know the assumptions you are making. Without knowing, inappropriate conclusions will be made. This ratio is best used to compare yourself to yourself at different time periods and to set goals on hitting a new target level and to evaluate your progress toward reaching that target. An example would be adapting a new technology or adding a new person with a specific skill set and seeing what the impact on productivity is and what kind of time it takes to return on that investment.
Employees are a unique asset to a business. A company that nurtures this asset well and leads it well will reap the benefit of higher productivity and thus a competitive advantage. Employee productivity is one of the last great competitive advantages, and the great news is … it is available to everyone who wants to harness it.
