Todd Thurman, SwineTex Consulting Services, LLC
I corresponded recently with a restaurant owner and we discussed the Covid-19 challenges he’s faced. He explained the economics of the restaurant business and why many restaurants can’t be profitable at 25% capacity which is the limit that has been placed on some restaurants during the “reopening”. He explained that “table turnover” is a major factor in restaurant profitability. Essentially, the table turnover rate is a calculation of how many parties they can seat per table over a particular time period. They’re indirectly measuring the amount of potential revenue you can generate per table. While table turnover affects different types of restaurants differently, it’s a consideration for any restaurant that has a sit down dining room.
This is the basic concept of throughput, a concept almost everyone understands but few actually apply effectively. Throughput can mean different things in different applications but it’s simply the idea that if you can produce more units without affecting a fixed cost, you’ve in effect, reduced your cost of production and improved profitability.
As I’ve often stated, the difference between great businesses and merely good businesses often lies in the consistent application of basic fundamentals. When interviewed by Guy Raz about the keys to success for his airline, Southwest Airlines founder Herb Kelleher mentioned turnaround time at airports. At one time early in their business, Southwest Airlines was operating a four plane schedule with three planes. When asked how he charged less than other carriers, Kelleher responded, “Through enormous productivity.” One of the examples he gave was that Southwest could turn around an airplane (arrival at the gate to departure from the gate) in 10 minutes. Their competition averaged a little less than an hour to accomplish the same feat.
You’re probably wondering at this point what all this has to do with pork production? What we’re talking about here, in both cases, is asset utilization. How can we get the most food served (and paid for) with the tables we have available to us? How can we run a four airplane schedule if we only have three planes? This concept is equally important in pork production but all too often, we don’t think of it that way. We should be asking ourselves, how much pork can we produce with the facilities we have available to us? In pork production, we call this facility utilization.
SwineTex calculates facility utilization as a percentage of ideal. There are several ways to calculate facility utilization and none are perfect but what is important is measuring it directly and also indirectly through other metrics. Perhaps it’s easier to explain first how we don’t measure facility utilization now. In sow farms, the gold standard metric has been and continues to be Pigs per Sow per Year, or PSY. Actually, it’s now “Pigs per Mated Female per Year” or “P/MF/Y” but it’s often still lazily refereed to as PSY by many in the industry including yours truly. When this metric gained popularity, it was a breakthrough. It represented the first efforts at measuring efficiency. It wasn’t necessarily how many pigs you produced, it was how many pigs you produced with the number of sows you had. This was a giant leap forward and for decades it provided the most fundamental metric for sow productivity. Even today, if you inquire about the productivity of a sow farm, the answer you’ll most likely get with be X PSY.
As many people have pointed out over the years, however, PSY has some flaws. First, it didn’t account for differences in gilt inventories. Farms with low gilt inventories showed an inflated PSY and the opposite was true for high gilt inventories. We wanted to encourage people to have the right gilt inventories not low gilt inventories. This issue was largely resolved when the industry switched to Mated Females per Sow per Year but issues remain in comparing farms because of difference on when animals are entered into the official inventory. Second, PSY doesn’t account for pig quality. A sow farm that produces large numbers of poor quality pigs shows better results than a farm that produces fewer high quality pigs. As any nursery manager will tell you, the large numbers of low quality pigs often end up making you less money than the fewer high quality pigs. The final problem is perhaps the biggest one, however, that PSY doesn’t account for facility utilization. If you have a 5,000 sow farm stocked with 1,250 sows, you may show an excellent PSY but find yourself bankrupted by your own fixed costs. To use our original example, it’s like running a restaurant at 25% capacity.
Obviously, there are similar issues on the growing pig side. You might have a fantastic mortality rate or feed conversion ratio, but if you take a month longer to grow your pigs to market weight or leave facilities empty for six weeks between turns, you’re going to find it difficult to show a profit except in the highest margin countries. Even if you can show a profit, you’re still leaving a lot of money on the table. This is why SwineTex encourages our clients to measure facility utilization and big picture metrics that make sense for your business. Here are some examples:
• Pounds of Pork per Wean-Finish Space
• Kilograms of Pork per Square Meter
• Kilograms of Pork per Farrowing Crate
• Pounds of Top Quality Weaned Pigs per Sow Space
A failure to address these economic realities has real consequences. An unhealthy obsession with PSY has driven some producers to extremes that have resulted in poor facility utilization. They will argue that the strategies they implement result in more pigs which offsets the cost of poorer facility utilization. That may be true but more often than not, they have scant evidence to support their assertion. At a minimum, I would encourage those producers to make sure they’re not giving away more than they’re making.
Another area where I see huge opportunities is in developing markets. Profitability is often much higher in developing markets than in mature markets. This allows producers to operate facilities far below what would be considered efficient and still show a profit. In China, I routinely see facility utilization rates that are 20% below typical levels in the US. Farrowing crates sit empty for weeks and turnaround times for finishing barns can be extensive. These things don’t happen in the US because, with small margins, producers would quickly go out of business if they were unable to become more efficient. I have a client I’ve worked with in the US that has a 5600 sow farm with 840 farrowing crates and I have a client in China that has 4800 sows and has 1200 farrowing crates with the same weaning age. While it will remain difficult to effect change in markets that are already highly profitable, if we can get producers to measure facility utilization related metrics we can at least more easily demonstrate what could be gained by improving efficiency.
Soon, we as an industry will be having a discussion about improving resiliency in our operations. This will likely involve less emphasis on efficiency. I strongly encourage the industry, however, to not dismiss the value of efficient systems. Yes, they create problems when there are disruptions, but during the 99% of the time when there aren’t disruptions, they create enormous value for our production systems and ultimately, our economies. While we may choose to give away some efficiency in exchange for better resiliency, I hope we do so thoughtfully and with sufficient consideration of the unintended consequences.
About the Author: Todd Thurman is an International Swine Management Consultant and Founder of SwineTex Consulting Services, LLC. SwineTex is a US-Based provider of consulting and training services to the global pork industry. To learn more about SwineTex Consulting Services, send an email to firstname.lastname@example.org or visit the website at www.swinetex.com.