At Swine Insights, we have developed a concept called “The Three Pillars of Profitability”. We use the image above to explain the concept. The idea is that profitability is the roof which is supported by three pillars which is, in turn, supported by a foundation of accurate records. The three pillars are 1) Animal Productivity 2) Cost of Production and 3) Facility Utilization. I’ll talk about each one in detail, but first, let’s address the foundation, accurate records.
Without accurate records, it becomes very difficult, if not impossible, to drive improvement. The old adage, “you can’t improve what you don’t measure” certainly applies here. Detailed, in depth records, are fantastic but what is most important is that you have the ability to track the basic metrics and that the numbers are accurate. Only when you have accurate basic metrics does it make sense to explore additional metrics that might be useful.
I would be remiss if I didn’t take this opportunity to mention how employe incentives and other company policies can make accurate records a challenge. If employees are incentivized heavily to improve particular metrics, there is a great incentive to falsify data in a way that might seem harmless.
For example, I often see incentives for pre-weaning mortality that leads to pigs born weak being written up as born dead. That is a major problem from a diagnostic standpoint because the problems that lead to stillborn piglets and the problems that lead to live piglets dying are very different. When considering compensation, I recommend to lean towards incentive pay at a lower percentage of total compensation and try to focus on higher-level metrics that are more meaningful to the business and more difficult for employees to manipulate.
Now we’ll discuss the three pillars starting with animal productivity. This is one the one we generally spend most if not almost all of our time focusing on. This is where we’re measuring animal performance metrics such as PSY, FCR and ADG. This is obviously critical information as efficiency is a major driver of profitability. The danger comes when we focus too much on these metrics without considering the other pillars.
It is entirely possible that one could smash all of their animal productivity metrics and still not be profitable due to ignoring the other two pillars. This risk becomes even greater when we over focus on one metric. PSY is a perfect example of this. PSY is a critical metric and a good way of comparing overall productivity of sow farms, but focusing too much on that metric can take you down a path that leads to not enough focus on other important productivity metrics such as growing pig performance.
It can also lead to a lack of focus on the other two pillars. This is not just a risk at the farm level but also at the system level and even the country/regional level. I would argue, for example, that most of the European industry has over-focused on PSY.
The second pillar is cost of production. Every businessman knows that there are two ways to make more money, increasing revenue and reducing costs. Pursuing animal productivity without considering cost is easy to do, but can get you into trouble fast.
A high cost model is not necessarily a problem if it results in even higher revenue that drives profitability. Most of our industry is commodity focused though, so our ability to control the revenue side is limited. That means that managing cost of production is critical. In my consulting business I very often hear clients explain that they do things this way because they ran a trial and X practice resulted in better performance. Very often, when I ask about the cost of implementation, they’ve not even considered it.
Obviously, like everything in business, this requires a certain balance. Over focus on cost of production can lead to other undesirable results and lost opportunities. This is quite common in the North American industry where an over focus on cost of production has cause us to miss out on many revenue enhancing opportunities. As the industry continues to change and shifts away from the commodity mindset, this will become an even bigger issue.
The last pillar is facility utilization. Let’s assume that you are getting excellent animal productivity and have a very competitive cost of production. Does that guarantee success? Absolutely not, there are no guarantees of success because business is about risk, but you may be missing a very important component that is sometimes easy to overlook…facility utilization.
Facility utilization involves understanding the return on a physical asset, in this case the buildings and equipment the make up the farm. This may sound strange, but I very often find in Asia that facilities are severely underutilized. This can be caused by simple understocking, but more often than not, it involves pig flow bottlenecks.
I was on a farm recently in Vietnam that had plenty of gestation and farrowing spaces to expand the sow herd significantly, but lacked the necessary finishing, and to a lesser degree nursery, space to do so. Furthermore, they were marketing at a lighter weight than ideal because of the limited finishing space.
By expanding nursery/finishing space, adjusting pig flow between the nursery and the finisher, selling weaner or feeder pigs or adjusting their marketing strategies, they could have easily expanded their sow herd by at least 10%. In essence, they could be producing 10% more pigs in the same (or slightly modified) facility. This particular farm had excellent animal productivity and a competitive cost of production compared to their peers, but were leaving significant money on the table by not fully leveraging their facilities.
In conclusion, it is critical that we maintain accurate records reflecting the key metrics in each of the three pillars. We also need to make sure that we’re taking a balanced approach to the three pillars and not over focusing on one at the undesirable expense of another. If we are able to accomplish this balance, we have an opportunity to maximize profits and return on investment.
About the Author: Todd Thurman is an International Swine Management Consultant and Founder of Swine Insights International, LLC. Swine Insights is a US-Based provider of consulting and training services to the global pork industry. To learn more about the company, send an email to email@example.com or visit the website at www.swineinsights.com. To learn more about Mr. Thurman’s speaking and writing, visit www.toddthurman.me