Production Economics

Improve your production system to efficiently deliver superior products

In business, there are never enough hours in the day. The only way to overcome this challenge is to ensure your business is well organized and efficient. This includes cost management, cost of production, purchasing, enterprise analysis, production strategies, facilities, equipment, systems, scheduling, performance measurements, environmental impacts and regulations that may impact the financial performance of the business. Running a well-organized operation allows you to deliver maximum yield and reduce costs. This is an ever-important factor when producing for a commodity market.

Record, Measure, and Compare

It is hard to improve what you do not measure and compare. Measuring and comparing (otherwise known as benchmarking) against your farm’s past performance helps you make improvements within your system and is key to meeting and surpassing your goals. Benchmarking against other farms points out areas where you could make improvements to your system. You can benchmark production yields, quality, costs of production, and production margins.

 

  • Decide on key information required to make the best decisions.
  • Keep timely records of yield, quality and cost of production.
  • Compare the costs of production for different business units within your operation.
  • Set production, service and quality goals.
  • Compare results against past performance and industry benchmarks where available.
  • Consider purchasing rather than producing overly costly products.
  • Develop positive relationships with your suppliers so they can provide product information, production advice, training, market trend information and market referrals.

 

Additional Business Management Resources

 

 

Focus on Production Activities that Add Value

No one wants to do useless work, yet the work we like to do is not always the work that creates value for the customer. Ask yourself if there are unnecessary steps in your production system, such as work patterns or inventory storage, which cost you money but do nothing for your customer. At the same time, production practices aimed at increasing quality or creating new markets should not cost more than the potential increase in revenue.

  • Make a list of what your customer values in the products or services the farm produces.
  • Make a list of the steps in your production system.
  • Identify how each step contributes to what the customer values.
  • Look for ways to create greater value or the same value at less cost.
  • Eliminate the steps (and their costs) that do not create true end value.

 

Adoption of Technology

Technology can be many things (e.g., machinery, production systems, conservation tillage, record keeping systems, marketing systems). “By the time 75% of the industry has adopted a new technology that change in technology has put the other 25%, who didn’t adopt it, out of business.” On the other hand, technology pioneers can go broke before the bugs are worked out, so it is important how and when you adopt new technology on your farm.

Successful farmers:

  • Watch for innovation trends
  • Weigh all costs versus benefits
  • Always try something different each year (usually on a small scale basis)
  • Adopt technology in a way that gives the most advantage to their farms
  • Test technology on their farms in ways that reduce risks

Balancing Production Excellence with Other Business Needs

While implementing the necessary business procedures takes significant effort, the end result is an efficient production system that allows for multiple benefits:

  • Create time for personal, family, and community activities
  • Create time to manage the other aspects of your business such as marketing, financial, human resources, business direction, and structure.

If production is your passion, maximize the use of any other people on your farm who have skills and interest in these other areas of the business such as marketing, finance, and people management. If you do not have the expertise within your farm operation, acquire the expertise you need from outside suppliers or hire new workers.

Key Components of Production Planning

  • Quality of Product or Service
  • Cost of Production
  • Facilities and Equipment
  • Benchmarking
  • Production System
  • Transportation Systems Purchasing and Supplier Relationships