Shrink the shrink

Features - Management

Small improvements in outputs and reductions in shrink can have significant impact on financial outcomes.

Greenhouse growers face many challenges. Their products are alive, the weather and light levels are unpredictable, which affects crop quality and finishing times, and the markets are seasonal and capricious. To be both profitable and competitive, growers must add value, not simply cost, every time they touch a plant. They must increase and maximize sell-through, provide high-quality products with minimal shipping errors and respond quickly and efficiently to order changes due to weather, product mix and condition and customer requests.

Regardless of how efficiently a greenhouse operates, there is always an element of shrink that occurs during all stages of the supply chain. In today’s hypercompetitive market, small improvements in outputs and sales and reduction in losses (shrink) can have significant impact on financial outcomes.


Types of shrink
There are three major types of shrink that can occur in a greenhouse:

  1. Shrink associated with internal production losses.
  2. Shrink associated with unsold product.
  3. Credit on product that was shipped.

Production losses at the young plant stage stem from oversowing seed, oversticking cuttings, poor germination or rooting, patching, inferior starter material, disease and insect damage, chemical/plant growth regulator damage, and product that did not meet specifications or was low quality. These same types of factors lead to shrink at the finished stage as well.

Unsold product generally results from cancelled orders, speculation miscues, overproduction due to forecasting errors, and plants used during trials or research-and-development programs. The best forecasting procedures can’t be 100 percent correct all the time. A certain amount of shrink is expected. The real issue arises when growers start to mark down plants in their primary markets, but that is a topic for another day.

Even when growers do everything right and orders are shipped, credits are sometimes requested on sold product because of damage during shipping; heat or cold damage; and plant quality doesn’t meet specs due to insufficient growth, wrong color, pest damage, lack of flowers, etc.


Amount of shrink
While growers may differ (sometimes dramatically) in regards to the types of shrink-related losses they incur, a recent survey of larger growers indicated that internal production-level shrink ranged from 2-10 percent, with a median (and mean) of 5 percent. The same survey showed that retail-level shrink ranged from 8-33 percent, with a median of 19 percent. Attendees at the Crop Management Workshop at the 2010 OFA Short Course indicated they experienced an average 8 percent production-level shrink.

The stage at which shrink occurs can have a dramatic impact on profitability. In general, the earlier in the production cycle losses occur, the less impact on profitability and vice versa. Early on, fewer inputs (particularly labor) have been applied so losing a product early means fewer costs have been incurred. However, if bench space is not readjusted or filled in accordingly, overhead costs, when considered on a per square foot per week basis, are going to be higher because of the shrink. The more mature a product is when shrink occurs (or the later shrink occurs in the supply chain), the greater the impact on profitability.


Minimizing shrink
The first step that growers can take in minimizing shrink is to actually measure it. During the OFA Short Course workshop only 36 percent of the audience indicated they are currently tracking their shrink. It all comes down to diligence in record keeping.

Growers should track shrink in each of the three areas described above and stick with it. The best way is to develop a spreadsheet to track shrink rates on a per-crop basis. This information can then be used to assess the impact on profitability (loss associated with the value of the inputs used, unrealized profits, etc.)

Maintaining an accurate perpetual inventory depends on it and accurate costing procedures aren’t possible without it. If nothing else, tracking shrink acts as an insurance policy in case something goes awry and litigation becomes inevitable (e.g., plant losses due to contaminated Benlate).


Shrink’s affect on profitability
Once shrink is measured, growers can then determine how it affects profitability. One key measure of financial performance is the asset turnover ratio, which measures the sales that are being generated with the asset base (greenhouses, equipment, etc.) that is in place. Obviously, the more shrink, the fewer sales that are being generated from the asset base.

Looking at return on the asset base (often referred to as ROA or ROI), if a grower discovers ROA is unsatisfactory, this weakness can be traced back to asset turnover and net operating profit margin since these are the major components of ROA. The analysis can be further tracked to net sales and total costs if the operating profit margin is determined to be the main reason for the low ROA.

Net sales can be improved by either increasing the price received (better marketing and differentiation strategies) or by increasing the volume of product sold (increasing yields or productivity; selling to larger buyers; finding new markets, etc.). Likewise, operating profit margin can also be enhanced by reducing costs of production (through the use of technology, automation, lean flow techniques, etc.). An astute grower will most likely consider all of these actions (see Figure 1), but the model offers an opportunity to do some comparisons and determine what options will most benefit the grower.

Fig. 1 (click image to enlarge)



Seeking continuous improvement
Measuring performance on a continuous basis and using these measurements to drive improvement is core to operational excellence. It provides a rational approach for evaluating performance, identifying real problems, determining the causes of the problems and directing resources towards the best solutions.

By constantly assessing, measuring, taking remedial action and then measuring again at both the production and post-production levels, growers can finally do something that has not been possible until now – treat the entire supply chain as the critical revenue driver that it is. This allows growers to gradually eliminate waste and inefficiencies so that their companies can retain more of their current revenue stream.
 

Charles Hall is professor and Ellison Chair in International Floriculture, Texas A&M University, charliehall@tamu.edu. Michelle Jones is associate professor and D.C. Kiplinger Chair in Floriculture, Ohio State University, jones.1968@osu.edu. Terri Starman is associate professor, Texas A&M University, tstarman@tamu.edu. Claudio Pasian is associate professor, Ohio State University, pasian.1@osu.edu. George Staby is owner, Perishables Research Organization, george.staby@volcanol.net.