Under the Microscope

Under the Microscope

Features - Cover Feature

Imperial Nurseries’ precise cost tracking ensures robust production

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December 7, 2012

Greg Schaan, who’s been at the helm of Imperial Nurseries for 14 years, uses a set of meticulous procedures to plan production and track costs. Resembling the methods of a forensic scientist, Schaan investigates and analyzes details of the entire nursery in a way commonly seen in Fortune 500 companies.

An accurate understanding of all costs helps Imperial thrive and weather economic uncertainties. Imperial is part of a public company, which is the driving force for the comprehensive production planning and cost tracking procedures. As with all public companies, there’s a lot of scrutiny regarding where and how money is spent and how much profit is made. The nursery has been a subsidiary of Griffin Land and Nurseries (NASDAQ: GRIF) since 1997. It’s certainly an unusual situation for a grower. But the financial models are something any grower can adopt.

“To us, it’s a profit and loss business, and a cash-flow business,” Schaan said. “Our financial goals include making an operating profit and generating positive cash flow. Because we are part of a publicly owned company, we want to provide a reasonable return on investment for our shareholders, and generate enough positive cash flow to keep the business growing.”

This outlook is a bit different from most growers because building shareholder equity in a privately owned business often revolves around assets (such as land and inventory) appreciation, he said.

“Those are typically longer term-type returns on investment. We are looking to provide a shorter term return on investment to our shareholders in the form of operating profit that supports the payment of corporate stock dividends,” he said. “I don’t mean to imply that other growers are not interested in profit and positive cash flow, it’s just that our timeline for providing a return on investment can be shorter than the norm.”

Imperial takes a business management and market-based approach to growing and selling. The company uses a detailed production planning system that considers unit sales at a predicted price, production costs, and an expected return on investment.

“Our overall goal is to achieve complete and on-time sell through of our products, while managing our production costs to the levels we identify when we make the decision to produce the product. If we achieve both of these goals, we will generate the anticipated return on investment,” Schaan said.

The nursery also has established key metrics for measuring its results. Some of these metrics are total labor hours per FTE (full time equivalent), FTE per growing acre, shipping expense per unit shipped, potting expense per unit, plant maintenance labor per unit, and selling, general and administrative expenses as percentage of sales. Each month, Imperial reviews its results using these metrics.


Filters for planning

When it comes to production planning, Imperial uses financial modeling to determine what to grow. Before a plant is grown, it goes through several filters before it’s approved for production. One of the most significant filters is the return on investment (ROI) filter. It is a percentage calculation of what Imperial can expect as a financial return on the investment it’s making by growing a group of plants in a specific container size.

“It is our profit after all costs, including interest on the inventory investment, is considered,” he explained. Some other filters, both pre- and post-production, include:

  • Average price trend. The net selling price the company has achieved, by customer segment, annually for the past four years.
  • Units sold by customer segment. Units sold to each customer segment annually for the past four years.
  • Sales territory demand. A forecast from each of its sales territories on a rolling next-three-years basis.


“All filters are applied to each product class and size that we consider growing,” he said.

This type of financial modeling is used throughout the year as Imperial looks at opportunities to add new products or product lines.

“We review unit sell through and pricing achieved on all products annually as a basis for making adjustments to previous production decisions. For example, we may decide to increase or decrease production already in the pipeline based on current pricing or unit movement data,” he said.


Costs revealed

Another critical aspect of Imperial’s management is tracking production costs. Costing categories are established for a group of plants and all the sizes in which they’re produced. The categories are comprised of plants that have similar production requirements, and these categories are used only for production planning purposes. There are 135 costing categories for approximately 1,400 varieties.

“We track our actual production costs within a much shorter list of categories,” he said.

Some of the major categories where actual production costs are tracked include production labor, direct materials (such as liners, fertilizers, plant protection products, pots, soil), operating supplies (utilities, for example), selling (including commissions, and travel and expenses) and administrative (such as credit and information technology). Most of these costs are tracked using a standard general ledger system.

Overhead represents a large chunk of a nursery’s production costs. Imperial allocates overhead costs (such as supervisory labor, irrigation, fertilization and pesticide application) based on the square footage the plant takes up in the nursery. For example, a plant that occupies 2 square feet of space will receive an allocation double that of a plant that occupies 1 square foot of space. These space occupancy rates are reviewed annually.
 

Brands boost business

Imperial Nurseries grows several branded plant programs, including The Knock Out and Drift family of roses, First Editions, Proven Winners, Endless Summer and HGTV Home Plant Collection. The nursery also produces Plants That Work, a brand now jointly owned by Willoway Nurseries and Imperial. The Plants That Work brand is used as a house brand to feature new and interesting woody ornamental plants.

“Brands will continue to evolve and play a larger role in our product mix,” said Greg Schaan, president of Imperial Nurseries. “Our customers are independent garden centers and rewholesalers, and brands should be a part of their differentiation strategy.”

 

“This allocation of overhead expenses allows us to fully track costs by product group,” he said.

Imperial uses six direct labor codes for tracking production labor costs. They include weeding, moving and spacing, pruning, potting, shipping, and “other.” When any of these activities is performed on a group of plants, Imperial records the time spent. The labor cost (time spent x average hourly wage) is charged to that group of plants.

“When you know your costs, you can make intelligent production and marketing decisions,” he said.

A system like Imperial’s can be tweaked to fit any size nursery. It just takes commitment. Once a grower has a solid understanding of costs, other factors will influence production decisions such as market trends and expected volume movement.
 

High-tech helper

Imperial Nurseries introduced tablets to its production crews in the spring of 2012 to help improve efficiency. The tablets are used for recording and updating crop readiness dates, adjusting locations from which to pull orders for shipment, monitoring the status of order pulling and loading, and accessing the nursery’s internal operating systems.

Next year, the nursery plans to expand the tablets’ use to the sales team for order entry, streamlined access to customer information, and improving communication between the sales and operations team.

 

“When you commit to accurately tracking costs, you won’t rely as heavily on past sales history or the desire and comfort to grow certain products,” Schaan said. Typical green-industry production models cause significant swings in product availability, and a mismatch of growers’ product supply and market demand.

“Once this takes place, an oversupply of product can appear, and growers are forced to drastically reduce prices to move their inventory. These price reductions can have a very negative effect on other producers,” he said.

That’s why it’s so critical, Schaan said, to use discipline in determining production levels to help ensure proper sell through and achievement of expected return on investment. 
 

Witty ways to sell

Imperial’s Greg Schaan and Mark Hixson shoot some pretty entertaining videos throughout the selling season known as Quick Tracks. Says Schaan, “Quick Tracks is a fun way for our customers to get an update on what crops are looking the best on the farms, or new items that we have introduced.”

They’re in matching jogging suits and take on a persona much like the Spartan cheerleaders of Saturday Night Live fame. The pair shoot about 10 Quick Tracks videos per year.

Farm Fresh is a series of short videos featuring Imperial’s sales team where territory managers share their excitement for the best looking plants. These videos are targeted to customers in the geographies they manage.

“The videos are shared with our entire customer base, and we see an immediate bump in sales for the featured items,” Schaan said. “The Farm Fresh videos are also very helpful to our entire sales team as they can see the best looking crops on a regular basis as their peers tour the farm.”

 

For more: www.imperialnurseries.com


Watch our website for videos of Greg Schaan and the crew at Imperial Nurseries.