Success in business can be measured in many ways. The most prominent measures tend to be cash-flow related in that if there is money available at the end of the accounting cycle, we typically feel pretty good about ourselves. However, the most prominent, progressive and profitable firms tend to be those in which company officials continually ask themselves these types of questions:
* How are we doing financially speaking?
* How do we compare with others?
* Are we making progress fast enough?
* Are we using the best practices?
* Are we tracking the right measures?
Measuring business processes
Benchmarking should be the primary method used by managers to answers these questions and measure or evaluate various aspects of production, marketing and customer service processes in relation to the best management practices in the industry. This then allows firms to develop plans on how to adopt such best practices, usually with the aim of increasing performance.
Why is benchmarking important? While the fact remains that the green industry is growing (albeit at a much slower rate nowadays), it does not mean that local market conditions are always favorable. Nor does it mean that things are going well for individual greenhouse operations. Companies need to take a closer look at their firm-level performance.
Reasons to benchmark
A 2003 PricewaterhouseCoopers Trendsetter Barometer survey found that companies who benchmark achieve 69 percent faster growth and 45 percent greater productivity than those who don’t. Benchmarking is a powerful management tool because it overcomes paradigm blindness. Paradigm blindness can be summed up as always thinking: The way we do it is the best because this is the way we’ve always done it.
Benchmarking opens firms up to thinking about new methods, ideas and tools to improve effectiveness. It helps crack through resistance to change by demonstrating methods of solving problems other than the one currently used and demonstrating that these methods work because they are used by other firms successfully.
There’s an old managerial adage that says, “You can’t manage what you don’t measure.” But in this age of information some companies and their managers may be experiencing an information overload.
My rule of thumb is: If you are not going to take action based on results, then don’t measure it. Don’t measure what you aren’t willing to change. The key question to always ask yourself is: Does the potential benefit to be gained from collecting, measuring and analyzing this information exceed the cost of getting it?
Score-keeping
The bottom line is that you get what you inspect. Major scorekeeping areas in a greenhouse business include:
1. Financial measures: return on assets, sales volume and gross profit, etc.
2. Operational measures: production rates, quality and safety measures, etc.
The key is to figure out which metrics (things to be measured) are important and use this information to educate employees about the correlation between these metrics and profit. When employees begin to see and understand this correlation, it is amazing how intrinsically motivating this becomes for them. They can now understand how their job affects the business’ profitability and ultimately how it affects their own paycheck -- provided the proper incentives are in place that tie pay to performance.
Books have been written about the correlation between benchmarking and employee motivation. We all need to feel that things we do in our jobs actually make a difference whether we are the CEO or the front-line employee.
What better way to encourage and motivate employees than to actually measure the results of their performance and reward them accordingly? I know it sounds simplistic, but it warrants mentioning because of the numerous firms that I have worked with that do this so poorly.
Simply the best
Benchmarking also helps define the best-in-class companies that continually perform above industry averages despite economic conditions. What makes a company best-in-class is that it operates much like decathletes. These top-ranking athletes compete in decathlons and excel across a broad set of events. The winners accumulate the most points among all events. They may win some events, but usually not all of them. They know their own strengths and weaknesses and focus their training in the “must-win” events. They spend the remainder of their training time being at least minimally competitive in the other events.
Best-in-class companies excel across a broad set of processes and they beat competitors in some areas but not all. They are not best-in-class in all performance areas, but they are in those that match their strategies and priorities. They know their core competencies. They typically know their competitors. They spend most of their resources in areas they know they must win and are minimally competitive in other not-so-important areas. Undoubtedly, the key is to figure out what processes are key success factors and which ones aren’t.
Growers gain potential metrics
Growers should glean as much information as they can from other sources to develop their own benchmarking system. Here are some suggestions as to the metrics growers may consider in establishing such a system. While the table may seem initially daunting, I advise growers to choose one or two benchmark metrics each year to incorporate into their systems.
Table 1. Potential metrics for financial and operational benchmarking.
|
Financial metrics |
Operational metrics |
|
Total annual greenhouse sales |
Weeks operated per year (by location) |
|
Total greenhouse debt |
Full-time worker equivalents (labor hours/2080) |
|
Sales per sq. ft. of bench space (by location) |
Area per full-time worker equivalent (FTE) |
|
Total sq.ft. weeks per year (# weeks x sq.ft.) |
SFW per full-time worker equivalent (FTE) |
|
Income statement line items as a % of sales |
Gross margin full-time worker equivalent (FTE) |
|
Net income per sq.ft. |
Hired labor expenses as a % of sales |
|
Net income per sq.ft. week (SFW) |
Net income per full-time worker equivalent (FTE) |
|
Gross margin (sales - cost of goods sold) |
Machinery investment per sq.ft. |
|
Net profit margin (net profit/net sales) |
Average collection period for accounts payables |
|
Total cost per sq.ft. |
Inventory turnover (COGS/average inventory) |
|
Total cost per sq.ft. week (SFW) |
Inventory holding period (365/inventory turnover) |
|
Overhead expenses as % of sales |
Sales to fixed assets (net sales/fixed assets) |
|
Overhead expenses per sq.ft. week (SFW) |
Sales to working capital |
|
Asset turnover (total sales/total assets) |
Production rates (# units completed per task) |
|
Return on assets (net profit/total assets) |
Quality measures (size, flowering, etc.) |
|
Financial leverage (total assets/net worth) |
Safety measures (# days w/o lost-time injury) |
|
Return on equity (net profit/net worth) |
Customer turnover |
|
Sales per full-time worker equivalent (FTE) |
Average # of complaints per customer |
|
Average sales and profit per customer |
Returns and adjustments per customer |
Types of benchmarking
Once the key success factors are identified, there are two major types of benchmarking procedures.
Internal benchmarking (benchmarking within a company) compares your firm’s performance against a previous time period (i.e., previous quarter, same quarter last year, etc.). This is often referred to as time-series benchmarking.
Competitive benchmarking (benchmarking performance or processes with those of competitors) compares your company’s performance against similarly sized firms in the industry. This is often referred to as cross-sectional benchmarking because you are comparing your firm against a cross-section of the industry.
Unlike other manufacturing industries, there are not a lot of cross-sectional benchmark data available for green industry companies, and even fewer specifically pertaining to greenhouse businesses. The best way to glean benchmarking information regarding greenhouse operational measures is by scanning trade journals, university research reports, attending educational conferences and trade shows, on-site visits to other greenhouse operations (via tours and personal visits) and talking with other greenhouse managers outside of your production region, who are usually more apt to share information. Measuring firm-level productivity over time will point to corrective actions to address inefficiencies in production, marketing and customer service.
Benchmark measures
Benchmarking financial measures is often solely time-series oriented but there are research efforts under way that are beginning to provide some cross-sectional benchmarks to which individual greenhouse businesses can compare themselves. The Greenhouse Business Summary Program at Cornell (http://hortmgt.aem.cornell.edu/programs/hortbusiness.htm) helps
Another program, Horticultural Business Analysis and Planning Program (http://hortbusiness.ifas.ufl.edu/hba.htm), provides similar services for nursery/floral firms in
- Charles R. Hall
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Charles R. Hall is professor and Ellison Chair in International Floriculture, Texas A&M University, Department of Horticultural Sciences, (979) 458-3277; c-hall@tamu.edu.
May 2008