Recently I was going through all my notes from my Toyota days and I re-discovered this fabulous quote from my early years with Toyota back in 2003! I have shared this quote already on a previous post here, but it is so important that I am talking about it once more and want to reflect on this quote yet again…
CEO and President of TME – speech to group in 2003
“Cost reduction must be a fundamental part of our working life at Toyota. We must encourage all our members to have a cost conscious mind and we must lead and stimulate the cost reduction activities both on the shop floor and in the office. As manufacturing companies, cost reduction is the single biggest weapon to improve our profitability. It is also our main defence against negative external factors.”
What is remarkable is that even though this is from the automotive industry 20 years ago, it is absolutely just as relevant today as it was then. But even more interesting is that it is just as relevant for FARMERS as it is to the automotive or any other industry! We most certainly are not the only industry affected by cost increases, and negative external factors…. most industries are. It is how we approach these challenges that matters.
Let’s go back to business basics:
PROFIT = SELLING PRICE – COST PRICE
What do each of these things mean and why do they matter?
PROFIT
Why is profit important? Why do we as farmers need Profit? Well besides paying yourself, you need Profit to be able to re-invest in your farm business (ensuring that infrastructure is maintained correctly and invested in and land development/ improvement is occurring.) You need profit to grow, to reduce debt levels and demonstrate your viability to banks, and to keep up with increasing expectations and standards. Bottom line is, if you don’t have profit, at some point you will cease to exist! Profit is key to a successful, sustainable farming business.
SELLING PRICE
In farming (just like many other industries), our selling price is generally not something we can control as most farmers are producing a commodity which is sold and is dependent on a global market. This means that we have NO control over our selling price. So when prices for our beef, lamb, crops, dairy or anything else we are producing fall, it is a negative external factor for us. One that we cannot control. So if we cannot control our Selling Price, then how can we rely on this factor to improve our profit? Is that not a risky game? ……. Essentially relying on the Selling Price increasing provides no guarantee for our profitability as we have no control over the selling price – it can fall or go up anytime depending on what the market wants.
COST PRICE
When we talk about Cost Price we are talking about how much it costs us to produce our product (don’t forget farmers are actually producers – we produce products too). The amount it costs us to produce our product is dependent on many factors – how many inputs we have, how much our inputs cost or how much we buy them for, what we do, how we do things, when we do things, our input utilisation efficiency, our decision making and prioritisation, our operating systems, our management systems, our people knowledge and skills, our processes and systems and many other such factors………However, believe it or not, most of these things are in OUR control. We decide what feed we use and how much, we decide what fertiliser we use and how much, we decide how large our farms are, our stocking rate, what people we have in our team, what we buy, how much we buy, we make the decisions on how effectively we convert our inputs into outputs. We are actually making most of the decisions relating to how much it costs us to produce our product. While some elements such as how much inputs cost us (such as fertiliser, or meal, or agchems) are outside our control, how much of these we buy and how we use them effectively without wasting, is in our control – which means the overall cost is actually in our control. So that brings us to this question – if Cost Price is in OUR control, then it suggests that if we can focus on Cost, we have the ability and control to reduce it right? If we can reduce Cost Price, what does that mean in terms of our profitability……..
Going back to our quote above……
“COST REDUCTION IS THE SINGLE BIGGEST WEAPON TO IMPROVE OUR PROFITABILITY. IT IS ALSO OUR MAIN DEFENCE AGAINST NEGATIVE EXTERNAL FACTORS.”
This rings absolutely true for EVERY farmer out there. If you can focus on Cost Price (your costs) and continuously reduce costs, then regardless of where the price is you will be able to positively influence your Profit.
WHO IS RESPONSIBLE FOR COST?
The crucial message that pops out of this quote and I remember very clearly from my time in Toyota, is that the expectation is that EVERYONE is responsible for COST. If you truly want to reduce Cost Price (costs) on your farm, then every person working on your farm must be committed to and accountable for achieving this. They must understand the above equation, understand why cost is so important in achieving profit, why PROFIT matters and how Cost Reduction will positively impact them. And importantly what role they can play in cost reduction – the things they can control and have influence over to reduce costs.
COST REDUCTION THROUGH WASTE ELIMINATION NOT CUTTING CORNERS!
An absolutely fundamental principle of cost reduction in a lean business, is that you achieve cost reduction through the elimination of Waste (The 8 Wastes). You are taking out cost that was unnecessary in the first place because you were simply wasting it (eg producing defects, rework, using more materials or feed than you needed because of poor process/ communication/ decision making, spending twice as much time to do something because of poor organisation & process etc. etc.) This is really important to understand, as many people think that cost reduction is about just cutting costs at all expense, cutting corners, skimping on things and so on. THAT IS NOT GOOD OR CORRECT COST REDUCTION!! This is not how you do cost reduction – this will just lead to a poor farm business, poor results, quality issues, animal welfare issues, people issues, maintenance issues and so on.
When we talk about cost reduction, it means looking at what we do, how we do things, when we do things, identifying any waste (The 8 Wastes) in all of our processes (this is the stuff that is adding cost to our product but zero value) and working on reducing this waste or eliminating it. By doing this we aren’t taking out things that we need. We are simply taking out the rubbish we don’t need which will ultimately reduce our costs, but also actually improve our business results. (the power of lean!).
Bottom line – being a good farmer is important, but being a good cost controller is just as important…