Use Production Inputs Wisely

During the Great Recession, I witnessed a cost-centricity like I had never seen before in my nearly four decades of being affiliated with the green industry. By cost-centricity, I am referring to the tendency on the part of growers to reduce costs. After all, there are only two ways to increase profit margins — either increase sales or reduce costs.

It’s easier (or at least perceived to be easier) to do the latter. Having grown up in the family nursery business, I know all too well the mentality of shaving every single cent from the value chain that is possible, but this last economic downturn forced us to tighten our belts even further than we had thought possible.

Belt-tightening in depressed economic conditions involves reexamining both the demand and supply side of profitability. On the demand side, growers ask what products and how many of each they should be growing and how they can reduce the risk of speculated production.

On the supply side, the questions include, can I reduce costs by cutting back on certain inputs, which ones can I get at a cheaper price and which ones do I really need to produce the minimally acceptable level of quality required by the marketplace? It’s these questions on the supply side of the equation and the decisions regarding the use of inputs that I want to focus on in this column.

Optimal Inputs Maximize Profit

If you have ever taken an economics course, then you’ll remember that there is a body of economic theory that talks about the “optimal” combinations of inputs. But what folks don’t often realize is that cost-minimization (through the optimal use of inputs) is the same as profit-maximization (through the optimal mix of outputs).

Consider the following from California State University’s Stephen Shmanske:
“There is an often-missed opportunity in the teaching of intermediate microeconomic theory. Invariably, the presentation of the firm’s calculation of the profit maximizing output level is covered in a different chapter than the firm’s optimal input decision, even though these two decisions are actually the same problem in two different guises. It is not improper that the topics of the profit maximizing output level and the profit maximizing input level each get their own chapter, but because of this, unfortunately, the connection between the two topics is not stressed.

“As such, many students remember the logic and mathematics of MC = MR (marginal cost equals marginal revenue) but fail to make the connection to the same equation expressed in different variables and presented as: VMPL = PL (value of marginal product of labor equals price of labor) or in its more general form: MRPL = MFCL (marginal revenue product of labor equals marginal factor cost of labor). Students think they are learning (or perhaps attempting to memorize the alphabet soup of) two different models when it is really the same model.”

— “Connecting the Firm’s Optimal Output and Input Decisions,” Perspectives on Economic Education Research.

Growing: More Science Than Art

But growers rarely consider the alphabet soup of cost-minimization formulas when they are making decisions about which and how much of what input to use. Nor do they have the luxury of developing a sophisticated mathematical model to determine optimal levels of each resource (input) to use. Instead, it often comes down to which allied trade vendor can supply the magic silver bullet chemical, fertilizer, seed, etc. at the cheapest price. This may have worked in the old paradigm of production, but this train has wrecked and is no longer functional.

In today’s paradigm, it helps to consider the optimal combination of inputs in a systems type of framework. In other words, growing quality plants has become more science than art and, as such, requires more technical consideration of the right combinations of inputs that fit into the production system rather than simply selecting the popular input of the month or, heaven forbid, the portfolio of cheapest products available. There’s an old adage that says, “You get what you pay for,” and I have seen growers save money in the short run to only lose a lot of money in the long run. In addition to cost, other things need to be factored into the decision regarding the optimal inputs to use (see Questions To Ask Before Buying sidebar).

Of course, it’s impossible to answer these questions in a vacuum. Relationships between allied trade vendors and growers are critical because it’s the long-term relationships that generally result in a win-win situation for both parties. This was reinforced to me just recently at the recent North American Horticultural Suppliers Association conference where the focus of many discussions was, “How can we enhance the success (i.e. profitability) of our grower customers?”

It also helps to bear in mind that, like Shmanske wrote, the most expensive input a grower ever uses is labor. Adopting some lean flow principles may be the single greatest investment a grower can make in terms of saving on input costs. Yet it is ironic that so much time is spent getting the absolute lowest price on production inputs.

Hire A Procurement Specialist For Better Buying

The last thing I should touch on is the branded versus non-branded/organic decision. There are some very good products to choose from on both sides of the coin. Efficacy is seldom the sole reason for making a decision to buy one way or another. It often comes down to the service-related dimension I discussed earlier, and I’ve noticed that growers ultimately go with who they trust the most. The growers that I have seen do this the best have a dedicated person that focuses on procurement. This person interacts externally with allied trade vendors to develop key long-term relationship and internally with growers and other managers in a concerted effort to reduce shrink and excess inventory of inputs.

Let me close by reinforcing the notion that growing quality plants should be looked at as a science-based system, particularly if you want to make money doing it. Even though input costs are a smaller part of the cost of goods sold on the income statement, it doesn’t mean that you can take input adoption decisions lightly. Nor does it mean that you are going to dramatically increase profitability simply by choosing the cheapest inputs. So be wise and be profitable.

Leave a Reply

More From Finance/Operations...
Smith Gardens Marysville outdoor field production

November 30, 2015

Why Smith Gardens’ Marysville, WA, Facility Is A Great Place To Work

Labor rates in Washington State are some of the highest in the nation, making competition for labor fierce. This is why Smith Gardens in Marysville, WA, wants to strengthen its reputation as a great place to work.

Read More
Feature - Agave ‘Blue Waves’ (Rancho Tissue Technologies)

November 30, 2015

Spice Up The Garden With 12 New Succulent And Miniature Plant Varieties

New succulents and miniature plants for 2016 offer a variety of colors and foliage textures that add interest and visual appeal to any size garden — indoors or out.

Read More
Iridescent green sweat bee

November 30, 2015

Nine Native Bees You Should Know About

There are at least 17,000 other species of bees globally, and 4,000 native bee species in North America. Although honeybees get all the attention, native bees can be efficient and sometimes superior pollinators compared to honeybees. Here's a quick run down on what you should know about native pollinators.

Read More
Latest Stories
Smith Gardens Marysville outdoor field production

November 30, 2015

Why Smith Gardens’ Marysville, WA, Facility Is A Great …

Labor rates in Washington State are some of the highest in the nation, making competition for labor fierce. This is why Smith Gardens in Marysville, WA, wants to strengthen its reputation as a great place to work.

Read More
Great Lakes Expo

November 30, 2015

6 Reasons You Should Attend The Michigan Greenhouse Gro…

The Michigan Greenhouse Growers Expo, held Dec. 8-10 in conjunction with the Great Lakes Fruit, Vegetable and Farm Market Expo, will feature an expansive trade show and several educational sessions aimed at greenhouse growers.

Read More

November 25, 2015

Everything You Need To Know About the New England GROWS…

Held In Boston December 2-4, New England GROWS includes a comprehensive conference program, a trade show, and with six special programs that teach new skills and provide opportunities to network with colleagues.

Read More

November 20, 2015

Lessons Learned From The California Drought

For those of us who live in the areas of the country that experienced harsh winters and significant rain over the past three seasons, water has become a nuisance in some cases, rather than a blessing. I can’t count the number of times I have wished to be able to send the snow or the rain to the West Coast, tied up with a big red bow. But think about how we’d feel if we didn’t have the snow and the rain, and we were experiencing the same dry conditions that the residents of California, Oregon and Washington have. With fresh water supplies dwindling in regions of the world, and the resistance of residents in states like Michigan to share water from the Great Lakes, it’s likely that the next civil or world war could be fought over our most precious resource. California’s epic drought should cause everyone to look […]

Read More
Jill Calabro

November 3, 2015

AmericanHort Names New Research And Science Programs Di…

Jill Calabro will bring strategic direction and oversight to research funding by the Horticultural Research Institute, the research affiliate of AmericanHort.

Read More
SBI’s ANY Device Application allows growers to quickly determine availability-featuer

November 2, 2015

SBI Software’s Solutions Help Simplify Logistics For G…

The company focuses on helping growers improve their existing processes with solutions for site fulfillment, replenishment, inventory management and more.

Read More
Griffin Expo15 seminar

October 28, 2015

Griffin’s Hits Record Attendance With 2015 Expos,…

Griffin Greenhouse Supplies set new attendance records with its 2015 Expos. Its 2016 Expos are set for August 31 and September 1, 2016, in West Springfield, Mass., and September 21-22, 2016, in Lancaster, Penn.

Read More

October 28, 2015

Possum Run Greenhouses Taken Over By New Owners

Justin and Lynn Marotta have placed Possum Run Greenhouse and Gifts into the hands of new owners. John and Caroline Bletner, a newly married couple, took over the Bellville, Ohio, property October 2, according to an October 24 article in the Mansfield News Journal. The Marotta family has run Possum Run Greenhouse and Gifts for 41 years. When the Marottas announced in April the greenhouse operation was for sale, they said they were looking for an energetic couple to take the business to the next level, which is what they found in the Bletners, the article reports. The Bletners have hinted they’ll be “opening to a larger market” and that the retail side will “look different.” They’ll hold a grand re-opening the week of April 22, 2016. Staff are staying on board and the Bletners are maintaining many of the suppliers. The 200-plus varieties of fuchsias Justin brought to the greenhouse […]

Read More

October 25, 2015

We Could Be Growing More Green Infrastructure Plants Th…

At her Cultivate’15 presentation in July, Shannon Currey of Hoffman Nursery challenged the horticulture industry to get involved while green infrastructure is still developing, saying that a good start is to offer more plants that fit the unique needs of this market.

Read More
Integration Key To Compliance For Specialized Crops

October 22, 2015

Integration Key To Regulation Compliance For Specializ…

Growers considering supplementing ornamental crops with cannabis will enter into a new world of governmental regulations where key business systems will be indispensable for successful crop management.

Read More
Kate Santos Operations Director Dummen Orange

October 21, 2015

Kate Santos Explains What The Sale Of Dümmen Orange To …

Over the weekend, Dümmen Orange announced that the Dümmen family has sold its majority stake in the Dutch flower breeding company Dümmen Orange to European private equity firm BC Partners. The deal is valued at more than $560 million, around 11 times its core earnings, according to a Reuters press release. The company, owned by the Dümmen family and investment firm H2 Equity partners, has locations all over the world, including farms in Central America and East Africa. This is BC Partners’ first foray into the flower business. We caught up with Kate Santos, operations director for Dümmen Orange, to find out how the company’s sale to BC Partners affects Dümmen Orange customers, if at all. Here’s what she told us: Why did the Dümmen family decide to sell their shares? Why to a private equity investment company? Similar to the reason that H2 sold its shares to BC Partners, all […]

Read More
The tradeshow at the Cannabis Business Summit & Expo — outside of the occasional 1960s vibe, perhaps — would feel familiar to most growers

October 19, 2015

Have Cannabis Growing Expertise, Seek ‘Golden Ticket’

Many horticultural growers might start cultivating cannabis tomorrow if they could secure a license, the equivalent of a “golden ticket.” But these are hard to come by, and the number and criteria vary greatly by state

Read More
Lurie Garden Millennium Park

October 16, 2015

Green Infrastructure An Opportunity To Redefine How We …

Green infrastructure is an emerging market that has important ramifications for the horticulture industry. That is, if growers, designers and other industry players take a proactive approach to grasp the opportunities that come their way.

Read More

October 5, 2015

Smart Business Sense At Tidal Creek Growers Yields Succ…

Tidal Creek Growers stays competitive by focusing on what really turns a profit. It helps the large operation successfully balance contract growing with growing for retail garden centers.

Read More

October 4, 2015

ePlantSource Adds 5 New Partner Companies

ePlantSource has announced an additional five companies that have been added to its partner distribution list. Not only do the additional partners offer more supplier options to ePlantSource customers, but the website now also provides a more diverse product list with the addition of bulbs, clematis and many new varieties. New partners added for the 2015 – 2016 season: A.D.R. Bulbs Lennon Farm Greenhouses Micandy Gardens Pacific Growers Roseville Farms “We make it a priority to respond to our customers, and we have had many requests for additional options and a more diverse product line, so we are continually evaluating suppliers that work well with our non-traditional approach to the sale of live goods,” says Gary Falkenstein, President and CEO of ePlantSource. “We feel that it is good for our company, our customers and the industry as a whole to keep looking forward and seeing how we can improve and expand how […]

Read More
Cannabis marijuana

September 8, 2015

Supplemental Lighting Benefits For Growing Cannabis In …

The cannabis industry has moved out of the basement and into the light, and with this shift in politics and regulation occurring worldwide there is a need for growers to change the way they think about lighting and energy consumption.

Read More

September 2, 2015

Delegation Is Key To A Successful Greenhouse Operation

In a packed room at Cultivate’15, speaker Bernie Erven presented key steps growers need to take to improve their delegation skills, the benefits of delegating and the dangers of not learning how to delegate. This is a skill, he says, that everyone needs to learn. “For all of you who are part of a family business, you are choosing not to do things the easy way,” Erven laughed, as he presented a list of ways to know whether or not you’re an effective delegator. The owner of Erven HR Services, LLC, Erven has been working with and observing family businesses for many years. In his presentation, he said, he didn’t share anything that he hasn’t seen first-hand. You might not be a good delegator if you: Tend to be a perfectionist Work more hours than anyone else Lack time to explain clearly and concisely Are often interrupted Enjoy what you used to […]

Read More
AmericanHort logo

August 20, 2015

David Savoia To Serve As AmericanHort’s Interim P…

Following Michael Geary’s announcement that he has resigned as president and CEO of AmericanHort, the association has announced that CFO and Senior Vice President for Operations David Savoia will serve as interim president and CEO while the board conducts a search for a new staff executive. Craig Regelbrugge, the senior vice president for advocacy and research, will support Savoia with the association’s external affairs. Geary announced August 12  that he will be leaving his position after September 30 to serve as CEO of the Society for Marketing Professional Services, an organization dedicated to creating business opportunities in the architecture, engineering and construction industries. “As some of you know, I grew up connected to the horticulture industry so this was not an easy decision for me,” Geary said in an eMail. “I have loved working with our organizations and our talented members, staff and partners. However, my choice to return full time to Washington, D.C. will allow me […]

Read More
[gravityform id="35" title="false" description="false"]