| The approach of spring means a frenzy of activity for the green industry. At no other time of the year are as many plants shipped. In order to have the inventory ready, a substantial amount of time, planning, labor and capital has been “invested” in the inventory. All of this activity occurs within the bounds of the production facilities. Ag economics 101 teaches us that resources are finite so every grower deals with his or her own limited production space. There are ways to stretch this space, including tighter plant spacing, using headhouses and the vertical space above greenhouse benches and floors and getting more turns from the production space. In maximizing the physical efficiency of an operation, the financial efficiency can be easily compromised. By focusing your investment (in time, space and money) on the most profitable crops, you’ll make more money doing less work. In consulting with growers, one tool that I’ve seen stand above the rest is analyzing inventory performance. Multiple turns Increasing the number of physical crop turns is one of the simplest ways to increase production. It adds another dimension to the production area beyond length and width and height. Incorporating multiple turns incorporates time. If space is limited for a specific number of containers, grow them as quickly as possible, move them out and start again. Growing two, three or even four crops of the same plants has several benefits. Growing multiple crops spreads labor and inputs and their costs, over a longer period of time. It makes better use of facilities, keeping them in production longer. It can also help even out cash flow, since the earlier plants are shipped, the earlier a grower is paid. The industry as a whole has multiple production turns down to a science. Though there’s always room for improvement, research on environmental control, lighting, fertilization and crop protection has figured out how to grow the highest quality crop in the shortest amount of time, with an eye on cost. But multiple physical turns aren’t foolproof. Inventory investment traps If you invest too much in inventory, you’ve tied up money unnecessarily. If you have extended terms on your payables, it’s easy to think there’s no cost to that. But you’re giving up the savings that you could be getting for prompt payment, not to mention the opportunity cost of the money. If you invest in the wrong inventory, it takes longer to sell and that much longer to get your investment back. Worse yet, plants may not sell, causing you to not only miss out on a profit opportunity, but you won’t have even turned the dollars you invested. The cost of maintaining inventory is significant. Even with mechanization advances, labor, fertilizer and chemical costs add up quickly. So does shrink, whether the source is physical plant damage or is caused by disease and/or insects, or even because the crop is past peak and no longer has the color it needs to be a quick mover. Another way to look at turns Consider the “financial turns” of the crops you’re growing. This calculation takes your inventory efficiency one step farther by measuring the relationship of the turns and the gross margin on the sale of those inventory items. This is a way to measure how efficient you are at maximizing the return on your inventory investment. You’ll need to determine your average monthly inventory and the gross markup on the crops you sell.
The gross margin is the profit before overhead costs and is calculated as a percentage of sales. Gross markup is the percentage of the cost of goods sold added to the item to calculate the price.
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