Agribus Operations Management
Agribus Operations Management ABM 332
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This 52 page Class Notes was uploaded by Leanne McDermott on Saturday September 19, 2015. The Class Notes belongs to ABM 332 at Michigan State University taught by Staff in Fall. Since its upload, it has received 22 views. For similar materials see /class/207438/abm-332-michigan-state-university in Agricultural Economics And Business at Michigan State University.
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Date Created: 09/19/15
imam g L rnmlqz mh Hum mA s an Subroutines Decision Maker r A coomon tool used by manaers in addressin operational and tactical decisions Standard algorithm readily available Solver in Excel Post optimality information is very valuable in making business adjustments Easy to cheat on the assumptions 1 Easy to incorporate traditional economic concepts 5 Three main parts 1 Have activities or process available as alternatives 2 Desire to maximize or minimize somethin 3 Have constraints or restrictions Has many similarities to the standard what products to produce of marinal economic analysis Py1 Y I SIope 239 Py2 1 Linearity Real World Output Y1 IIIIIIII IIIIIII Input X1 Input X1 2 Divisibility Inputs and outputs can be fractions Can handle with mixed inteer programmin 3 Additive and independent X2 X1 4 Homoeneous units of input and output Can address by addin more contraints only two crops per acre gures Corn x So s x Economic sutuatlon 1 y 2 Gross Income Direct Expenses Netlncome Resources required Land Ac Harvest Labor Hr Capital Resources available Land Ac 400 Harvest Labor Hr 225 Capital 35000 Also a minimum of 70 acres of corn to be rown HINT Divide the amount of resource available by the amount needed by the activity Corn Soys Croplancl 4001 400 4001 400 Harvest Labor 225045 500 225060 375 Capital 35000110 318 3500060 583 c X1 Corn Net Inc X2 Says 150 W 1071 How many acres of soybeans does it take to generate the same income as 500 acres of corn 500 1071 5355 Slope of lsoRevenue Line 01 O O Acres Soys X2 220 100 200 300 400 500 600 700 Acres Corn X1 DOpt 2200 1800 58200 Acres Corn Acres Soys Total Net Inc Land Used Ac 4000 Labor Used Hr 2070 Capital Used 35000 00 N Acres soys X1 b 2188 MaxCapital o C 1000 3000 57000 4000 2250 29000 Impact of Adding One Acre of Land V I I I I I 217 218 219 220 221 Acres corn X1 I 222 Post Optimality is also important in this analysis What is an additional acre of land worth NEW PROFIT Corn 2188 Ac 150 32820 Soys 1822 Ac 140 25508 58328 Less Old Profit 58200 Value of one acre 128 What is an additional 100 of capital worth NEW PROFIT Corn 2220 Ac 150 33300 Soys 1780 Ac 140 24920 58220 Less Old Profit 58200 Value of 100 20 Maximize Z 150X1 140X2 Subject to 1X1 1X2 g 400 045X1 060X2 g 225 110X1 60X2 g 35000 1X1 2 70 AND auxjgo General Form n Maximize Z X Cij 1 Subject to Forj1 to n m Aux g Bi i1 and X 2 WHERE n Number of activities columns in Number of constraints rows Level of constraint i Riht Hand Side Level of return of activity profit Level of activity Technical coefficient for activity at constraint i Tableau Form gt For more complex problems it is not possible to solve linear prorammin problems with raphical methods Can use one of several linear prorammin alorithms SOLVER in Excel Can handle limited sized problems Special linear programming packages using the Simplex method AELP for a smaller problems LINDO with What sBest for very large problems I How is it done with SOLVER r Works fine but it take some extra time to set up the problem in the proper structure It finds the maximun profit net income Overall profit I This is in the Target Cellquot amp Answer Report Pro t 58200 return to xed resources i Level of activities that maximize the profit This is found in the Changing Cellsquot and Answer Report Corn 220 acres Soys 180 acres Utilization of fixed resources contraints r This is found in the Constraints Cellquot or the Answer Repon Land and capital totally utilized 18 hours excess harvest labor Minimum corn exceed by 150 acres TOTAL QUALITY MANAGEMENT TOTAL QUALITY MANAGEMENT Total Quality Management TQM concept gt quotTQM means that the organization39s culture is de ned by and supports the constant attainment of customer satisfaction through an integrated system of tools techniques and training quot Sashkin and Kiserr Early US pioneers where Drs W Edwards Deming and Joseph M Juran gt Slow acceptance in the US 139 First wide scale utilization was in Japan following WW II Points to remember about TQM gt TQM can work in all types and sizes of businesses and organizations gt TQM is not a shortterm project simple slogans or an inspection program Customer39s PLICCptmn of Us Comprtmon Cnmpolilm s Strengths and Weaknesses Total Quality JOSEPH M JURAN 10 STEPS TO QUALITY Build awareness of the need and opportunity for improvement Set goals for improvement Organize to reach the goals identify problems select projects assign responsibilities Provide training Carry out projects to solve problems Report progress Give recognition Communicate results Keep score on the various team efforts 0 Maintain momentum by making annual improvement part of the organization 139 Deming39s Cycle PDCA 1 DIMENSIONS OF QUALITY Performance Features Reliability quot Conformance I Durability Serviceability Aesthetics quot Perceived Quality 39 Price Competitiveness TQM TOOLS Data collection methods gt Direct observation gt Interviews gt Questionnaires gt Focus groups gt Direct checking gt Sampling Nonquantitative analysis methods gt Flowcharts EXAMPLE Cashier notes a large amount of broken cookies Store Cashier Customer Self Stocker Back LquotII Warehouse Nonquantitative analysis methods continued gt Cause and Effect Diagrams Fishbone Chart EXAMPLE Customers are unsatisfied with the Green Valley s parts department pool Parts not computer In Stock sysmm cut Poor Bin System Low Turnover Too Small Inventory Customers r are Unsatified Employee Training Poor Phone Responce l Quantitative analysis methods gt Histograms EXAMPLE Livestock farm comparing hay quality from different sources HAY QUALITY BY SOURCE 25 20 15 E10 7 5 o I I I 1st Cutting 2nd Cutting 3rd Cutting D Home Grown I Ace Farms El Bee Acres 11 l Quantitative analysis methods continued gt Scatter Diagrams EXAMPLE Effectiveness of newly introduced herbicide varies from research trails is it temperature related HERBICIDE EFFECTIVENESS 100 g 33 g 60 g 40 0 I I I I I I I I 45 50 55 60 65 70 5 80 Application Temperature F West Region Central Region East Region 12 l Quantitative analysis methods continued v Pareto Diagrams 80 20 Rule EXAMPLE Horticulture firm suppling plants to a mega market chain is concerned with high rejects and returns REASONS FOR REJECTS AND RETURNS Wrong Timing wrong Size Percent of Rejects 8 Returns l Quantitative analysis methods continued gt Control Charts eg Run Chart EXAMPLE Pickle processor filling a 16 ounce jar of plckle rellsh RELISH RUN CHART Upper limit Oz Packed Other techniques used gt Benchmarking gt Critical Path Analysis CPA gt Many others REASONS WHY TQM SOMETIMES DOES NOT WORK Failure to embrace the concept at all levels Not an addon program not something you drop into place or add a new department to address 39 Need strong leaders to make it work if leader leaves the process often fails Often it is assumed it is a quotquickfixquot process Attempting to use traditional quotproven39 methods to solve problems Middle managers have a hard time changing in Attemptin to apply in only a small area gt Crossfunctional teams are often needed Financial analysis is one of the key internal analysis tools 39 It is a tool for recognizing both positive and negative trends in the business Helps you identify what areas ofthe business are contributing to the nancial health of the business It become one of the important factors in developing the mission statement of the business It should be more than a diagnostic tool It should help provide direction for the future It is a means of communication with the management team a It is broader than the financial picture given by the income tax statements Income Statement It examines the pro tability ofthe business over a defined time period usually one year I It looks at profitability from an economic viewpoint Balance Sheet It is a summary ofthe assets and liabilities and owner s equity at a given point is time It is like a snap shotquot Cash Flow Statement It examines the cash movement into and out of the business Important because even a pro table business may not cash ow All three documents are needed for doing a good financial analysis AL PROFIT Earns As a starting point the business income section of the tax form can be used Need to make critical adjustments To reflect changes in inventory of produced items To account for changes in accounts receivable For some types of farms this is referred to as Value of Farm Production Gross revenue is adjusted for purchase of major inputs eg feed on a livestock farm 2004 2003 Revenue 1 Inc reported on inc tax 207850 gt 268435 260369 gt 2 Prod items inv changes 6098 gt 20143 5 4533 gt 3 Acct Rec on prod items 4440 7174 46725 4 GROSS REVENUE 209508 295752 218177 How serious is the variability from year to year I Do you see other possible problems v 5 VJ Earns Gross Variable Revenue Costs Variable costs are those that vary with the level of business activity eg fertilizer labor As a starting point the business expense section of the tax form can be used Also need to make adjustments to re ect changes in inventory of purchased inputs often done for tax management Eva gts fl 33 V l Earns Fixed costs are those that do not vary with the level of business activity eg property taxes fire insurance As a starting point the business expense section of the tax form can be used Need to add the unpaid costs related to the management team and unpaid family labor State a cost per hour for similar services FARM COSTS Case Farm 2005 2004 2003 Costs 5 Var costs inc tax form 5 90394 5 130960 5 132822 5 6 Var cost inv adjust 5 2000 5 4950 5 4700 5 7 Total Variable Costs 5 88 394 5 135910 5 128122 5 Fixed costs inc tax form 5 76164 5 73913 5 57078 5 Unpaid m ngt team 5 37666 5 35231 5 31642 5 Unpaid family labor 5 1614 5 1566 5 1519 5 Total Fixed Costs 5 1154445 1107105 902395 TOTAL COSTS 5 203838 5 246620 5 218361 5 Questions Are the fixed costs a high proportion of the total cost Do you have a feeling that the costs are higher than desired 39 Earns Gross Variable Fixed Revenue Costs Costs The net income figure is not the same as on the tax document because inventory adjustments and the inclusion of the cost related to unpaid management team and family labor 13 NET INCOME 5670 49132 Is the variability from year to year less extreme than that observed relative to the income Is there positive net income in most years to cover some of the capital costs a If a higher Net Income is desired what adjustments could the business make 39 Earns GIOS S Variable Fixed Revenue Costs Costs Interest amp Gross o39 ffti39tng Expense 39 Revenue Margin 1 Operating profit margin measures the profit generated per dollar of gross revenue What is left to cover business capital equity and borrowed OPERATING PROFIT MARGIN Case Farm NET INCOME 5670 49132 184 Interest Cost 6150 6781 7379 GROSS REVENUE 209508 295752 218171 OPER PROFIT MARGIN 56 189 33 Questions What does the operating profit margin indicate gt How small a margin is this business facing gt If too small what are the options For the cost structure increase gross revenue Find ways to control costs E3 Earns N t e Total assets Is calculated by adding till b W wo and ending assets together and dividing by Results in average total assetsquot for the year A e Turnover Ratio measures how efficmqmmtthg as arelbeing used to generate revenue Profit Eam g generally has a low rate Margin Retail businesses eg supermarkets have a higher Turns rate Asset 39 52th Turnover Ratio r 39 Earns Gross Revenue 1 Turns Gross Reven Ue Variable Fixed Costs Costs Interest amp Gross Expense 39 Revenue Turnover Ratio amp Total 39 Assets Margin Operating Profit Rate of Retu rn FARM FIGURES Case Farm quotTurnsquot 2005 2004 2003 16 Gross Revenue 209508 295752 218177 17 Total Assets Ave r Value gt 550796 gt 513981 gt 504832 gt 1 ASSET TURNOVER RATIO 038 5 1 Rate of Return on Assets 21 Questions What is the Asset Turnover Ratio of a well run business Do you find the Rate of Return on Assets acceptable You can make changes in the EARNS and TURNS or both Improving the EARNS Increase the gross revenue Obtain a higher price Others Needs to be done without incurring costs that exceed the returns Decrease the costs For variable costs Be more efficient in use of inputs Other For fixed costs Spreading fixed costs over more units of output Needs te be achieved without hurting revenues Improving the TURNS Increase the size of the gross revenue This was discussed earlier Grow the business without increasing investments Reduce the size of the assets used in the business Get rid of dead assets Explore ways beside ownership to acquire the service of little used assets Leasing Joint ownership Custom hire Others Ef ciency Operating Expense Ratio 944 967 Depreciation Expense Rati1 300 185 Interest Expense Ratio 5 29 34 5 w m What are the important ratios to consider when evaluating a business from a financial viewpoint What should these ratios be compared to Assets ShortTerm Those items that can be quickly converted into cash IntermediateTerm Ifthese items are liquidated it would have an impact on the operation ofthe business eg equipment and machinery LongTerm Items not so easily sold quickly and if sold would greatly change the nature ofthe business eg land and buildings I Liabilities 1 ShortTerm Money owned that is due in the next year IntermediateTerm Loans that have a length from two to 10 years LongTerm Loan with a length of over 10 years I Net Worth gt The difference between assets and liabilities owner s equity FA RM ASS ETS Case Farm ShortTerm Assets Cash 105005 5 Production items in inv 5 371165 31 0185 108755 Accounts receivable 5 52966 5 57406 5 50232 5 Other shortterm assets 5 5600 5 7600 5 2650 5 35 SubTotal 980325 1065245 646075 Intermediate Assets 36 Machinery and Equipment 175167 150774 37 Coop Stock 0 0 0 5 38 Other intermediate assets 0 0 39 SubTotal 175167 150774 Questions What do these these trends indicate lites Farm ssetls Qenti39nuedili Case Farm 2005 LongTerm Assets 40 Farm Buildings 20836 22788 25102 Improvem ents tile trellis 0 0 0 Bearing fruit 0 0 K 0 K NonBearing fruit 0 0 270000 243000 0 0 0 240000 0 Lan Other longterm assets 290836 SubTotal 265788 523113 TOTAL BUSASSETS Questions What is the trend with respect to these assets 554112 547479 480483 27409 0 23 50 00 0 26 24 09 52 91 80 What is causing a change in the value of the assets gt Island values the driving force CASE FARM LIABILITIES Case Farm ShortTerm Liabilities 48 Loans 5450 1250 49 Accrued interest 966 1045 5 1102 5 5o SubTotal 2766 6495 2352 Intermediate Liabilities ans 51 Lo 24540 28414 52 SubTotal 20357 24540 28414 LongTerm Liabilities 53 Mortgage 61 521 66321 5 70807 54 Other Loans 0 0 0 55 SubTotal 61521 66321 5 70807 56 TOTAL BUS LIABIL11ES 84644 97356 101573 Question Is the debt under control 57 NET WORTH 469468 450123 378910 420089 u What has happened to the net worth owner s equity situation over time What does it mean if the net worth keeps eroding over time Current Ratio can cover current liabilities a liquidity measure Debt to Assets Ratio Measures the financial position of the business or the creditor s claims against the business solvency measure Does the business have a good Current Ratio Do you feel confortable with its DethAssets Ratio I What has been the trend in over time The cash flow statement measures the flow of cash into and out of the business The cash flow situation is very important to the business As we should now know cash flow is not a good indicator of business profit Ignores noncash costs such as depreciation and unpaid resources such as labor and capital I On the other side a profitable business can have a good profit level and have serious cashflow problems Two main parts Source of Funds Indicates the funds flowing into business v Use of Funds Tracks the where the funds of the business are spent 2003 Source of Funds 1 Beginning cash 72 Cash sales Income Tax Netincreaseinloan bal 0 10500 850 11000 3644 207850 268435 260369 288406 0 0 27554 Total Bus Cash Inflow 218350 5 269285 271369 319604 As a source of funds is the business incurring new loans substantiality faster than repayment of your current loans I Does the business seem too small to generate the funds needed to be effective 2004 2003 Use of Funds Cash exp income tax 101384 141981 144933 131457 Netcap prch of deprec ite 53299 84971 48312 34400 Netprch of nondeprec itg 0 5 0 Net reduction in loan balan 12712 L 4217 7518 0 Ending Cash 105005 850 11000 Total Bus Cash Outflow quotMtg j I r Is the business having problems in covering cash ependitures I Is the business making progress on reducing the level of debt CASH FLOW POSITION ANALYSIS Case Farm NET BUS CASH FLOW 50955 38116 70606 Estimate of needed 70388 67923 48564 capital replacement Estimate of debt 8751 9866 10902 principle payments Desired returns to unpaid 39280 36797 33161 mngt team and family Est Discretionary Cash 1453 12718 33808 Questions Is the business able to replace depreciable assets and make payments on debt principle Can it provide for family living expenditures Projects often fail because of four main causes 1 Cost overruns 2 Inadequate capital 3 Not foreseeing possible problems 4 Delays in completion There are methods to address these problems Hiring a project management consultant Using proven project management tools PERT Project Evaluation and Review Technique Sometime also called CPM Critial Path Method Part of TQM tools These tools will help control all four ofthe above problems EXAMPLE quot There are numerous activities involved from the concept to eneratin returns w There is uncertainty as to the time involved in each ofthe activities 1 Desire to know where the bottlenecks are in the implementation process and how much slack time there is in ettin the project completed 4 There are several steps involved in usin PERT Step 1 Define the sequence of activities and events needed to complete the project Initial Feasibility Feasibility Analysis Analysis To 0 0 gt Other Nodes Test Generate System Revenue STEP2 Assign completion times to each of the activities Three different times are assined 1 To Optimistic time 2 TL Most likelytime 3 TP Pessimitic time A fourth time is caluated from the first three times T 4TL TP 6 L Assumes a triangular distribution To T Expected Mean Time TE T p PERT Example Continued Specified Times forActivities 39 e os Activity Event Event Aucnuncbmuwcubcnmbuw Initial Feasibility Analysis Obtain Bids Arrange Financing Local Zoning Clearance Environmental Approval Dummy Activity Revise Feasibility Analysis Schedlle Contractor Build Facilities Order Equipment Hire Manager Hire Staff Train Staff Dummy Activity Licience Staff Integrate EquipFac Recruit Customers Dummy Activity Test System Generate Revenue OOOONOSUIJBUIUIMN N mood cnommxrmuubnnund Aucnmbcbmmnnb cmwumubundcmmumubund PERT Example Continued STEP 3 Determine the critical path Determine the time to reach each node event using TE values Where events merge at a node take the largest time 257 Activity Time 25 Node time Revise Feasibility Z I g 42 Feasibility Analysis 39 26 Activity Time Integrate Test Generate Fac amp Equip Revenue a o 85 a a 26 Activity Time 4 t r 1 ya 5 I f V 5on 42 233 0 Order 39 Integrate T t Generate Fac amp EqUIp Revenue 85 PERT Example Continued Critical Path gt 26 Activity Time 26 Node time v Initial 99 ReVIse Feasibility 42 Feasibility Analysis r r Analysis PERT 7 Site Sjeclflc Qopping System TABLEAU