Six Ways to Increase Income

Newsletter No. 38 May 2006 - Item 2

Many of you will have read Alan Stable’s last news letter and the 6 ways he gave to increase income.  It all sounds excellent advise, but how can we apply this advice to our ostrich businesses?

Increase your transaction size
In any transaction there are always certain administrative activities that have to be carried out regardless of the size of the order.  A certain volume is required to ensure sufficient margin to cover these and other fixed costs.  The greater the volume clearly reduces these costs per unit of sale. Currently this is a critical issue with ostrich production as our volumes are so very low.  At every stage of the production chain there are few economies of scale yet being achieved.

One example is skins.  Skin buyers will pay better prices if handling container loads.  When only selling a few hundred skins, there are significant additional transport and handling costs when it is necessary to consolidate loads in a central collection point.

Whatever the product, the paper work and administration is the same if a shipment is a container at 15 tonnes or a pallet at 1 tonne.  So increasing your transaction size will not only increase revenue, it helps the margins as well.

Increase your margin
The margin in this instance is of course the difference in the selling price (total revenue received) and cost of production.  Increased margins can be achieved by increasing revenue and reducing costs through improving production efficiency.  With ostrich we have opportunities to benefit significantly from both.

Increase Revenue
Revenue can be increased in two ways – by increasing the price of the products and by increasing the yield.

Increasing the price is the area of good marketing to differentiate your product over your competitor.  Our industry is currently in a position of lack of supply, so our opportunities and ability to increase the selling price in some markets remain excellent for a number of years.  Increased prices can only be expected if production systems ensure absolute consistency of supply and consistency of product.

Product grading is the next tool to achieving increased prices.  Grading for skins has been used to differentiate price for many years, with significant variation between Grade 1 and Grade 4.  The difference per skin at US$16.50/sq ft Grade 1 and Grade 4 is around US$100.

Similar price differentiation can be achieved for meat.  However, the meat is a new product and our grading system requires education, both for our customers and producers. Marketing the meat on grade to provide product differentiation is one method to increase the selling price of the meat.

Reduce Costs of Production
There are a number of ways to reduce the current costs of production very significantly.  Increasing yield and reducing the age to slaughter are two key factors.  With ostrich we have very significant savings achievable in this region.

Cost of Chick: The greater the number of slaughter birds produced per hen the lower the breeder cost of chicks.   The knock on effect of increasing the number of chicks per hen that survive to slaughter are reduced incubation costs, stronger chicks that convert feed more efficiently and have increased survival. Stronger chicks also require less heat in the early weeks.

Cost per Kilo Meat:  With ostrich significant savings can be achieved by increasing yield and reducing the time to slaughter over current averages. Key savings when reducing time to slaughter are reduced feed consumption, less infrastructure required, less labour and not only less working capital but also the cost of that working capital is reduced.  The cost of working capital is reduced as it is recovered more quickly.

Cost of Processing:  The size of a bird does not affect the cost to slaughter a bird.  Therefore, as the graphic below clearly demonstrates, significant savings on processing costs per kilo can be achieved with increased meat yields.

Influence of Meat Yield on Costs of Processing

Figure 1 - Influence of Meat Yield on Costs of Processing

Skins: Worthy of note when discussing processing costs; it costs exactly the same to tan a Grade 1 skin as it does to tan a Grade 5 skin.   So clearly far greater margins are achievable the better the grade as the costs of production are identical.

Early slaughter also reduces the costs of producing quality skins.   A study carried out by the scientists at the experimental farm in Oudtshoorn clearly demonstrated the increased number of grade 1 skins when slaughter was at a younger age.

For too long there has been the belief that skins from young birds have immature follicles. A number of us have proven very clearly that when production systems are correct, younger birds can also produce skins of acceptable quality.

Increase the frequency of transactions
Many products in food production are determined by season.  One way to increase frequency of transactions is to extend the season.    A knock on affect of introducing production methods that reduce the costs of production as suggested above, will be an extended breeder season and elimination of the “end of season” chick syndrome.  Chicks hatched towards the end of the season have often been considered weaker than those hatched at the beginning of the season.

Increase consistency of purchasing
The following are processes in the production chain.  Some may be involved in only one process, others several or all of the processes.

Producing Feed Producing Fertile Eggs
Producing Day Old Chicks Producing Slaughter Birds
Producing Breeder Birds (Genetics) Slaughtering Ostrich
Processing Meat Tanning Ostrich Skins
Sorting and Cleaning Feathers Manufacturing Processed Meat Products
Manufacturing Leather Products Manufacturing Pharmaceutical Products
Manufacturing Cosmetics Dying Feathers
Manufacturing Feather Dusters Decorating Eggs
Wholesaler Retailer

The customer of every single process is dependent on being supplied with a consistent product; the customer maybe just another department of the same farm or company or it maybe a totally independent commercial concern.

Consistency in purchasing is essential and if any one of those processes fails to deliver a consistent product, it will impact on the profits of those further up the chain. If delivery is unreliable in supply, the customer will fail.

In this discussion the most important customer is the user of the product – our final customer.  That leads into the final two items on Alan’s list.

The final two items were “Increase longevity (keep your customers longer)” and “Improve conversion of new prospects to customers”.

My suggestion is that to reverse these two items may be more appropriate for our fledgling Ostrich Industry?

Improve conversion of new prospects to customers
Globalisation of agriculture has resulted in the livestock production industry becoming a highly competitive market that is leaner and increasingly efficient over the past few decades.

The Ostrich industry is a new livestock production industry, so what do we have to do to gain customers in such a competitive market?

A major complaint with buyers of ostrich meat is inconsistency of supply.  There are many markets we cannot enter as we lack volume. The first step is to have sufficient volume on a consistent basis.  Producers who can achieve consistent supply will have overcome the current production challenges of low numbers of eggs laid, low conversion of egg to chick and high chick mortality.   If scheduled to deliver birds to slaughter, ensure they are delivered on the day.

Figure 2 - Comparative South African Slaughter Figures

Figure 2 - Comparative South African Slaughter Figures

The graph in Figure 2 shows the tremendous variability in slaughter numbers, not only from month to month, but the significant variability in the same month each year.  This makes supplying markets extremely challenging as actual product available is clearly unknown and extremely inconsistent.

Increase longevity (keep your customers longer)
The ability to guarantee supply efficiently, at a market related price and saleable product is a most important issue to not only win over new customers but to keep them also.

The processors – slaughter plants, meat processors, tanneries, leather good manufactures and feather companies can only win over new customers and keep their customers provided they have a reliable and consistent supply of raw material.

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