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What does optimizing operationalefficiencies mean for seed compa-nies today?

“It’s all about efficiencies,” said R.B. Hal-aby, chairman of AgriCapital, a New York-based investment bank for agribusiness withglobal interests. “The global dynamics incrop production will continue to require suc-cessful seed companies to improve theiroperational efficiencies.”

It is not new for global dynamics to have animpact on U.S. grain and seed businesses.However, the pressures are more intensetoday, and now agribusinesses are faced withsignificant pressure from capital markets interms of having to satisfy investors.

“If you don’t satisfy shareholders, theymove their money to a different investment,”noted Mike Boehlje, Ph.D., professor of agri-cultural economics at Purdue University. “Ifyou can’t drive costs out of the system, you willlikely be forced out or ‘capital-starved’ out.”

He said that today’s global dynamicsrequire companies to take a reality check.

“You can think you are low cost, but reallynot be. Capital market pressures are beingapplied to every level because people whohave changed their expectations about com-petitive rates on their capital own more of thevalue chain.”

Enhanced operational efficiency enablescompanies to be competitive, realistic andpotentially more profitable, according to Halaby.

“Large and small companies alike thatforce themselves to focus on operational effi-ciency are those which will find the most

growth, benefit, and profit in 2005 andbeyond,” he said.

STRATEGIC APPROACHESTO GAINING OPERATIONALEFFICIENCIES

AgriCapital’s mission is to helpagribusinesses cope with acceleratingchange. Its goal is to be equipped to pro-vide its services creatively and profession-ally and with the highest ethical standards.

Those who compete successfully willattain operational efficiencies in two differentways, Halaby noted. The approach that hasgained the most attention during recent yearsoccurs through mergers and acquisitions.Companies build the critical mass necessaryfor global business in multiple sectors to sharecosts across markets or by linking researchand development efforts to marketing. Theother approach is to become small and lean.

“There are benefits to each approach forcompanies both large and small,” Halaby said.“But two critical questions remain for seedexecutives: how do I make it work for my com-pany, meaning my customers, and where do Igain those efficiencies?”

There are essentially two strategies toincrease efficiencies, Boehlje added. One isto lower costs and improve your margins.The other is to increase efficiency throughthe use of an asset base, and inventory man-agement is not to be ignored in operationalefficiency strategies.

“In the seed business, we see a tendency tofocus on cost control, that is, how we can

lower costs in our organizations,” he said. “Wecan see it and watch it increase our bottomline. Too often, however, turnover ratio – animportant measure – is overlooked.”

For the past two years, Boehlje has taughtseed managers about operational efficienciesas part of the ASTA Management Academy.

“Seed companies can improve those opera-tional efficiencies by increasing turnoverratios,” he said. “Doing so can even allow com-panies to get by with lower margins.”

John Crabtree, vice chairman for AgriCap-ital Advisors, said he has witnessed this situa-tion with agribusinesses working to increasemargins through their supply business.

“Some organizations have farmers whomight be willing to pay a fertilizer or chemicalprice but not the application fee,” he said. “Inresponse, I’ve watched a general manager putall of his equipment up for auction and keephis fertilizer prices more or less where theywere. He basically said to the farmers, ‘if youwon’t pay for it, I’m out.’ Many agribusinessesare not accustomed to the manager handlingthe situation this way. More typically, thatmanager is in the mode of ‘let’s just coverthose costs with more volume.’ These are theold rules that probably no longer apply. Someof the innovative business leaders understandthis, but most haven’t come to terms with it.”

ENABLING INVENTORYMANAGEMENT

While lowering all costs associated withdoing business has been the typical means ofgaining operational efficiency, many companies

OPTIMIZING OPERATIONAL EFFICIENCIES IN A GLOBALLY COMPETITIVE MARKET

What Does it Mean for Seed Companies?By Kathleen Erickson and Betty S. Jones

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are focusing on boosting asset utilizationthrough better inventory management.Boehlje contends that seed companies need toask the hard questions and face often equallydifficult answers.

“If you reduce inventory, might you risk los-ing a customer?,” he asked. “The considera-tion must be made if it’s worth loosing thatcustomer … and it may be!”

Improved turnover took on a new meaningfor Emergent Genetics in 2003 when they set anew packaging standard. They changed thepackaging of Stoneville“ and NexGen‰brands of cotton planting seed from 50-poundbags to 230,000 seed count units. In doing so,Emergent Genetics became the first cottonseed company to offer seed count packaging.Bulk packages were also offered and con-tained 8.05 million seeds, or 35 units of230,000 seeds.

“For several decades, we sold cotton seedin 50-pound bags,” noted Don Threet, vicepresident-U.S. Business Operations of Emer-gent Genetics. “This bag size was establishedby default long ago when the industry decid-ed that the 100-pound bags it had been usingfor commodity cotton seed were too heavy.But today, better quality planting seed and

equipment advancements have enabledgrowers to considerably reduce the amountof seed they plant per acre, resulting in a veryprecise planting density. Additionally, seedsper foot of row have replaced pounds peracre because of significant quality advancesin today’s cotton planting seeds. Just 10 yearsago, before transgenic cotton, growers wouldtalk about planting 15 to 20 pounds per acre.Those same growers will now tell you thatthey plant seeds per foot of row or cottonplant population per acre. So we need to sellthem seeds instead of pounds.”

Threet said that knowing seed countsenables retailers and growers to improveinventory management by ordering the exactnumber of bags they need. From an internalbusiness perspective, this type of inventorymanagement helps minimize tied up cash flowresulting from excessive inventory. Fewerextra bags in inventory reduces the risk ofdamage and loss during loading and storage.

But Threet said the benefits of seed countpackaging extend to his growers and distribu-tors. By adding value that enhances theiroperations, the benefits offer a ripple effect.

“Seed count packaging enhances growers’planning and management accuracy, and

eliminates the need to convert pounds toseeds,” he concluded. “Knowing exactly howmany seeds are in each bag, coupled with thedesired seeding rate, allows growers to orderexactly what they need, thereby assuring theydo not buy too much or too little of the elitebrand varieties they want and need.”

This is part one of a two-part series on oper-ational efficiencies. Next month’s articlewill explore innovative approaches compa-nies have taken to differentiate themselvesin the marketplace while optimizing opera-tional efficiency.

Kathleen Erickson is president of EricksonCommunications & Consulting, LLC, ClarksHill, Ind. Betty S. Jones is associate directorfor the Center for Food and AgriculturalBusiness at Purdue University, WestLafayette, Ind.

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