Evaluating on-farm labour efficiency
Where to start with measuring and increasing worker efficiency within your operation.
In these times of higher minimum wage and other input costs, it’s critical to make sure labour efficiency is as high as possible.
First, let’s define labour productivity for any operation or task. It’s a ratio of the total dollar output of goods/services against the number of person-hours that output requires. It can also be measured as the ratio of output to the number of workers used to produce that output. For seasonal or part-time workers, total months worked should be added up and divided by 12 to arrive at a total number of workers.
To begin benchmarking where your labour productivity is at, Michael Langemeir advises to start with computing the share of your total costs taken up by labour, as well as gross revenue per worker each year for the last several years. Langemeir is the associate director in the Center for Commercial Agriculture and a professor in the Department of Agricultural Economics at Purdue Agriculture in West Lafayette, Ind., who has studied labour productivity at livestock and crop farms in the U.S. corn belt. “This provides a baseline to compare with future years,” he explains
He adds that, “if information is available, external benchmarks (comparing with other farms) is just as important as internal benchmarks (comparing against a farm’s own previous measures).”
In his recent published paper in the journal Farmdoc Daily, ‘How Can I Improve Labour Productivity?’ Langemeir outlines the main ways to improve labour productivity.
One of these is resource allocation: how much is spent on inputs such as labour, fertilizer and management time in proportion to total costs. With regard to resource allocation, Langemeir advises asking yourself how efficiently your current workforce is being used. Are there inefficiencies in your production processes, for example, and do you need to expand the operation to more fully utilize your workforce? If you add an employee or a family member, have you also appropriately changed your use of purchased inputs and capital? Conversely, Langemeir advises asking if you buy machinery, are you making the appropriate changes in labour and purchased inputs?
Another way to increase labour productivity is through increasing physical capital (assets, including land). Again, Langemeir advises farmers to ask themselves many questions. For example, has each asset purchased for your farm increased technical and cost efficiency? (He defines technical efficiency as a farm’s ability to efficiently produce outputs for a given level of inputs, while cost efficiency measures a farm’s ability to produce outputs at the lowest cost per-unit.) In addition, analyze how the purchase of each asset allows (or doesn’t allow) you to gain or increase economies of scale, or to more efficiently utilize labour?
Langemeir also recommends examining if there are skill gaps on your farm pertaining to all business areas (production, procurement, selling and financial management, HR, strategic positioning, risk management). Skill checklists can be very helpful with this. Langemeir adds that as any other business hires more people, “it becomes very important to have a notebook that contains job descriptions, detailed explanations of how certain jobs should be done, assign supervisors to each job type and so on.”
Age of technology
As we all know, the adoption of technology and automation is increasingly becoming more important in efficient use of labour and can also lead to economies of scale.
With regard to integration of potential new technologies, Langemeir advises in his paper that farmers should think about whether they have mechanisms in place to fully evaluate new tech, and/or the ability and flexibility to afford it.
“Technology questions are difficult to address with off the shelf answers,” he adds. “To assess new technology, we need to carefully compare benefits with costs. Ideally, this should be done using net present value concepts.” To calculate net present value, examine the costs (negative cash flows) and benefits (positive cash flows) over a period of time.
If you have never tried to measure labour efficiency, hopefully this will get you started, or if you have, hopefully it will help you to do more. Please let us know about your labour productivity analysis by sending a letter to the editor.
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