Lean Management
As farm managers strive to utilize labor and other inputs more efficiently, Lean Management offers a framework to design production processes that minimize waste and disruptions without sacrificing safety or quality. Over time, managers who adopt Lean systems can shift the entire culture of their organization to enhance employee engagement and productivity. This website offers an overview of Lean Management for an agricultural audience and provides guidance to implement Lean principles and practices within your own farming operation.
What is Lean?
Lean Management is a systematic approach to analyze and continuously improve the flow of information, materials, and work in a manufacturing environment. Lean systems maximize production efficiency by removing the root causes of waste and disruptions. Lean principles and practices emerged from the Japanese auto manufacturing industry in the 1950s. Managers have since applied them across many other industries, including agriculture.
When trying to understand what Lean is, it can be helpful to think about what Lean is not. Disorganized procedures that waste time and materials, frustrate employees, or cause disruptions in production activities are definitely not Lean. How much time do managers on your farm spend responding to crises and putting out fires versus setting up systems that eliminate the cause of those problems? How often does a ten-minute task take twenty minutes or more because the right tools and materials are not immediately available? How often does a failure to communicate critical information cause a quality defect or production delay? Lean Management invites farm operators to shift away from a reactive problem-solving mindset toward proactive process design grounded in continuous improvement.
Why Lean?
Labor is a critical input on farms, and the costs associated with labor are significant. In 2020, farms that participated in the Dairy Farm Business Summary (DFBS) utilized 58,788 total labor hours, on average, or 53.4 hours per cow (DFBS Progress Report 2020). , this represents 21.3 worker equivalents per farm. Employees provided 87 percent of that labor, and owners contributed the remaining 13 percent. Hired labor is the second largest expense on New York dairy farms, behind purchased feed. In 2020, payroll costs represented 17 percent of total farm operating costs (DFBS Progress Report 2020).
Total farm payroll expense is a function of hourly cost of hired labor multiplied by number of hours worked. Hourly cost of labor is rising and the rate of that change is increasing. In 2020, the cost per hired labor hour on New York dairy farms jumped 5.7 percent from the previous year, compared to a 4.6 percent increase in 2019 and a 2.6 percent increase in 2018 (Hired labor on New York State Dairy Farms, 2010-2011) (Graph 1, below). Many of the factors driving this exponential growth are outside the farm’s control. Farm managers face minimum wage hikes, overtime thresholds, competitive labor markets, and rising health insurance and housing costs, to mention a few.
As the hourly cost of labor rises, labor efficiency and effectiveness are of increasing importance to farm managers. Labor efficiency, measured in terms of cows per worker and milk sold per worker, varies tremendously across dairy farms in New York. In 2020, the top 20 percent of farms sold 1,795,478 pounds per worker, on average, while the least efficient 20 percent of farms sold just 777,158 pounds per worker (DFBS Progress Report 2020). At the farm level, a rise in labor efficiency can offset some of the increase in hourly labor costs and slow the growth of total payroll expenses. In fact, without any labor efficiency gains, the payroll cost per hundredweight would have risen 24.4 percent from 2014 to 2020 on New York dairy farms participating in the Dairy Farm Business Summary (Hired labor on New York State Dairy Farms, 2010-2011). The actual payroll cost per hundredweight rose just 6.7 percent over that period, thanks to labor efficiency improvements (Graph 2, below).
A management focus on labor effectiveness can complement labor efficiency gains, allowing farms to stay economically viable while paying higher wages. Labor effectiveness is harder to quantify, as it refers to the quality of worker effort. Effective employees utilize their own time and other production inputs well to advance business priorities, while avoiding unnecessary expenses. Employee effectiveness is associated with lower operating costs across multiple expense categories, fewer disruptions to production processes, and higher quality outputs. While labor efficiency emphasizes generating more output per labor hour, labor effectiveness has potential to reduce costs and increase revenues per unit of output.
Lean Management offers a proven approach to enhance labor efficiency and effectiveness. Over the past few decades, Lean concepts and practices have spread throughout the manufacturing sector and into other industries. While many dairy farmers have made improvements to labor efficiency and effectiveness in recent years that reflect Lean concepts, the agricultural sector has been relatively slow to systematically adopt Lean Management. Opportunities exist for farm operators to learn from the successes of other businesses that have implemented Lean improvements across their production systems.
Anecdotally, some dairy managers estimate that five to 10 percent of their hired labor hours are not effective due to inefficient processes or process disruptions. If employees can produce more output, generate more value, or avoid unnecessary expenses with the same effort, their contributions will produce higher returns to the labor hour. This is a large potential area of improvement that is under the control of farmers and can be achieved by formally applying Lean concepts in day-to-day operations.
Graph 1 (left): The rate of increase in hired labor costs has been growing since 2015 (Hired labor on New York State Dairy Farms, Cost, Efficiency & Change from 2011-2020)
Graph 2 (right): By improving labor efficiency, dairy farmers slowed the increase in labor costs per hundredweight of milk relative to what would have occurred with no change in labor efficiency (Hired labor on New York State Dairy Farms, Cost, Efficiency & Change from 2011-2020)