Operations Management of Medium-Sized Business at the Cost of $ 100 million US
United Farmers Holding Company, shareholders of which are government of Saudi Arabia and members of King’s family, in the middle of 2013 purchased major agricultural producer Continental Farmers Group with assets in Ukraine and Poland for an amount of 100 million dollars US.
Major assets of the Continental Farmers Group are placed in Ukraine in Lviv region (companies Agro LV Limited and Agromark), where this company leases more than 30 thousands ha of land, owns elevator by capacity of 24 thousand tons of grain crops and storage by capacity of 30 thousand tons of potatoes. Also the company Continental Farmers Group owns 1.6 thousand ha and leases 1.1 thousand ha of land in Poland, owns elevator by capacity of 12 thousand tons and vegetable store for 12 thousand tons of products.
“Obviously, CFG management could present the company and its development prospects to the investor well. I do not see other obvious reasons for such high assessment”, – said Vice-President of Dragon Capital, Yuri Astahov.
Korrespondent.net, June 10, 2013, 07:26 a.m.
Interview with Operations Director of Agro LV Limited LTD, Yuri Pulgun.
Yuri Pulgun – the Operations Director in “Agro LV Limited” LTD
1. Yuri, companies Agro LV Limited and Agromark are examples of successful project in the field of Ukrainian agribusiness. Thanks to a professional work of international managers’ team, it took 7 years to create and to sell business in the value of $ 100 million US. How the business was developing?
The companies Agro LV Limited and Agromark were founded by Scotland Continental Farmers Group, which at the moment of Ukrainian market entry had already management experience in “Farming”, as owned large, according to European standards, business in Poland (about 2500 ha near Gdansk). In 2006, realizing development prospects of Ukrainian market, the company leased 80 ha of land in Kamyanka-Buzke district, Lviv region. Next 3 years the company had been dynamically developing, significantly expanding land bank and investing in fixed assets: agricultural machinery, building, etc. The company had a strategy to create and to develop a socially oriented, diversified, high-technology agricultural production, with high crop-capacity, social infrastructure development, long-term cooperation with rural communities.
As a result of such strategy, already in 2009 the company serviced more than 10 thousand ha and got high yield results of following crops: rape – 3.1 ton/ha, winter wheat – 5.3 ton/ha, potatoes – 30 t/ha, sugar beets – 50 ton/ha. These crops are dominant in the company for today. High results, which had been achieved by professional and organized team, gave opportunity to enter the IPO successfully. That allowed the company to involve investments, which were directed at purchasing of high-productive and efficient import agricultural machinery, and also at logistics systems development of agricultural enterprises: warehouses, granaries.
For today the company has more than 30 thousand ha in the turnover at the territory of four production blocks. All production functions are decentralized: planning and work in field, quality control, service of agricultural machinery. Other functions are centralized: logistic, purchasing, agricultural machinery complex repair, operational inspection.
2. It is not a secret that European conditions for agribusiness differ from Ukrainian. What are, in Your opinion, the main disadvantages and advantages of Ukrainian conditions for successful investment?
Yes, European conditions differ from Ukrainian, and, firstly, it is right of ownership for land (or long-term lease), which gives an opportunity for long-term investment and its payback at term 10-12 years.
The main advantages of Ukrainian conditions for successful investment in agribusiness are low labor resources’ price (not more than 10% from general direct and indirect costs are paid for labor), low lease price (less than 5% from total costs), rapidly growing market (Ukrainian export potential), natural climatic conditions (rich soil, weather conditions).
The main disadvantages are unsettled questions on land lease, absence of land market as main instrument for resources borrowing, absence of government support, high cost of credits, and “soviet”, “kolkhoz” mentality. Long time people that worked in fields did not were owners of production means, that is why they want to take something home, from here their treatment of work, and shortage of qualified personnel, especially of technologists and managers – old school has already become obsolete, and new generation of specialists is not formed yet.
3. You are optimizing, developing and introducing business-processes in the company. It is interesting to get to know even if about some of Your developments that have been already introduced at the enterprise and about future events, which will allow the company to be more competitive in Ukrainian market.
Not exactly, the owners and the committee of directors made a decision that work result must not depend on staff’s collective wish to do work well, but must depend on correct planned actions in accordance with confirmed order. That is the job should be set on bases of prescribed business processes. The decision was not easy one, because it meant reduction of executors’ personal factor role, and also of their subjective decisions.
As an Operations Director I, firstly, response for support of production and marketing activity, secondly, I control using up of company’s material values.
I am responsible for 4 directions in the organization structure:
- logistics, which includes dispatching, fuel supply, transport (automobiles and railway transport), other logistics processes;
- purchases: fertilizers, plant protection means, seeds, spare parts, agricultural machinery and other commodity and material values;
- service department – central repair base and service of agricultural machinery in blocks (approximately 400 units), work optimization of spare parts warehouse;
- operatinal control – it is something like security service.
My experience shows me: first of all it is necessary to provide functioning of production activity on the bases of definite business processes if you want to organize operating work at the enterprise. That is why primarily it is necessary to work at production according to definite rules and technologies, after what you can do the optimization of allied departments. I’ll give a simple example: for supplying necessary spare parts in time block’s foreman and engineer should do fault detection using catalogue, send list of code numbers to own central warehouse for analyze, then Service Department will take away from general order those spare parts, which are in the warehouse, after what it will send the order to Purchasing Department. All these processes must be followed and controlled: which order, at what stage it is, etc. Next example: for pretending standing tractor downtime in the field because of fuel lack, the foreman must ensure timely informing of dispatcher by tractor operator about refueling necessity, if the fuel level in the tank reached mark of 30%. I can give lots of such examples.
For solving production issues at the enterprise system SOP (standard operating procedure) was introducing, where clearly was written about who was responsible person for one or another process, and also in what terms that person must complete the task or the operation. More than 200 SOP are prepared and introduced for today. Business processes’ optimization is an important work area, which I do and successfully introduce together with the staff at our enterprises.
If we speak about results, it is, first of all, significant reduction of fuel consumption to 20% on 1 ha: as by monitoring improve, so by selection the most optimal work scheme, by removals reduction, by the repeated work because of low quality, etc. For this, early in the year, a technological map for all operations was prepared, on basis of which a very detailed plan of fuel consumption (budget) was formed, that later on allowed to analyze in details the consumption and to define difference between the plan and the fact. In monitoring system the following was implemented: optimization of fuel level sensors, ensuring of timely sensors’ service, on-line control of machinery work: downtimes, measuring of completed work, test measurements of fuel consumption, fuel tanker convoy, sealing of all possible pipelines of fuel delivery system (and this is not more than 10 seals on each unit). The second successfully realized project is costs reduction for agricultural machinery and transport service. It was a result of the Service and the Purchasing Departments joined work. Briefly saying, this is repairs planning according to the Production Department order, preparation of repairs schedule for each machinery unit, qualitatively found detects, correctly formulated order to the Purchasing Department, regular meetings of the Purchasing and the Service Departments for status tracing of repair, and, of course, qualitative service. We could reduce prices for spare parts (approximately 6%) and for service by tender approach, and by timely done orders. Besides that, we increased turnover of own spare parts warehouse (turnover is 120 days), that reduced our expenses on warehouse content. Also a very important fact for efficiency are permanent analyzes of repair necessity, when all costs spent for repair are higher than lease or purchasing prices for new agricultural machinery. As a result, expands on service of 1 ha reduced for 10-12%, that in couple with declining of agricultural machinery downtimes, positively affected on agricultural machinery cost price.
4. What criteria do You follow upon agricultural machinery choosing, as it is an important component of production process?
We exploit premium class agricultural machinery of leading world brands: John Deere, Challenger, Berthoud, etc., thanks to which good results are achieved.
In our park we have no one agricultural machinery produced in the CIS, except MTZ tractors, because it does not conforms today’s requirements, and its price (for example price of combine harvester Rostselmash) approximates to the price of combine harvester new model produced in the EU or the USA.
At the first stage of business development we exploited used agricultural machinery, which we had imported from Britain ourselves. During the formation period it was absolutely warranted, because used agricultural machinery significantly cheaper than new imported ones, and in comparison with agricultural machinery produced in the CIS they were more productive, efficient and reliable.
Now the company purchases new premium class agricultural machinery, last models of leading world brands. Thanks to that last advanced agricultural technologies are being introduced and price cost for agricultural products is being decreased, because these machines are more effective and more productive.
Usually we test agricultural machinery in our agricultural enterprise’s fields before purchasing it. It helps specialists to determine how one or another agricultural machinery model satisfies our conditions. Just after specialists conclusion based on direct tests in the enterprise, on condition that the manufacturer and the dealer have appropriate sales and service infrastructure, we make final decision. A good example is purchased cultivation and sowing agricultural machinery from German manufacturer Horsch, which were delivered by “Agrobuilding Alliance “ASTRA” LTD. The manufacturer and the dealer not only gave agricultural machinery for tests in our fields, but also organized business-tour to company’s Horsch experienced agricultural enterprise, which was situated in the Czech Republic. There our specialists could not only learn more deeply possibilities of that agricultural machinery, but also to open new opportunities for themselves and to adopt experience for a successful agribusiness.
5. Logistics system is one of the most important factors for modern agricultural production for today. Please, tell us about Your approaches in this area?
Everybody understand perfectly that it is not enough to grow harvest, it is also necessary to provide products transportation from field, its cleaning, drying, storage and delivery to a final customer. As the enterprise grows potatoes, it needs very serious investments in storehouses and in service. The whole storage infrastructure was built from scratch using the latest technologies, and it is situated on three bases, on the territory of one of them the company’s central office is located. Having of modern storehouses for today is not just a logistics question, but also a question of profit, because rape or wheat can be sold for low price in the beginning of the season, and in 2-6 months the production can be sold at prices higher than the started. For vegetables it is more appreciable: potatoes we sell in May and in June, that follows after harvest gathering.
Particular attention is paid to transport logistics, whose task is to provide uninterrupted materials deliveries for production, for example deliveries of seeds, plant protection products and fertilizers to the field, that makes possible to exploit effectively powerful, wide agricultural machinery, what justifies investments in it. Another very important element of transport logistics is providing the transportation of finished products from the field. We call it “zhnyva” and it is the most difficult period of the year. At this time every day more than 4000 tons of rape or wheat are taken out every day, then cleaned products are shipped to wagons for transportation to the port, for moving to the bread products plant, therefore there may be turnover of up to 6000 tons of agricultural products. At the same time it is necessary not to allow downtime of combine harvesters by reason of transport’s lack and, on the contrary, not to have penal sanctions from the transporter’s company for unused transport. We succeed to solve these tasks by correct processes organization and by timely response on emerged problems. Control is provided at all stages of products moving: sealing, documents monitoring, automatic weighting, GPS tracking, etc.
Another important element in logistics is dispatching. It is control of planning and works completing, control of works in the field by using GPS monitoring, agricultural machinery downtime registration and analyze, timely service coordination, supporting by necessary resources, etc. Dispatcher can at any time give an answer to the direction about what becomes with one or another agricultural machine. At the same time dispatcher-controller registers completed work by each agricultural machine per shift with exaction 1-2% for each field, does fuel control that permits to have concrete information and to make administrative decisions operatively.
6. Why rape, winter wheat, potatoes, sugar beets are the dominant crops during the all period of business in Ukraine? How do You make Your enterprise’s merchandising? Who buys Your production?
This crops assortment is a realization of the company strategy directed at long-time development, but not for making profit just today. Firstly, it is necessary for crops rotation as one of tools for effective agriculture and soil fertility saving, which is one of the company’s strategic goals (for the years of tillage soil quality and fertility have been risen). Secondly, those are the crops that are typical for current, rather complicated region. At third, such crops assortment makes it possible to use company’s resources during the year effectively, as sowing and harvesting works are prolonged in time and do not intercept each other. Fourth, such assortment gives us more confidence in profitability ensuring, that is to diversify risks connected with prices instability as at the internal market (potatoes, carrot, sugar), so at the external market (wheat, rape, corn). I will give an example: last year was successful for wheat and rape, but unfortunate for sugar and potatoes, in the current year the situation is opposite – prices for rape and wheat are low, but prices for potatoes in 2.5 times higher than last year, sugar have risen in prices for 75-80% in comparison with last year.
In marketing work we follow the principle of building long-term relationships with grain traders (Bunge, Glencore, Louis Dreyfus and etc.) of rape and grain group, selling of sugar and potatoes realizes by a situation, as prices for these products are unstable, and it is actually impossible to sign forward contracts with buyers. Especially, as I have already mentioned, we do not have enough resources for qualitative ensure of potatoes and sugar storing and we just wait for the most opportune moment for its realizing.
What modern agricultural technologies in crop growing branch do You prefer and why?
You know, that success is hided in simple things. The same is with technologies: if everything necessary is done in time, there will be good result, or, at least, you will minimize influence of other negative factors. If you bought qualitative seeds, prepared soil qualitatively, did sowing timely, controlled growing process, qualitatively fertilized soil and protected plants by special means, etc. and upon that you use highly productive, modern agricultural machinery, what do you think about final result? Miracles do not happen.
Which of crops in Your enterprise is the most profitable? At the expense of what high profitability is achieved?
Speaking about profitability, they are rape and sugar beet, but not always. High profitability is achieved by high harvest (rape up to 3.5 tons per ha), products quality (sugar degree in sugar beets ups to 18%), and also by optimal expanses for production.
7. Does the company plan to increase land assets in Ukraine in future? If yes, then what regions of the country do You see as the most perspective for development of the company’s agricultural business?
Yes, our company plans to increase land assets, new shareholders said about this. This increase will take place in the West of Ukraine, and also in the South, where we already have 5 thousand ha, half of which are under irrigation. Increasing of land assets under irrigation is planned in the South regions.
8. Does the government policy assists in doing agricultural business in Ukraine with foreign investments? How is it efficient?
It is hard to speak about efficiency, but what I see is that there are no differences in state’s approach to development of business with foreign or Ukrainian investments. The government does not encourage foreign investor. As our company, so other agricultural enterprises had lots of problems upon lands registrations this year. I consider that for today the government policy does more problems than help in agriculture (in comparison with European).
9. What, on Your mind, should be changed in the Ukrainian government policy for increasing of foreign investments into agriculture?
This is very broad question, because it touches on actually all major problems of our state, starting from total corruption till price regulation for agricultural production. Until market conditions for agricultural business development will not be created, it is difficult to talk about increase of direct foreign investments in Ukraine. Ukrainian market for many foreign investors becomes less attractive, there are too many risks, including political risks. Recently I had a meeting with representatives of the Canadian Pension Fund, who learnt opportunities of investments into Ukraine, and on my question about if they would recommend to Canadian businessmen to invest into agricultural projects in Ukraine, they gave answer that it is out of the question about direct investments.
10. What Ukrainian agrarians, both small and large, should expect from European integration?
Speaking about European integration seriously, we need to accept that many agricultural enterprises, especially those that did not invested into development and modernization would be difficult to compete, because cost price of their agricultural products is higher than European cost price. As a whole, it will assist in developing of highly efficient forms of management at Ukrainian agricultural market. I think that many large agricultural holdings will not be able to hold their positions and will have to be divided into smaller holdings to stand competition. For today many Ukrainian holdings are public companies, for which stocks price at the exchange is the most important, that causes them to do everything possible to show development (instead of highly productive result), they expand, buy new assets, and thus they simulate great activity. Most of them will be bought and divided, or divided and then bought. My vision is that middle enterprises from 10 till 50 thousand ha, by which it will be really possible to manage effectively, are the future.
11. Year 2013 is coming to the end. What kind of years it was for the company? Were the goals achieved?
The year was uneasy, we are satisfied by what received: winter + spring wheat in average 5.7 tons/ha, rape – 2.7, taking into account that more than 1 thousand ha were lost after flooding (snow in Lviv region came down only in the middle of April), sugar beets brought 40 tons from ha, although they were sowed for 1 month later, by reason of whether conditions, potatoes – about 40 tons per ha.
Also it should be noted that there were many changes in this year: including of administration modular system and increase in control of company’s resources using, shareholders change. I would call this a year of changes and of foundation laying for further increase. We significantly reduced expenses for a hectare by all operational expenses: fuel, service, transportation costs, etc. Profitability we will calculate after selling all products – “do not count your chickens before they are hatched”.
12. At the conclusion of the interview I wish You a Happy New Year! I wish success and prosperity to Your business in Ukraine. What would You like to wish to agricultural business in 2014?
Thank You for congratulations. Next year will be very uneasy for many agrarians, because it will be a year of hope after a record year by production volume, but at the same time it was unprofitable year for many companies. Certainly, many of them hope for revenge and to recover the lost. That is why I wish agrarians to stop thinking about agricultural business as a business, in which it is possible to earn without investing into modernization, new technologies of production and direction. Time of professionals (agronomists, field managers, financiers, logisticians, etc.) is coming, who will make agricultural enterprises highly effective economic players, with which it will be extremely difficult to compete.
Those will win, who are ready to invest not only into highly productive modern agricultural machinery and technologies, but, first of all, those, who invest into personnel and improvement of direction quality.
Ukraine has great potential of agricultural sector development, and it is, first of all, production intensification – raising the level of crop yield and the quality of produced production.
Interviewed by Vitalii Mietolkin
Internet portal about agricultural machinery and equipment market: runo-agro.com
Specially for APK-INFORM
Translated by Natalia Dragnieva
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