University of California College of Agriculture Agricultural Experiment Station Berkeley, California AN ANALYSIS OF THE OPERATIONS OF THE HATORD POULTRY PRODUCERS' ASSOCIATION fey J. M. Tinley and J. B. Schneider February, 1934 Contribution from the Giannini Foundation of Agricultural Economics Mimeographed Report No t 31 Digitized by the Internet Archive in 2014 https://archive.org/details/analysisofoperat31tinl AN ANALYSIS OF THE OPERATIONS OF THE HAYWARD POULTRY PRODUCERS ' ASSOCIATION 1 f ? J. M. TinleyV and J. B. Schneider^ INTRODUCTION The Hayward Poultry Producers' Association handles feeds and supplies ' for poultry producers in the general vicinity of Hayward. A number of its members are also members of the Poultry Producers of Central California, through which they market their eggs. The latter organization has a branch in Hayward. The present relationship between these two organizations is much the same as that between the Sscondido Valley Poultry Association and the Poultrymen's Cooperative Association of Southern California- The Association^ desired assistance which would tend to strengthen its financial and economic standing and improve its methods of operation. In addition to the more general analysis, the Board of Directors also wanted assistance specifically in making its decisions concerning action it might take toward (l) attempting to expand the hardware department,, (2) improving the platform services, (3) changing the credit policy, and (4) changing the organization and policies to obtain the exemption from income-tax payments which is extended to cooperative marketing associations- The Board also desired a thorough analysis of its finan- cial condition and its ooerating policies. The information on which this study is based was obtained from the files and financial records of the Hayward Poultry Producers' Association, from the files and records of the Giarmini Foundation, and from interviews with various persons, including members of the Association who are not directly engaged in its management as well as others interested in the study. BUSINESS OPERATIONS AND POLICIES Disposal of Ee;gs.-- On February 16, 1308, a group of ooultry.nen formed the Hayward Poultry Producers' Association with VJ. Jacob as president and C. F. Suss as secretary. The purpose of the organization was to market eggs and to buy feed cooperatively. At first the Association sold eggs to grocers both locally and in Sari Francisco, but in August, 1909, an agent was appointed to make all sales. He had to sell in his own name but he could sell eggs anywhere . He deduc- ted a commission for his services and paid the balance of his receipts to contri- buting members. Members were under no contract to deliver eggs- By 1911 the agent was selling eggs in th© name of the /issociation but with no change in the method of payment for his services. In March, 1917, soon after the formation of >y Associate Agricultural Economist in the Experiment Station and Associate Agricultural Economist on the Giannini Foundation. •£/ Associate in the Experiment Station and Associate on the Giannini Foundation . ^/The term "Association" used throughout this report refers to the Hayward Poultry Producers' Association. 2. the Poultry Producers of Central California, the Association discontinued handling eggs in any way. The egg agent was released and a jobber representing the new association handled eggs in the district. Early in 1926 the Association offered to construct on its land a plant for receiving, candling, and packing eggs if the Poultry Producers of Central Cali- fornia would lease it. This offer was again made in 1927. An agreement was finally reached in 1929. The plant was to be constructed by the Association and leased to the Poultry Producers of Central California. If the venture were not successful, the plant was to revert to the Association. At the end of the first year of operation the plant was purchased by the Poultry Producers of Central California and is now being operated as a branch of that organization. Purchase of Feed and Supplies. — On April 4, 1903, the first carload of wheat v/aTl3UT~clms"ea r . lT"vas* ~de Tivered from the car door. Later, mixed feeds were purchased and delivered in the same way. About the middle of the following year a warehouse was constructed for the storage of feeds though much of the delivery continued to be made from the railroad car. Frequently orders were taken from members before purchases were made by the Association. In July, 1913, coal was added to the merchandise purchased, and in October, 1914, the Association was granted an agency by a fire insurance comoany and bought policies for its members. When a California law forbidding the refund af any part of the premium by the agent to the insured went into effect, the Associa- tion gave up its agency. Shortly after the United States entered the ,;,r orld War, a grocery line was added and about 1924- the Association began stocking paint. In August, 1925, the Association decided to mix its own feeds in adiition to carrying the regular brands, but it was not until April, 1930, that a small mixer was installed. A complete milling plant was decided on in August, 1930, and construction of it was begun shortly after. During the first ten months of 1933 the record showed that 23,630 tons of feed were processed. In July, 1932, the Association decided to add a small hardware line. The merchandise line has expanded until at the present time the Association carries not only its own mixed feeds and feeds of the Poultry Producers of Central California out also five other brands. Included in the inventory are the many ingredients which go into the mixed feeds. In addition to these feeds there are hay, straw, litter, shells, grit, charcoal, coal, wood, groceries, hardware, building material, and a great variety of supplies including paint, tires , insect- icides, medicines, etc. Some of these items require little room and a relatively small investment, but some of the items such as grains require both considerable space and considerable investment. In November, 1933, the Association was considering the advisability of in- stalling a completely equipped hardware department under the control of a special- ist. That the officers of the Association wish to improve and increase the ser- vices rendered to members is a laudable objective, but a policy of continually increasing the variety of merchandise carried is of questionable wisdom. The difficulties in all the ramifications of business control are mere ased as new lines are added. Many of these problems will be more clearly understood after a discussion of the present problems of control, particularly of inventory. 3. i/ They receive detailed consideration in another section of this report. Before deciding whether or not to expand the hardware department, it is necessary to compare the probable gains with the probable costs. Among the ques- tions to which answers should be found, the following may be included.: 1. What profit, if any, is being made on the hardware handled at present? 2. Would added income exceed added expenses by a sufficient margin to offset the disadvantages? a. How much additional caoital, both long time and current, would be required? b. Would the time of present help be more fully utilised? Would more help be needed? How much? c. -euld more storage space be required? 3. What would be the effect of the additional line on the feed business? On other managerial problems? a. 'J'Ould additional customers be attracted? b. Would attention of the management be diverted from the chief endeavor of the Association? c. Would platform delays be increased? 4. Wnat would be the reaction cf ether hardware concerns in the area? Would their attitude in any way, immediately or ultimately, affect the operations of the Association? ■answers to these questions would assist the Association in arriving at a decision but would be difficult to obtain because the present system of records used by the Association does not supply the needed information. The first question, for example, cannot be answered because the Association does not segregate its sales or expenses by departments. Although the association might well continue to be cautious about introducing costly records, it is desir- able to weigh the added cost against the value of the records to the Association. In this case it seems doubtful whether much, if any, added cost would be involved, and the records would be very useful at present as well as in the future. They could be used in periodically checking on the profitableness of any department. Such checks would also be useful in deciding what policies to pursue in setting prices, contracting or expanding inventory, etc. Sales could probably be grouped according to department on the sales slip -which is used at present. Additional work would be involved in making extensions ^Pp. :34-39 . 4. of separate totals for each department. The inventory record could easily be segregated by departments and the separation of purchases would not be much of a task. The allocation of expenses by departments offers an additional problem, that of choosing an appropriate basis for allocation, whether quantity, value, added cost, or some other. In all of this, the Association would probably need the assistance of its auditors. If records were kept as suggested above, they would help in answering the second question. Beyond that, the answer would depend on the quantity and value of inventory carried and on whether present storage space could be utilized or a new building were constructed as has been suggested by some members. If a special building for housing the hardware department were to be con- structed, it is more likely that additional help would be required than if a portion of the present warehouse -were used. Some light is thrown on this ques- tion by table 10 though care must be exercised in drawing any definite conclusions. Although there seems to be a tendency toward a smaller volume of sales per em- ployee from 1926 to 1933, the reader should not conclude that labor is utilized less efficiently than formerly. There has been a declining orice level since 1929 and the milling service was begun in 1931. Both of these would reduce sales per employee. Here again records kept as suggested in discussing the first question would indicate something concerning tendencies in the efficiency of the labor force . The answer to part c of the second question would depend on the size of hardware inventory the Association planned to carry and on the degree to -which present capacity is being utilized. A more careful planning of floor space and a restriction of investments in feeds and supplies with the assistance of inven- tory records may leave enough room for a separate hardware department. At present the Association finds it necessary to rent extra storage space occasion- ally . Only statements of probabilities can be made concerning all these ques- tions, particularly the third and fourth. Reflection on these and all the other questions by members and management alike should prove profitable. In general it might be said that there is danger in spreading activities beyond the capacities of the personnel. Many of the benefits of specialization may be lost and the business organization may become unwieldy. It may prove desirable to concentrate most of the hardware vhich the Association now carries in one oart of its warehouse rather than have it scattered as at present. At least this or some other method, such as providing each member with a list of articles in stock, might be used to acquaint members with items carried. But a policy of expanding the hardware inventory beyond items which can be classed as poultry producers' supplies and constructing a special building for the hardware department cannot be recommended. Certainly the questions raised above should be answered satisfactorily before any expansion is undertaken- Trucking and Platform Delivery.-- The Association as such never collected eggs from the farm. During all the time the Association handled eggs, members delivered them to the Association's place of business. Until the agent bought his own truck with which to collect eggs, he followed the same plan. At present, as has been stated previously, no eggs are handled by the Association. 5. In the Association's early history, feed was called for by members at the car door and later at the warehouse • For a long time a buyer could arrange with any drayman to do this work. Later the Association required that only draymen who had given bond to the Association as security for goods carried would be per- mitted to render the service. Otherwise the Association would not guarantee delivery. For all in-bound hauling for the Association, and where a buyer ex- pressed no choice of drayman, the Hayward Transfer Company was employed to do the hauling . Zone rates are ordinarily used, with some discounts for quantities. Most of the delivery, however, is done at the rate of 5 cents a hundred pounds. At times, when delivering to some distance from the plant, if several jobs can be coordinated, a special rate is given. The buyer pays the drayman for his services. This arrangement has created several problems. Necessity of driving to town daily to take children to school, shortage of ready cash, particularly during the depression, lack of the realization of hidden costs involved in doing their own hauling, and the excitement of "going to town" have all led to an increased amount of platform business. This in turn has led to a need for a larger ware- house force and an increase in office work' and supplies needed. Small purchases and frequent calls increase the work involved. This condi- tion leads to delays on the platform in getting goods and again in the office where extensions are made, and where the bill is paid, or where a record of indebtedness is given to the buyer. This delay is only natural if expenses are to be kept down but delays are irritating at times and seem longer than they really are. The member himself often wants to look around. He does not always know what he wants, particularly if he is having some trouble with his flock. Then, at times, with no record of inventory and with no uniformity in location of all goods, the platform man may not know whether a certain material is in stock or not. This condition does not involve a very serious problem. Members, on the whole, are well satisfied. There are certain advantages in having the members in close contact with conditions at the plant of the Association, and there are times when the members are going to town for other reasons or they may have the time to spare . But, with passenger cars being damaged by heavy and dirty loads, traffic on the roads being materially increased, trucking costs being higher than neces- sary, not to mention the resulting increases in the operating expenses of the Association, some change would seem advisable. To the extent that conditions are undesirable, they might be improved by adopting one or more of the following plans : 1. Have a head platform man who is at all times familiar with the location, the quantity, and the quality of all inventory on hand. He would have to be the right type to contact members, one who is politic, and one who is familiar with the needs of producers so that he could give advice on types of feeds and sup- plies to meet particular requirements, if the advice is requested. He could contact all buyers and have the merchandise brought from stock by his helpers. If the member wished to see the merchandise before deciding to purchase, he could accompany the assistant. The order which the head platform maxi would write might be used for further 6. record-keeping instead of having the order written twice with a double delay for the member, as at present. In this way a better utilization of platform and warehouse men might be worked out to improve the service and also to keep the stock in order and in good condition. A plan for keeping an inventory record might be worked into this plan. 2. Offer quantity discounts to increase the average size of orders. Care would have to be taken not to make the quantity too large. Most members should be able to purchase such quantities. Or, instead of a quantity discount, delivery might be offered either with a smaller charge than at present or with no extra charge. The discount should not be so large that undesirable purchases by out- siders are encouraged. 3. Include delivery in the price. Hire the work done on a per diem or per ton-mile basis if it is considered undesirable to invest in trucking equipment. DEVELOPMENT OF THE HAYWARD POULTRY PRODUCERS' ASSOCIATION Membership Members By Years.-- The number of members in the Association has shown a net increase each year except two from the time of founding until the present. The decrease in 1911 took place as a result of incorporation. Prior to incorpor- ation membership dues were 25 cents a month. After incorporation a $20 member- ship fee was charged . Some former members either could not or would not meet this requirement at the time. Later many of them did join. In 1951 there was another net decrease. This time the membership fee again played a part. The fee was raised in November, 19 20, from $20 to £50. The $50 member fee was a means of getting capital and served as a safety fund against the possibility of losses due to extensions of credit. In spite of the 8 per cent which was being paid on this amount, a number of members found themselves in dis- tress and were forced to withdraw to get the $50. If the Association continues to find desirable members dropping cut for this reason or if others are prevented from joining, a change to about a $10 fee might be advisable . Effect on unit operating costs and on general usefulness of the Association, must be considered. An additional #40 might be required should the member want credit extended to him. This would help in keeping down losses due to bad debts. The amount (.#40) could be represented by a certificate of interest and patronage dividends declared could be withheld to build up this fund. When one considers the factors which lead to a rather high turnover among poultry producers, the number of members of long standing as illustrated in table 2 speaks well for the Association. It must be noted, however, that a number of these are no longer oroducers but have retained their membership as an investment. They continue to get 8 per cent on the $50. As a result of this situation, the percentage of members making purchases has been decreasing. Even among the buyers there are some members who are not poultrymen. It may be advisable to so amend the by-laws that the membership be restricted to poultry producers. Because the reserves of the Association are relatively high,^' See page 21 and figure 5. 7. TABLE 1 Growth of Membership in Hayward Poultry Producers' Association 1908-1933 New | With- | Net Total members ! drawals increase membership 1908 58 5 53 53 1909 67 Z. 5 62 115 1910 52 10 42 157 1911 34 118 84* 73 1912 24 2 22 95 1913 86 8 78 173 1914 52 14 38 211 1915 96 22 74 285 1916 60 33 27 312 1917 129 41 88 400 1918 53 27 26 426 1919 95 34 61 487 1920 131 69 62 549 1921 99 55 44 593 1922 106 39 67 660 1923 106 36 70 730 1924 108 31 77 800 1925 105 41 64 877 1926 145 52 93 941 1927 122 60 62 1,034 1928 122 46 76 1,096 1929 149 49 100 1,196 1930 107 65 42 1,238 1931 80 94 14* 1,224 1932 98 80 18 1,242 1933 87 69 18 1,260 * Decrease. Incorporation November 5, 1910 caused many to drop because they did not desire to pay the membership fee. During 1931, many withdrew to obtain the $50 membership fee. TABLE 2 Length of Time Members of Hay ward Poultry Producers' Association Had Been in the Association as of December 1, 1935 1 j i i Number o /"} vn ~\ -f- 4" a H stunix Luea. Total number Length of time in Association to December 1, 1933 1920 and before i j 275 , — ,™_ . — 2 75 j 14 i years and ■ longer j 1921 i i 62 337 13 it 1! u ! 1922 j j 65 402 ! 12 it it it 1923 ( j 61 463 I 11 ii ii n 1924 j i i 65 528 1 io 1 it it it 1925 ! j i 59 587 1 n i y ii ti 11 i 19 26 i 84 671 1 8 u ii ( i 1927 i j 77 748 j 7 ii it 1 ! j 1928 i | 85 833 j 6 ti it ! tf ! j 1929 i 9 8 931 i ! 5 i i it u » ; 1930 1 76 1,007 j 1 * 1! n ! " j i ' 1931 1 70 1,077 ! 3 ! H it | it 1932 96 1,173 2 It it „ ! j 1933 i i 87 1,260 i 1 year t! II j I i \ 9. TABLE 3 Per cent of Member and Nonmember Sales, Per cent of Members Purchasing, and Average Sales per Active Member of Hayward Poultry Producers' Association, 1928-1933 Year Total net sales Members purchasing Nonmember ! I L Member Per cent of total Average annual sales per cent per cent per cent dollars 1928 I * 74 .5 * 1929 * 70 .0 * j 1930 ! * 1 i * 74 .0 * 1931 17.5 82.5 73 .5 790.45 1932 16.4 83.6 73 .5 679 .61 1933? 15.4 j 84.6 72 .5 577.94 ! * Information not available . /"First ten months. 10. the 10 per cent of annual earnings which is usually put into the general reserve fund may be used to build up a special fund for retiring the membership certifi- cates of nonproducers . This policy would result in a reduction of interest expense, the saving being available for patronage dividends on purchases. Consideration might also be given to adopting a policy of dropping members who have definitely ceased purchasing from the Association even though they may be producers. Active mem- bers are, as a rule, the useful members. Distribution of Members. — It is difficult to make an exact comparison between actual and potential membership. The Association now has 894 active member-buyers in Alameda County, a large majority of whom give Hayward as their post-office address. Table 4 and figure 1 show clearly that the active members are closely concentrated in the vicinity of Hayward. The Poultry Producers of Central California already has two branches in each of Alameda and Centra Costa counties and three in Santa Clara. Room for further territorial expansion is restricted under present conditions, but the value of an organization should be measured, not in the extent of territory- served, but in the type and efficiency of service rendered. Whether it would be wise to expand territorially is outside the scope of this investigation. It need only be said that many factors must be considered and that a continual close cooperation with the Poultry Producers of Central California would seem highly essential. The present condition of the poultry industry is not such as to encourage its expansion within the territory being served. Dairymen, however, are already purchasing some supplies' from the Hayward Poultry Producers' Association. This may prove to be a useful type of expansion. Business With Nonmembers . Table 3 shows that the percentage of business with nonmembers decreased from 17.5 per cent in 1931 to 15.4 in 1933. This is not much of a change. There is still considerable indication that nonmembers find the prices and quality of the Association's merchandise worthy of purchase even without the patronage dividend. These might well be encouraged to come into the /Association. Relations with Members. — The fact that many members have been with the Association a long time ■§/ indicates that the Association is rendering a satis- factory service. One of the important reasons for the satisfaction of members is the record illustrated in table 5. An 8 per cent dividend has been paid on the membership certificate each year from the time of incorporation to the present and the percentage of patronage dividends on purchases has tended to increase over a period of years. Even during the depression years when many other organi- zations were in difficulties, the Hayward Poultry Producers' Association increased its patronage dividends . v See table 2 . TABLE 4 Distribution of Active Member-Buyers of Hayward Poultry Producers' Association by Counties and Distances from Plant, November, 1933 11. Within ten miles of plant Town Number of members Within twenty miles of plant Town Number of members Within thirty miles of plant Town Number of members Total Alameda County Hayward Oakland San Lorenzo San Leandro Niles Alvarado Mt. Eden Decoto 690 38 59 49 14 4 3 1 858 Livermore Pleasanton Alameda Mission San Jose Newark Irvington Sunol Berkeley Warm Springs 8 6 2 5 5 4 2 3 1 36 894 Contra Costa County San Ramon Danville 4 1 Richmond Concord Alamo Moraga 11 Santa Clara County San Jose Campbe 11 San Mateo County Redwood City Total 858 41 909* * One active member-buyer in Fresno County. 12 v.. 4** \ 0 Richmond \T\ 3 c Concord 1 0 f A I ° Berkeley r \ s v °Moraga 1 o Oak land ^---^ r^s. 38 \ AlamedaJaK ^ \ o San Leandro * 49 San Lorenzo 59 °Hayward 690 °Alamo 1 °Danville 1 0 San Ramon 4 OMt. Eden o 3 A^varado© 'Decotr *\>2> Redwood City \^ 0 Newark s ^5 o Livermore °Pleasanton 8 A LA ML DA 1 o N iles °Sunol 14 2 0 Irvington ©Mission San Jcse n 5„ Warm Springs 1 o t \ ! v. ^ Q San Jose o Campbe 1 li ' S -j c < 4 3 Fig. 1 . — Distribution of active member- buyers in the Hayward Poultry Producers' Associ- ation. November, 1933. \ 1 TABLE 5 Records of Interest Paid on Membership Fee and Patronage Dividends on Member Purchases in the Hayward Poultry Producers 1 Association, 1926-1932 1 1 1 i Interest on membership fund p atronage dividends on purchases ! i Dollars | Per centT Dollars* 1 j Per cent — i_ 1 1926 3,209.58 | 8 22,306.01 ! 1 1927 i 3,539.56 j 8 36,216.94 i R 1928 3,786.39 j 8 37,698.14 i i ! Vk i 1929 j 4,081.21 | 8 46,560.21 i 5 i 1930 4,639.62 j 8 44,236.18 i 5 1931 ! 4,742.87 ! 3 42,384.88 1 7 1 1932 4,695.62 ! i i 8 i i i 3 7, 185.20 . | ? i .1 i * Patronage dividends on purohases of each year oaid within six months of the following year. These have been paid as early as April in recent years. - 1_ / ^ight per cent to be paid if earnings permit. It has always been paid. 7^ Not paid on accounts which are not paid within fifteen days after date of purchase . In i — 1 P B d M B Q P-< o O o | — i CD 1 — 1 1 — 1 i— > £ £. 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CTi Oi t — ' O CD Oi CD • • * CO co CO 1 — 1 cn 1 — 1 ro OO CO *• C7> h- 1 -J ro CO cn to • • • C/l Oi Cn ro ro ro cn CD ro 01 1 — 1 ro 1— 1 ro 00 CD • • • • CO Cn) CO 16. Current Assets as Percentage of Total Assets ioot 1923 1924 1925 1926 1927 1928 1929 1930 1931 1952 1933 Fig. 2.-- The assets have remained rather liquid during the entire period. The drop during the last three years resulted from investments. The Association began mixing and grinding its own feeds • 17. Current Assets as Percentage of Current Liabilities Fig. 3. — The trend is generally upward. The sudden rise in 1924 came as a result of paying a note which left current liabilities relatively small. 18. Financial Condition An analysis of the assets, liabilities, and net worth of the Hayward Poultry Producers 1 Association will throw considerable light on its financial condition. Tables 6 and 7 and figures 2, 3, 4, and 5 show changes which took place over an eleven-year period. Assets.-- Total assets have increased from $110,467 in 1923 to !( >203, 664 in 1933T" The rise has been relatively gradual and has come largely as a result of needed investment to care for a larger volume of business and to render added services mixing and grinding. The assets have continued to remain in rela- tively liquid form as evidenced by the fact that current assets have remained be- tween S3. 4 and 78.3 per cent of total assets during the entire oeriod. The percentage has fallen a little in the last three years with the purchase of equip- ment for grinding and the purchase of real estate for expansion. Liabilities.-- While assets were increasing, liabilities reached a maximum of 45 8 , 453~i5aT 19 2 6 , and have since fallen gradually to §24, 801 in 1933. Most of the liabilities have consisted of accounts payable with the exception of two years 1927 and 1932. The liabilities in each of these two years consisted largely of a short-time note which was soon paid off. In November, 1933, the Association had no notes payable. It will be seen in table 6 that the Association has had no fixed liabilities during this period in spite of the fact that consider- able expansion took place. The Association has used its own reserves instead of mortgaging its assets. It has a very commendable record in this respect. Ratio of Current Assets to Current Liabilities.-- Figure 3 shows an up- ward trend in the current ratio during "the period 1925 to 1933. An increase in 1924 resulted from the payment of a note by the association. The following year, short-term borrowing was again resorted to, but since that time current assets have been increasing much more rapidly than current liabilities. This ratio is often considered of prime importance, but care must be taken to note the factors causing it. As far as liquidity is concerned, the Association is in an enviable position. One-fifth of the current assets could be used to pay the current liabilities . The funds of members were used for investment in current assets. This is in general a desirable method of financing though a further analysis of these assets is needed. Later in the report consideration will be given to accounts receivable and inventory turnover figures. The present 5 to 1 ratio in light of business requirements and borrowing capacity seems unnecessarily large. The Association may find it can reduce its operating expenses by decreasing this ratio in ways to be suggested later. Pati o of F ixed Assets to Net "'forth.-- Considering the expansion of the Association in terms of volume of business and additional land, building, and equipment needed for the mixing and grinding service now rendered, figure 4 illus- trates a relatively good position-\/ The Association has followed a wise policy s/ See table 7 and figure 2. ^/See: Stokdyk, E. A. An analysis of the operations of the Sscondido Valley Poultry association. Giannini Foundation Mimeo , Rep. 27: 20. 1933. 19 30 60 -p S3 0 c 40 u Ph 20 0 Fixed Assets as Percentage of Net worth — / / ^^^^ 1 — y / — 1 i i - 80 60 S3 CD 40 o Sh CD Ph 20 0 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 Fig. 4.-- The decline to 1930 was result of writing down fixed assets gradually. The increase came with the installation of mixing and grinding equipment. 20. Net Worth as Percentage of Capital 1923 1924 1925 1926 192 7 1928 1929 1930 1931 1932 1933 Fig. 5.-™ The beginning ratio was high and it has since been rising, showing an abundance of reserves. 21. in its method of financing.^ A continuation of the same policy in this regard should be encouraged. Ratio of Net Worth to Capital. — In 192b' the ratio of net worth to caoital stood well over"* 2 to 1, "which shcv7s~considerable reserves. Since then reserves have continued to increase steadily until, at present, the ratio is nearly 3 to It should also be noted that 8 per cent interest has been paid annually on the membership fee, that the percentage of patronage dividends on purchases has been steadily increasing, and that assets have been conservative Iv valued. It is important to maintain adequate reserves, but under present conditions it seems unnecessary to make further increases by continuing to set aside 10 oer cent of the annual earnings for the reserve fund. Operating Efficiency Concepts of Efficienc y. — Associations can (I) sell at competitive prices and return any savings to members as interest on investment or patronage divi- dends or both or (2) sell at actual cost. But cooperative associations are tec often judged by the same standards applied to ordinary profit-seeking concerns. If a satisfactory rate of interest is paid on investment and if dividends on purchases are regular and sizable, many members are quite content. Likewise, if the selling price is ordinarily below that of competitors, the organization is thought to be satisfactory. Therefore, the usual goal chosen by officers is either high dividends or prices lower than those of competitors. A little reflection will make it clear that neither of these standards tells the whole story. The former of the two plans would appear to be more desir- able, but it must be accompanied by other conditions. The Association is now considering working on a narrower margin. Patronage dividends have been at satisfactory levels, but some members have complained that they must wait too long for them since they are paid but once a year. They would prefer, they say, lower prices. It would seem, however, most undesirable for the Association to adopt a policy of selling at lower than competitive prices. The complaining members themselves would feel the loss of the larger lump-sum divi- dend. With a continuation of the policy of selling to nonmembers there would be considerably less incentive for retaining membership since these benefits would be passed on to members and nonmembers alike. There would be a tendency toward a price war in the community with all its irritations and undesirable consequen- ces. In a time when prices of feeds were rising, the Association, if it operated on a low margin over cost, might find its inventories depleted through purchases by competitors. On the other hand, if prices of feeds were declining, the As- sociation might incur losses which would fall on those members who continued to purchase through the Association. The Association might consider the possibility of declaring dividends semiannually or even quarterly if the expense involved is not too great, but it should do nothing which might jeopardize its stability and continued rendering of a useful service. y For good discussion see: Tinley, J. M. , and E. A. Stokdyk. Operations of Poultry Producers of Southern California, Inc. California Agr . Exp. Sta . Bui. 516: 51-53. 1931. i^See table 7 and figure 5. ll^See table 5. 22. Prices charged by competitors are not taken into direct consideration in determining prices of merchandise sold by Hayward Poultry Producers' Association. However, members tend to drop out if prices elsewhere are or seem to be lower. Hence the fact that sales volume of the Association has held up so well even in the absence of a purchasing contract with members is some evidence that prices are fairly comparable with those of competitors • Quality of the commodities sold and of the service rendered must be con- sidered in relation to prices charged. But there are no definite standards of quality in feeds or supplies, and quality of service is largely an intangible thing which cannot be measured. There is some check on the former of these two since the entire plant of the Hayward Poultry Producers' Association is open to its members. They can inspect the quality of the ingredients which go into the mashes, etc As for service, the members themselves must also be judges of its quality . A cooperative association should not be judged entirely by a comparison with its competitors, with other organizations in a similar type of business, or even with other similar cooperative ventures. The cost of the type of service given compared with the lowest cost possible for such service would be a much more useful measure of efficiency. In the absence of an ideal, however, the ex- periences of other organizations may serve as some measure of what is possible if environmental factors are not so different as to nullify the usefulness of the comparison . Operating Statements.-- Table 8 shows a complete record of the income and expenses of the Hayward Poultry Producers' Association for the years 1926-1932, inclusive. Prior to 1926 the records were not kept in such a way that useful comparisons between years could be made. Net Sales. — Sales gradually increased until they reached a peak of $1, 180,99"9* in 1929 . Since then they have been falling steadily in dollar volume. Sales for 1933 were lower than they were in 1932. A large part of the decline can probably be explained by falling prices, but since no record of quantities handled has been kept, only a very rough estimate could be made. A record of physical volume sold would be useful in determining the extent of change. Reasons for the change might then be ascertained for the purpose of controlling policies. With physical -volume figures and a definite knowledge of the capacity of the plant, personnel, and equipment, very useful comparisons could be made. Whether the volume handled by each employee is increasing or being maintained at a desirable level, at what percentage of capacity the plant is operating, how all the different expenses are varying compared to volume changes, are all ques- tions, answers to which the management of the Association would find useful. Cost of Goods Sold.-- This figure has decreased more rapidly than sales as evidenced by the falling percentage that this bears to net sa les.i^ The Sales for 1933 were .;?739,034. 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CO — ., 1. —■3 O CO ro CD CO * — - - — CU ( f — ' hp 1 1 I — 1 O CD ro (_J hp* CD CD ro cn CD CO p- 1 p-> o cn CO 1— J ^P• co cn ro a> o hp* cn cn CX) ro P-" CO cd -<] Cri o CXI o p-j OO oo cn oo cn cn p- 1 cn CO CD CO ro SS5 OO o ! 1 -o CT*. Cf3 o 1 — ' ro cn p-* CO CO 03 cn CO ro 03 02 >■/• ro Q ro p-J ro ^ * w*J 1, . 1 /— *. v ^N ro ^-*J cn -J O 1 — 1 co i — • *—< p- 1 M h^ p- ** O p- J CD CD CO ro Oo CD cn r*^ Oj ro 00 cn ro CD - CO cn ro o CO -a P- J CD CD CD O ro CO hp- -a CTi CO cn CD O") cn tj> CXI cn CD Oo o ro CO OO co oo cn CO CO *£* CD CO CD ro -y Powell, "'niton. Some factors affecting the cost of operation of retail feed stores in New York State. Cornell University Agr . Exp. Sta. Bui. 505: 79. 1930. 33. and quantities needed without the assistance of some system of inventory control. The particular maximum and minimum needed on each article for varying volumes of business would be useful. Systems for checking quantity and quality of goods coming in and going out; plans of layout for inventory to meet needs of quantity and character of merchan- dise, place of unloading and loading, and milling; methods for checking on loss of merchandise through deterioration, destruction by rodents, or stealing; these and other similar factors ought to be considered by the Association in setting up any system of inventory control. The resulting savings are likely to exceed any added costs involved. Failure to Vary Inventory with Sales Weeds.-- It is quite easy and natural to get into a habit of carrying about the same volume of merchandise from year to year exceot when increased sales, by emptying bins, bring to light the need for more goods. But when sales are falling and there is considerable storage space, a decrease in inventory is slow to come unless limits are definitely set in rela- tion to needs. The introduction of a system of inventory control would tend to remedy this if care is taken not to make standards too rigid. Desire to Stock up at Low Prices.-- Sometimes an association's management is likely to feel that prices are sure to rise and that it should profit by such price increases. Much of the favorable showing made by the Association for 1933 can be ascribed to the large inventories which ^vere purchased at relatively low prices. If prices had gone down instead of up the showing would not have been so favorable. There is, of course, mere or less speculative risk involved in the carrying of ordinary stocks needed to meet producers' needs. But increasing such stocks increases these risks. The length of time goods are held in stock is increased and, as a result, either more gains or losses may be realized than if the goods were sold soon after purchases are made. It is hardly necessary to add that higher inventory also increases storage, depreciation, taxes, insurance, and other expenses. The needs of members; source, distance, and dependability of supply; quantity discounts; and many other factors must be considered in determining a desirable size of inventory to carry, but after these important precautions are taken, striving for a higher inventory turn- over is recommended. Turnover of Accounts Receivable.---- The total charge sales have varied be- tween 70 per cent and 77 per cent of net sales between 1926 and 1933 as evidenced by the record shown in table 12. This seems rather high, but most accounts remain on the books a very short time. Many of these would probably be paid in cash with the added inducement previously suggested.?.^' The average of accounts receivable was computed by taking the amount reported each month of the year. It should be noted that the turnover for 19 33 is for only the ten months on which figures were available. If the same rate were maintained for the balance of the year, the figure would be 22.54. The same condition can be expressed in terms of the average number of days that accounts were outstanding (table 12). A marked improvement was shown in 1933 over the two preceding years » A.s long as credit terms are not so strict as to restrict ourchases materi- ally, a high, turnover is desirable. It means lower investment in receivables and I if 34. TABLE 12 Turnover of Accounts Receivable Hayward Poultry Producers' Association 1926-1933 Year Total net sales j Total charge sales Average* accounts receivab le Turnover of accounts receivable' r~~' 1 | |Days per : turnover^ ( average ) Losses on bad debts dollars dollars oer cent 70.0 dollars days dollars 1QOC 608,644.89 c ( } U /U.bo O O A Q cc .4o lb . c b4o . oo 1927 1,040,069 .19 751, 150.07 72.5 33,945.72 22.15 16.5 1, 119 .48 1928 1, 112,151.77 830,377.80 74.5 35,382.65 23.47 15.5 64.55 1929 1, 180,993.65 899,896 .35 7S.5 34,700.45 25.93 14.1 39.71 1930 1,153,853.07 887,722.91 77.0 38,716.14 22.93 16.1 1931 862,535.05 630,205.36 73.0 34,473.53 18.28 19 .9 2,716.87 1932 741,558.55 539,291.75 73.0 30,558.83 17.65 20.7 2,968.23 1933 r 621,947.95 456,999 .38 73.5 24,339 .66 18.78 16.1 * Average of accounts receivable at end of each month. t Total charge sales divided by average accounts receivable. f Number of days in period divided by turnover of accounts receivable. f First ten months. If same rate continued, 22.54 would be annual turnover. // Not written off until end of year. lower bad-debt losses. With a continuation of the present credit policy the turn- over should approximate 25. Note in table 12 the relation between turnover and losses on bad debts. When turnover was lowest the loss was greatest, and when turnover was high, the loss was negligible. This emphasizes the eare which ought to be taken before becoming liberal in credit extension. Legal Problems Income Tax.-- The general regulations relating to farmer's cooperative purchasing associations 1 liabilities under the Federal Income Tax are included in a bulletin issued by the U. S. Treasury Department in 1933 .ty' In general "co~ operative associations engaged in the purchasing of supplies and equipment for farmers, fruit growers, livestock growers, dairymen, etc., and turning over such supplies and equipment to them at actual cost, plus the necessary operating expen- ses, are exempt." Purchases for nonmembers cannot exceed amount purchased for members nor can purchases of nonmembers who are not producers exceed 15 per cent of the value of all purchases. A decision concerning several other requirements of the regulations is made in each case by the Bureau of Internal Revenue. Ac- cording to Section 103, Article 521 of this regulation, "In order to establish its exemption and thus be relieved of the duty of filing returns of income and pay- ing the tax, it is necessary that every organization claiming exemption file an affidavit with the collector of the district in which it is located, showing the character of the organization, the purpose for which it was organized, its actual activities, the sources of its income and its disposition, whether or not any of its income is credited to surplus or may inure to the benefit of any private shareholder or individual, and in general all facts relating to its operations which affect its right to exemption." Form 1028, cooies of which may be obtained from any collector, is designed for farmers' cooperative associations. It would be advisable for the Association to file this application which, if granted, would exempt the Association from a continued payment of the Federal Income Tax. If the Association does not meet the legal requirements, some changes in policies or organization may then be contemplated. By-Laws.-- By-laws were first adopted May 2, 1908, and amended in 1909 and again amended at the time of the incorporation of the Association on November '5, 1910. Amendments were again made in 1915, 1920, and 1931. The by-laws have been improved in many ways. They are simple. They contain safeguards for the members and at the same time give officers the flexibility in powers needed to carry on the business of the Association. But, since the by-laws were drafted, s e v e r a 1 important changes have been made in the Cooperative Marketing Lav; which was incorporated in "The California Agricultural Code" of August 21, 1933. It seems advisable that the Board of Directors appoint a committee to consider changing the by-laws to comply with the California Agricultural Code and submit its recommendations to the members during the following year. Consideration could be given at the same time to other recom- mended changes. 25/ \7 Regulations 77 Relating to the Income Tax under the Revenue Act of 1932 of the United States Treasury Department. Bureau of Internal Revenue. Section 103. Article 532. pp. 157-159. V'' See page 36. 36. SUMMARY AND RECOMMENDATIONS By-Laws. — On the whole the by-laws are satisfactory, but it is recom- mended thalT~the Board of Directors appoint a committee to consider the following suggested changes: (1) Restrict admission to producers only, and make prevision for compulsory withdrawal as soon as a member ceases to be a producer. (2) Reduce the membership fee from $50 to 310 to make it easier for present members to stay and new producers to join. If capital is needed or safety for credit extension is required, certifi- cates of interest without voting privileges can be used. (3) Permit members to vote by mail. (4) Change the total number of directors to six, electing two each year for a term of three years, and have the Board elect the president from among its membership. If the members feel it more desirable to continue having the same number, as at present, three could be elected one year and two each of the others, each for a three-year term, the president to be elected by the Board from among its membership. This would safeguard the Association against any sudden, undesirable change in policy by an inexperi- enced group. (5) Close the date for nominations at least a week before voting, and declare ineligible for office any member not regularly nominated . (6) Make the intent of several sections more definite. Disposal of Eggs.-- The Association ceased handling eggs for its members many years ago. It seems advisable to continue this policy. Purchase of Feed and Supplies. — The Association has greatly expanded the type of merchandise carried during its business career, but has continued to restrict its activities to the purchase of supplies for producers. This policy does not seem to justify the installation of a completely equipped hardware department as is being contemplated. It would seem wise for the Association to continue supplying only the needs of its members as producers. The continued success of the Association may be jeopardized if it attempts to take on too many activities. Before definitely deciding on whether or not to make such expansions and also to check on the profitability of the various lines now being carried, records of sales, inventory, etc., ought to be kept by departments. Many other suggested uses could be made of such records. Trucki ng and Platform Delivery.-- The Association does not deliver its own feeds and supplies. A large volume, for this and other reasons, is called for at the plant by the members. This situation has caused several difficulties which may be remedied. Steos could be taken to reduce the percentage of plat- form business and/or to reorganize the method of handling it by: (l) Having a head platform-man who contacts all buyers, makes out all orders, helps in keeping perpetual inventory records, and closely supervises his assistants. 37. (2) And/or offering a small quantity discount or giving delivery at no extra charge if the quantity ordered justifies it. (3) And/or including delivery in the price, and hiring the work done on a per diem or a ton-mile basis if it is considered undesirable for the Association to invest in trucking equipment. Financial Condition .-- The financial condition of the Association is excellent^ Assets have been kept in relatively liquid form. Current assets continue to make up a relatively large part of total assets, in spite of the investment in milling equipment during recent years. Liabilities have been held down very well. Accounts and notes payable have never been allowed to become overdue. The current ratio has continued to improve even though it has been satis- factory for a number of years. The ratio of fixed assets to net worth has con- tinued to be satisfactory. The Association has relied on the capital of its mem- bers for financing its fixed assets. This is a good plan and should be continued. Satisfactory surplus reserves have been accumulated. It seems safe to forego placing the usual 10 per cent of annual earnings into the reserves for the 1933 fiscal year. The amount may well be used instead as a means of caring for the withdrawal of nonproducers . Price Policy.-- The authors would strongly advise against a change in price policy. It is considered better to keeo prices at competitive levels and give a patronage dividend than to reduce prices to all buyers. The Association might consider declaring a dividend more frequently than once each year if the record-keeping involved does not become too cumbersome. Operating Statement.-- Dollar volume of net sales has been decreasing since 1929. Physical -volume records should be kept to help in determining the causes. With present records there is no certainty -whether volume of goods sold has increased or decreased. The ratio of cost of goods sold to net sales has materially decreased in recent years, and the percentage of gross income has therefore increased, but this is due, in large part, to the failure to include manufacturing costs in cost of goods sold. The Association mills much of its own feeds, and manufacturing expenses have been included among the regular expenses rather than in the cost of goods sold. It would be advisable to use a simple system of cost accounting to keep the figures over a period of years on a comparable basis. Additional workers were needed with the introduction of a milling depart- ment. As a result, the percentage that salaries and wages bear to net sales has increased. Grouping these expenses with all other salaries and wages instead of as manufacturing costs, and the absence of figures on plant capacity and physical volume handled, hamper the making of as complete an analysis of the efficiency of the personnel as would otherwise be possible . The . decreasing dollar volume of sales per employee does not tell the whole story. Fixed-property costs might be reduced somewhat. If average inventory is decreased as seems advisable and utilization of storage space is improved upon, the need for outside storage would be decreased, thus reducing rent. Insurance expenses might be reduced by a better regulation of policies to meet the needs of the Association. 38. Bad debts have not been high, but they have increased considerably during the last two years (1931 and 1932). It would not be advisable for the .associ- ation to become liberal in its credit policies. It may, however, profitably consider the policy of having a sliding scale of dividends with a given percentage on cash payments, 3/4 of that percentage on payments made within fifteen days after date of purchase, and 1/4 on oayments made within thirty days, no dividends payable on accounts not paid within thirty days after date of purchase. A limit on amount of credit extension might also veil be set in relation to the business needs of the buyer and the nature of the credit risk. Authority for this policy, within certain limits, could be placed with the Board cf Directors so that changes could be made to meet new situations • Interest costs have been kept at a low level. Policies which have helped make it possible may well be continued. The Association might consider the service which the Bank for Cooperatives in Berkeley can render. Insurance expense on merchandise could be decreased with a smaller inven- tory and also by varying the amounts in line with the needs of the Association. The net income has continued to increase in recent years and is at satis- factory levels. The record has oroved the wisdom of installing milling equipment. Operating Ratios. — Two ratios which can be of value in measuring the operating efficiency of an organization could not be used because of lack of data. These are ohysical volume of goods sold in relation to the number of employees and also physical volume of goods sold in relation to storage and milling capacity. If the Association would keep records already suggested, these ratios could be determined . There are two ratios, however, which could be used. Inventory turnover has been decreasing to lower levels. This is an undesirable condition and should be watched carefully. It is felt the Association ought to attempt to raise it. Very likely a lack of inventory control has been responsible for this in large part. With an inventory of increasing size and increasing variety it is highly desirable to install some system of control. It has many advantages * Turnover of accounts receivable was considerably lower in 1931 and 1932 than in orevious years and, as is often the case, was accompanied by much larger losses from bad debts than is usual » An improvement was evident during the first ten months of 1933. The previous condition was orobably due, in large part, to business conditions in the poultry Industry, but a liberalization of credit policy would tend to aggravate the situation for the Association. With its present policy of taking notes where the credit risk is considered safe, emergencies receive adequate care. The Association should continue its policy of trying to encourage cash payments when goods are delivered and to discourage extension cf credit. The past record is evidence of the success of such a policy. ACKNOWLEDGMENTS The authors are indebted to Professor H. E. Erdman, Professor 3. C. Voorhies and Professor G. M. Peterson, all of whom are members of the staff cf the College of Agriculture of the University of California, and to Dr. S. A. Stokdyk, formerly of the staff but now President of the Bank for Cooperatives, for valuable suggestions and criticisms while this study was being conducted. 39. The authors also wish to express their appreciation to Mr. Eric Ruus, Jr., Manager, Mr. J. Nesbitt, Office Manager, and Mrs. L. V. Dobson, Accountant, of the Hayward Poultry Producers' Association for their patience and courtesy in explaining the details of operations and accounts. Mr. T. 0. Morrison, Farm Advisor of Alameda County, assisted the authors in the collection of material from producers. Finally, the authors wish to express their appreciation to the Board of Directors of the Hayward Poultry Producers' Association for the courtesies shown them and for the splendid spirit in which they have received the recommendations in this study.