Purchasing decisions can be a mine-field to the uninformed.
As dairy owners, we must make purchases based on accurate and timely information to insure a good return on investment. Failure to do so can have disastrous effects on profitability. Here are four steps you can use to help you make informed purchasing decisions.
1 Ascertain your needs
First ask yourself, is this a necessary purchase? Regardless if it is feed additives, pharmaceuticals, farm equipment or professional services, you must determine why this product or service is necessary. Ask yourself, if this purchase will reduce long-term cost or increase milk production. A balance of these two items may lead to a better return than just reducing cost or increasing milk production alone. Always review your health and production records to see if the purchase will have a positive effect on the herd.
2 Select a vendor
Don’t succumb to high-pressure sales tactics, fancy brochures, videos or sales meetings to make a decision. Be wary of any vendor who wants to sell you a product based on the “wondrous results” achieved on other farms. Every dairy is unique and one herd’s solution to a problem may not be the correct solution for your operation.
Instead, review the technical information on the desired product. Press the vendor for non-biased technical information that will support its product claims. Companies with proven research will gladly share this type of data with you and your professional consultants. Do your research to make sure the product will meet the specific need you have identified. Then, choose a vendor who can deliver a quality product and back it up with service or warranty.
3 Evaluate cash-flow impact
During this past year, many dairies have found themselves in a cash-flow crunch due to low milk prices. Before buying goods or services, evaluate how the purchase will impact cash flow.
Ask yourself if the increase in expenditure will be recaptured rapidly, or if it will take months or years. Many producers go to great lengths to justify why they need to make a certain purchase. But, justification without technical support generally leads to an increase in cost of production.
Know what your costs are and how this new product or service will impact your bottom-line. If more milk is required to pay for it, odds are you will not achieve more milk production throughout the year to cover the cost.
4 Calculate the ROI
All expenses have a return-on-investment. An investment that merely returns its input cost is a risky proposition. Determine what you feel is a good return for the risk you are taking and then inquire from vendor references if the results you need have been achieved elsewhere. Look for repeatability and longevity when purchasing items that have a long life span. Short-term items need to be easily monitored and validated for their effectiveness.
Be an informed buyer
Whenever you make a purchase for the dairy, take time to evaluate the supportive data to ensure the company’s claims are valid. Avoid justification of purchases, and use your professional advisers for unbiased advice prior to making the purchase. Keep your financial and production records up-to-date, and know your cost of production.
Remember, evaluation of all expenditures and their impact on profitability is paramount to a successful dairy in today’s complicated economy.
Paul Johnson is a veterinarian and dairy producer in Climax, Ga.