Efficiency is the Best Policy

For most large manufacturing companies, improvements in efficiency usually stem from technological advances. This can mean improved machinery or a more efficient process to make goods. These technological advancements can lead to economies of scale and reduced average costs, which are important factors in the growth and expansion of a company. Companies who are able to reach the level of low average cost are even sometimes able to reach the sought after spot of becoming a monopoly or becoming part of an oligopoly.

In the meatpacking industry, however, the most important aspect of the business is its employees.  Unlike most businesses, there is very little diversity in the meatpacking industry. Most type of cattle is comparable to each other. Unless the cattle are organically fed, companies generally use the same type of feed. The one place where companies are able to edge out each other is the process of deboning the meat from the carcass. Another aspect that is unique to the meatpacking industry is that humans are more efficient at the jobs needed for this industry than machines. This probably stems from the fact that no too cattle are alike. With products such as automobiles or electronics, machines can be programmed to do the work since every product is identical. A machine, however, has not been designed to be able to adapt to the different shapes and sizes of cattle for deboning. Humans are much more efficient in both time it takes to debone meat and actual yield of meat compared to that left on the bone.

One of the biggest meat packers in the world, JBS, believes they have been able to experience such growth because of the training of its employees. They train their employees to get the most meat off of the bone. This practice is much more cost effective since meat correctly butchered is worth ten times as much as the left over scraps. JBS’s factories contain screens for its employees that show job performance in relation to meat yield from the bone. This further shows how JBS believes efficient employees are the key to success in the meatpacking industry.

The higher profit margins from efficient employees have also allowed JBS to acquire other companies. Less efficient companies have smaller profits, so much so that they become unsuccessful. JBS has been able to acquire these companies and apply their strategy of efficiency. Although JBS does not have a monopoly on the beef industry, their belief of efficiency has allowed them to become the largest meat packing industry in the world.

2 thoughts on “Efficiency is the Best Policy

  1. To rephrase the EOS query, to what extent can a personnel system be scaled? The answer (cf. Costco) seems to be “quite a bit.” Deciding not to “whipsaw” workers by threatening them with cheaper labor, providing slightly above market levels of benefits, and creating pride in product – large organizations can do that.

    The real issue in my experience of watching firms is that sooner or later (and for the most part sooner) new management arrives who realize they can exploit such systems for several years by cutting corners before employee turnover and poor morale kick in. To put it into more formal jargon, such employee systems are a capital good that requires constant investment to maintain. Cut the investment to nil, and profits zoom – for a while.

    If the board puts you under a short-term performance contract (lots of stock options that vest quickly, or even better, cash bonuses), or you can influence who gets on the board and chose managers who believe in “strong” incentives, then milk the company for everything you can, screw the workers, screw the customers, and get rich.

    Proofread: “no too” … and minor repetition.

  2. Are there economies to scale in the meat packing industry? It seems that the most important factor, as identified by JBS, is employee performance. Thus, it could in fact be more expensive to ensure that substantially more employees are correctly trained at butchering meat rather than fewer. Is there an optimum amount of employees that could maximize profits through a desired efficiency, employee training cost, and output?

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