President’s message – September and October, 2000

PRESIDENT’S MESSAGE

Quantify the cost of ignorance

"If you think the cost of intelligence is high, you should try ignorance."

That statement is paraphrased from Hubert H. Humphrey, when he referred to the high cost of our central intelligence agency. I think it is insightful, far-sighted, and applicable to pig farms! Mr. Humphrey is saying that if we choose to incur some up-front costs, we can often avoid or alleviate catastrophic costs incurred later. If these up-front costs have a financial return, we might think of them as investments.

This should be the case with the costs associated with veterinary time, monitoring, and diagnostic testing. There should be a positive economic consequence to fixing a production problem. Let’s consider an unanticipated low farrowing rate where there was no corresponding increase in services to compensate. The cost will be:

(# litters not farrowed) x
(pigs not sold per litter) x
($ anticipated margin over feed per pig)

Assume a 2400 sow herd suffers a 5% drop in farrowing rate for 1 month. This could equate to approximately 25 fewer litters with 9.5 fewer pigs sold per litter and $50.00 margin over feed cost, and would cost the farm approximately $12,000 in foregone pretax income.

The first challenge, of course, will be to decide if this is a "real" decrease or a random fluctuation–but that is another discussion. Assuming it is real, you and the owner must decide how much to invest in the investigative efforts–note the distinction: these are not expensigative efforts! If this is a real problem, it may go away on its own, but more likely, it will continue to cost $12,000 per month until resolved. Perhaps it will cost $3000 for diagnostic efforts with a solution at the end. And so we see the cost of ignorance here is $12,000 per month and the cost of intelligence is $3000. But how often do you have to fight tooth and claw to justify the cost of diagnostics? Why is that?

Perhaps we are not very effective at marketing our services. Consider a recent survey of bovine practitioners. One half of a sample of 638 veterinarians said they did not explain their fees. And cost was the most common reason given by producers for limiting the use of veterinarians. The study stated that many producers do not use their veterinarians more because they do not understand the potential benefits of doing so. Hubert might argue that these producers are choosing to forego the cost of intelligence because no one has quantified the cost of ignorance for them. Like it or not, we have to market the benefits of our services, laying it out in dollars and cents. "It makes good business sense to use me because, while I will cost you $10,000 per year, we will resolve this problem that is costing you $40,000 per year. That is an excellent return on your investment."

A concern, of course, is that a veterinarian may sometimes be an added expense, not a wise investment. To be an investment, there must be a payback to your activities. To anticipate a payback, your time has to be strategically directed, not just frenetically active. Where are your time and resources best spent in a client’s herd to maximize the return? To answer this, you need to consider the cost of each opportunity, the cost of a potential resolution, and the probability of success. Benchmarking with similar herds can help identify opportunities. A herd might have a $150,000 opportunity in improved farrowing rate, $300,000 for decreased finishing mortality, and $200,000 for improved feed efficiency. You can calculate a cost for investigation and given your experience, you can anticipate a likelihood of success. Now you have the information needed to market your service and direct your efforts.

I suggest you help your clients quantify the cost of ignorance. Develop a menu of diagnostic investigative services with costs and probability of correct diagnosis for each alternative. Develop alternatives to resolve the problem once it’s diagnosed, again with costs and probability of success. Armed with this knowledge base, I believe you will become a wise investment for your clientele.

I welcome your comments.

–Bob Morrison
612-625-9276 or BobM@UMN.Edu