1. Efficient Business Operations in a
Poultry Firm
Sanjeev Bordoloi, Ph.D., University of St Thomas, Minneapolis
Jahnavi Indukuri, University of St Thomas, Minneapolis
Indukuri Srinivas Varma, Poultry Specialty Ltd., India
2. Objectives
• An analysis of a poultry business in India
• Optimization study on decisions for:
• Life cycle of birds
• Break-even points
• Investment options
• Branding
• Expansion
3. Overall business includes four sub-businesses
• Cocoa
• Coconut
• Paddy
• Poultry
Major resources for the business:
• Land (49 acres)
• Labor (contractors)
• Machinery (automation and transportation)
• Investment (money spent)
• Revenue generated (contributions from each sub business)
Broad View of Current Business
4. Poultry
Major resources
• Land- 4 acres of land (total 49 acres) is dedicated.
• Housing- there are 4 bird shelters housing 20,000 birds in each.
• Cages- four birds are kept in each cage; there are 5,000 cages in each shelter.
• Labor- 20 workers with 2 supervisors
• Machinery - water pumps; egg collecting conveyers; food preparation
machine; feed conveyers.
5. Production
• On average, 300 eggs per bird each year i.e. 300 * 4 * 20,000 =
24,000,000 per year.
• Eggs are sold at an average rate of Rs. 3.50 per egg.
• Revenue generated from the poultry business is Rs. 84,000,000.
• Note: price per egg may change daily.
6. Flow of Birds into the system
• Total birds in poultry are 100,000.
• Birds in production are 80,000.
• Young birds are bought in batches every three months.
• Each batch has 20,000 young birds.
• No production from young birds in the first three months, until they
mature
• Productivity of birds slows down as they grow older
• However, volume of feed increases as the birds grow older, to maintain
current production rate by each bird.
• Eggs are produced everyday, then packed and transported each day.
7. Fixed and Variable Costs
• The variable costs are costs that depend on business production
volume. 70% of Rs. 3.50 (selling price per egg) is taken as variable
costs (Rs. 2.45 per egg).
• The fixed costs are expenses that do not change as a function of
activity of business for a relevant period, which include loan
payments, salaries, transportation, packing etc.
9. Inputs
R – Revenue at full price
p – Bird productivity in percentage
C – cost of feed on week 1
f – fixed cost of operation
r1 – loss of revenue per week
r2 – Increase in cost of feed per week
10. Income from each egg for week i (Ii) = R - r1i
Variable cost of feed for each bird for week i(Ci) = C + r2i
Fixed cost: f
To get break even point (to find the optimal week i)
Ii = Ci + f
R - r1i = C + r2i + f
i = (R - C - f )/ (r1 + r2)
Linear Equations
11. Now considering the following values to find the optimal week i.
R = Rs 3.50
p = 90%
C = Rs 1.10
f = Rs. 1.20
r1 = 0.007
r2 = 0.01
i = (R - C - f )/ (r1 + r2)
= ((3.50)(0.9) - 1.10 - 1.20) / (0.007 + 0.01)
= 50 weeks.
Therefore, the optimal life of a bird should be 50 weeks.
12. LINEAR GRAPH
Fixed cost
10 20 30 40 50 60
Age
In
weeks
1.10
1
2
3
3.15
2.30
1.60
2.80
1.20
profit
loss
1.20
Rupees
13. Exponential loss of productivity
In reality, productivity loss (egg-laying ability) of a bird could be
exponential, instead of linear.
Then, income from one egg in week I,
Ii = Re-r1i
Where R is revenue from one egg, and r1 is the exponential rate of loss.
Now, the break-even equation becomes,
C + r2i + f = Re-r1i
Then, solve for optimal i.
16. Branding
• Premise: “High Quality” eggs can be sold at a higher price as a
premium brand.
• We consider one shelter out of four to be converted to premium
brand.
• We have considered different scenarios here.
• Several variables/ factors are taken into consideration that can change
depending on the situation.
• We use Excel Solver and Goal Seek to achieve our results.
17. Factors/Variables for Scenario Analysis
• Input variables: constants and given/assumed values
• Goal: Target values on selected parameter
• Output variables: to be decided/to be optimized
18. Scenarios
Scenario 1: All 4 cages together, for profit of Rs. 1 million, what should be the
fixed cost? [at selling price of Rs. 3.50]
Scenario 2: If one of four cages was converted to premium brand, to break
even, what should be the additional investment (= additional fixed cost)?
[now, at selling price of Rs. 5.00]
Scenario 3: Given an additional investment of Rs. 5 million, what will be the
expected profit?
Scenario 4: We also add to variable cost (e.g. better care of birds); now at Rs.
2.80 from Rs. 2.45 per bird. With Rs. 5 million investment.
Scenario 5: For Rs. 2.1 million profit (= 25% of Rs. 8.4m), what will be the
additional fixed cost? With reduced selling price from Rs. 5.00 to Rs. 4.50.
Scenario 6: For above, if we can maintain original variable cost of Rs. 2.45,
what will be the profit?
19. Scenario 1 (baseline, all 4 sheds)
• INPUT VARIABLES-
Eggs per year = 24,000,000.(80,000*300)
Selling price (Each egg) = Rs. 3.50
Variable Cost = 2.45 (=70% of 3.50)
• GOAL
Total profit = Rs. 1,000,000 (our goal).
• VARIABLE
Fixed cost = Rs. 24,200,000.(assumed for todays operation = loan
payment + labor + transportation).
20. Scenario 2
(Convert ¼ sheds to brand, break-even)
• INPUT VARIABLES-
Eggs per year = 6,000,000.(20,000*300)
Selling price (each egg) = Rs. 5.00
Variable cost = Rs. 2.45 (no change in feed)
• GOAL
Total profit = 0 (to break-even).
• VARIABLE
Fixed cost = Rs. 15,300,000 (= Rs. 9,300,000 above 25% of Rs. 24
million).
• Margin of additional FC is Rs. 9.3m
21. Scenario 3 (find profit at Rs. 5m investment)
• INPUT VARIABLES-
Eggs per year = 6,000,000.(20,000*300)
Selling price (each egg) = Rs. 5.00
Variable cost = Rs. 2.45 (no change in feed)
• GOAL
Fixed cost = Rs. 11,000,000(= 6,000,000(=24,000,000/4)+5,000,000;
assuming new fixed cost for branding at Rs. 5,000,000)
• VARIABLE
Total Profit = Rs. 4,300,000 (annual profit).
22. Scenario 4
(enhanced quality of life at higher variable cost)
• INPUT VARIABLES-
Eggs per year = 6,000,000.(20,000*300)
Selling price (each egg) = Rs. 5.00
Variable cost = Rs. 2.80 (increased from 2.45 to 2.80 for better
quality of life).
• GOAL
Fixed cost = Rs. 11,000,000(assuming new fixed cost for
branding at Rs. 5,000,000).
• VARIABLE
Total Profit = Rs. 2,200,000 (annual profit).
23. Scenario 5 (lowered selling price)
• INPUT VARIABLES
Eggs per year = 6,000,000.(20,000*300)
Selling price (each egg) = Rs. 4.50 (decreased from Rs. 5.00 to Rs. 4.50)
Variable cost = Rs. 2.80 .
• GOAL
Total Profit = Rs. 2,100,000 (to breakeven with current Rs. 2.1m, 25% of
Rs. 8.4m).
• VARIABLE
Fixed cost = Rs. 8,100,000 (this is Rs. 3.9m over 25% of Rs. 16.8m)
• Marginal of additional FC Rs. 3.9m
24. Scenario 6 (original variable cost)
• INPUT VARIABLES
Eggs per year = 6,000,000.(20,000*300)
Selling price (each egg) = Rs. 4.50
Variable cost = Rs. 2.45 (keeping at original variable cost) .
• GOAL
Fixed cost = Rs. 8,100,000 (this is 3,900,000 over 25% of 16,800,000)
• VARIABLE
Total Profit = Rs. 4,200,000 (double of Rs. 2,100,000).
25. Quality of Egg
• Defined by both external and internal quality
• External quality: shell cleanliness, texture and shape
• Internal quality: egg white (albumen) clarity & viscosity, size
of air cell, yolk shape, yolk strength
26. How to Improve Quality of Life
• Better quality feed
• Supplement to prevent disease
• Additional maintenance/care (for the specific branded cage)
• Special temperature/humidity control in cage
• Closer and more frequent monitoring of the birds
• Video surveillance
• Better/automated collection to reduce spoilage
27. Managerial implications & Summary
• Developed analytical tools for optimal life cycle of birds
• Conducted several scenario analyses on branding options
• Outlined ways to improve quality of life of birds
28. Future work
• Explore the possibility of converting into “cage-free” operation
• Adoption of more technology in the operation (e.g. automated egg
collectors)
• Better education and training to the staff
• Extending results from poultry business to other businesses (e.g.
paddy, coconut, etc.)
