5

>N BULLETIN 476

APRIL 1963

Marketing New England Poultry

4. Structure and Performance of the Assembly System

By George B. Rogers and Edwin T. Bardwell

AGRICULTURAL EXPERIMENT STATION

UNIVERSITY OF NEW HAMPSHIRE

DURHAM, NEW HAMPSHIRE

in cooperation with

Aipricultural Experiment Station, University of Massachusetts

and Marketing Economics Division, Economic Research Service,

United States Department of Agriculture

5

^1

>N BULLETIN 476

APRIL 1963

nh

Marketing New England Poultry

4. Structure and Performance of the Assembly System

By George B. Rogers and Edwin T. Bardwell

AGRICULTURAL EXPERIMENT STATION

UNIVERSITY OF NEW HAMPSHIRE

DURHAM, NEW HAMPSHIRE

in cooperation with

Agricultural Experiment Station, University of Massachusetts

and Marketing Economics Division, Economic Research Ser^ico.

United States Department of Agriculture

MMMmm^^^m

■■Sii'mM'm

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■'hie study was completed as'pjrfrl of & Northeast Regional Pro- ject, NEM-21, "The Effect of Marketing Changes Upon Market- ing Costs and Upon Demand and Consumption of Poultry Pro- ducts,** a cooperative study involving Agricultural Experiment Stations in the Northeastern Region and supported in part by regional funds from the Economic Research Service (formerly Agricultural Marketing Service). United States Department of Agriculture.

Preface and Acknowledgemeiils

This bulletin is the fourth in a new series to be issued by Agricultural Experiment Stations in the New England States and involves, in most instances, direct cooperation with the Eco- nomic Research Service, (formerly Agricultural Marketing Ser- \ ice ) U.S.D.A. The series deals with various aspects of poultry marketing in New England. This publication describes the main features of the assembly system, based largely upon a stratified random samiilc of 75 firms, and analyzes the possibilities for reducing costs of the assembly function alone and in combi- nation with processing.

The authors appreciate the cooperation of the assemblers of live poultry who furnished data on practices, costs and input- output relationships. Much valuable information was also ob- tained from the State departments of agriculture in New Eng- land who maintain records incident to the licensing and bond- ing of assemlily firms. The authors wish especially to acknowl- edge the assistance and critical appraisal received from W. F. Henry, of the Agricultural Economics Department of the Uni- versity of New Hampshire; A. A. Brown, of the University of ^lassachusetts; and from Norris T. Pritchard, Marketing Eco- nomics Division, Economic Research Service, U. S. Department of Agriculture. Harold B. Jones aided materially in the collec- tion and analysis of the data. John Payne and Frank M. Conley aided materially in the analysis of data.

TABLE OF CONTENTS

Paire

SUMMARY 3

I. BACKGROUND OF STUDY 5

Structure of the Present Assembly System 6

Types of Assemblers Defined 6

Importance of Various Types of Assemblers 9

Supply Sources and Market Outlets 9

Area differences in Assembly Systems 11

The Effect of Declining Resources in the Assembly System 12

n. PERFORMANCE AND COSTS IN THE PRESENT SYSTEM OF LIVE

POULTRY ASSEMBLY 13

Labor Performance 13

Truck Operating Performance 15

Present Costs of Live Poultry Assembly 17

III. REDUCING COSTS OF LIVE POULTRY ASSEMBLY 19

Methodology and Assumptions 19

Effect of Firm Size on Costs of Live Poultry Assembly 22

The Influence of Volume per Mile of Truck Travel on Costs of Live

Poultry Assembly 24

Least-Cost Combinations of Resources in Live Poultry Assembly 25

Importance of Cost Group in Producing Cost Reductions 29

IV. SOME IMPLICATIONS OF REDUCED COSTS OF ASSEMBLY AND PROCESSING 30

Institutional Changes which would Facilitate Assembly Cost Minimization 30

Systemic Efficiency in Assembly 31

Combining the Assembly and Processing Functions 33

Optimum Adjustments for Selected Supply Areas 37

V. APPENDIX 42

Suminary

Declining demand for live birds at the retail level, the movement of proce8sing toward large-scale country plants, the advent of contract growing, and dwindling niimljers of producers and small processors have caused a substantial decline in numbers of live assemblers in recent years and changes in the characteristics of the remaining firms. During 1951-57 the number of firms licensed by State departments of agricul- ture to haul live poultry in New England declined 55 percent. The num- ber of poultry trucks licensed declined 47 percent.

The present assembly system in New England is a mixture of the old and the new. The older system is characterized by decreasing operations as numbers of small slaughterers, live-poultry stores, buyers of live poultry, terminal market live-poultry receivers, and city dressing plants dwindle. Newer types of firms, such as large piocessing plants, contract haulers, and contractors, have made tremendous gains at the expense of the older types and through extensive use of contract production.

The size of the supply area for most firms has been shrinking. At the same time volume per firm has increased. As farm unit sizes have in- creased and the number of small firms has declined, itinerant live buy- ing has virtually disappeared. Commercial meat chicken production now greatly exceeds the volume of fowl in most areas. The increasing im- portance of contract growing, particularly as firm size increases, has contributed to producing larger lots and enabled better scheduling of plant operations.

The decline in the number of firms engaged in assembly, the changes in the types of assembly firms and in their practices, and the dominance of commercial meat chickens in total output have narrowed assembly margins and reduced resources devoted to that function. Nevertheless, the present assembly system is characterized by a sustantial excess of capacity and by duplication of travel and expense. Possibilities exist for further sizeable cost savings through enhanced firm and structural ef- ficiencies.

The individual firm can increase efficiency and lower costs per pound in assembly by: (1) Capacity operation of a minimum number of trucks and optimum pickup crew organization; (2) increasing total volume to obtain any inherent economies of scale; and (3) increasing the volume of poultry per mile of truck travel. As volume increases, from quite small sizes, decreasing per pound costs result in part from the ability of the firm to handle flocks of larger average size with the least-cost combination of resources.

On the basis of an analysis of cost data from 75 assemblers of live poultry in New England, unit costs in assembly declined from 0.90 cent per pound for one million pounds to 0.47 cent per pound at 50 million pounds when poultry was available at the rate of 100 pounds per mile of truck travel. Increasing the pounds per mile of truck travel to 1,000 lowered unit costs to 0.60 cent per pound for one million pounds and 0.35 cent per pound at 50 million pounds.

Increased density in the supply area can be achieved by establish- ment of exclusive supply areas for individual firms and/or a more active

role l)v a>^(Mnl>l(-i> iti (Unmnininji tlic location and !^'izc of prodncing units. In an environment where independent farm units predominate, ?uch units are likely to be located without reference to any one asseni- hlv firm. Where contract jjroduction is invohed some discretion exists as to farm location. But this feature has not been fully exploited he- cause of the heavy reliance upon the use or conversion of existing re- sources rather than on new investment. Cost savings availa1)le from in- creased volume and increased densitv would enable assemblers to oifer incentives to maximize the size of nearby farm units.

About 330 firms assembled 470 million pounds of poultry in 1957 at a cost of S4.6 million. If these firms doubled the volume hauled per mile of truck travel, assembly costs could be reduced to 83.9 million. Fur- ther developments to create exclusive supply areas, plus a reduction of 60 percent in firm numbers to enable operation at 100 percent of capaci- ty, could have reduced costs to $2.9 million.

Combining the assembly and processing functions imder one manage- ment can eitect cost savings. In 19.57, 70 percent of the 470 million ])ounds of poultry assembled was handled by combined-fimction firms. The combination of assembly and processing under one management further increases '.he comj)elijive advantage of large })lant*. However, the savings in assembly costs arc" relatively small compared to those in processing. In the short-rtm, larger firms can secure additional volume l)y increasing the size of their supply area and offset increased costs per j)ound in assembly by savings obtained by processing the larger volume. But in the long-run, elTorts to reduce assembly costs by decreasing the size of the supply area and increasing its density will most enhance the competitive position of the firm.

In 19S7 the con)l)!nfMl costs for assembling and processing New Eng- land poultry totalled S23.8 million. If the voluiiu> leaving the area in live form and sold live and processed through the older marketing channels remained constant, substantial savings could be obtained by reducing numbers of combined-function firms handling one million pounds or more annually and by creating exclusive supply areas. The additional savings in assembly an»l processing would total S8.0 million. Economic pressures are likely to force a continued reduction in plant numbers, but the extent to which maximum cost savings are realized will depend upon changes in institutional arrangements and develop- ments in the distributing function.

Marketing New England Poultry

4. Structure and Efficiency of the Assembly System

By George B. Rogers and Edwin T. Bardwell* 1. Background of Study

Marked changes have taken place in the pouhry industry in New Eng- land and in the United States in the last two decades. Technological ad- vances in production, assembly, processing and packaging, transporta- tion, and distribution have enabled the industry to reduce costs and to furnish consumers with larger quantities of higher quality poultry at lower prices.

Previous reports in this series on the marketing of New England poult- ry have dealt with (1) the characteristics of the processing industry, and (2) the costs and economies of scale in chicken processing. The first report was concerned primarily with description of poultry pro- ducing areas and plants in New England, including problems of plant organization and equipment, buying and selling practices, and assem- bling and distributing methods. The second report presented detailed analyses of the costs and economies of scale in the processing of broilers and fowl. This report, the fourth, summarizes the changing character- istics of the assembly system, describes the techniques and practices used, and the costs involved. However, the value of the report is not expected to be limited to the New England poultry industry. Assemblers in other regions of the United States are confronted with many of the same problems and physical and economic conditions that New England live assemblers currently face.

The advent of contract growing, increased specialization of certain areas in commercial meat chicken production, and larger producing and marketing units have facilitated volume handling of live birds. In addi- tion, the shift of poultry processing toward large-scale country plants has enabled the assembly function to become more localized. Hence, the number of assembly firms has declined sharply, their characteristics have changed and assembly has become more closely-integrated with growing and processing. ^

* Mr. Rogers is Agricultural Economist, Marketing Economics Division, Economic Research Service, U.S.D.A. Mr. Bardwell is Cooperative Agent, New Hampshire and Massachusetts Agricultural Experiment Stations and Economic Research Service, U.S.D.A. stationed at the University of New Hampshire.

1 Rogers, G. B., E. T. Bardwell and D. L. Deoss, Declining Numbers of Live Poul- try Dealers in New England; Causes and Effects. Agr. Exp. Sta. Univ. of New Hamp. Agricultural Economics Research Mimeograph No. 16, Dec. 1957.

Structure of the Present Assembly System

The present assembly system in New England is a mixture of the old and the new. The older system is characterized by decreasing oper- ations and a pessimistic outlook as numbers of small slaughterers, live- poultry stores, live-poultry buyers, terminal market live-poultry re- ceivers, and city dressing plants dwindle. The newer types of firms have gained at the expense of the older types as well as through extensive use of contract production. The forces which have produced the changes in the assembly system are still operating, but the question of predomi- nance has long since been decided.

Most meat chickens now are produced under contract arrangements with large processors, feed companies, hatcheries, and independent con- tractors. This development has increased control of these firms over production and sales practices. Large processors, the contract haulers they employ, and contractors who also haul live poultry have become more important in recent years as assemblers of live poultry. Many large processors and contractors formerly were buyers of live poultry and other former independent live-poultry buyers have affiliated with specific processing plants as contract haulers.

The small poultry farms of the past, largely selling fowl, were ser- viced mainly by small-volume assemblers. But the substantial decline in the number of poultry farms and an increase in their average size have reduced supplies available to the small assembler. Such firms usually are unable to handle large lots and larger assembly firms have evolved. Average size per lot acquired rises substantially with increas- ing firm size. This occurs in part because of the decline in lots per farm as emphasis shifts from fowl and related classes'^ toward broilers and other commercial meat chickens.-^ Many egg producers practice periodic culling, selling frequent small lots plus one large lot when the balance of the flock is liquidated. In contrast, meat chickens are grown on a regular schedule, with several large lots per year per farm.

Yet small firms are important in gathering such small and scattered lots of poultry which remain, particularly in non-commercial poultry producing areas. In addition, the older types of assembly firms such as live-poultry buyers, live-poultry stores, and small slaughterers are still important in supplying customers who prefer to examine live birds at the point of slaughter.

Figure 1 diagrams the channels through which New England live poultry moves during the assembly process.

Types of Assemblers Defined

Most assemblers carry on several marketing functions in addition to hauling poultry. These may include buying and selling, contracting, growing, processing, and distributing. However, for each type of firm

2 Included in this group are hens culled during or sold at the end of the egg- laying period, roosters, cull pullets, and some young chickens, mainly surplus cock- erels from egg strains of birds. Since fowl account for the major share of volume, this group is hereafter referred to in this report as "fowl."

3 Included in this group are broilers, fryers, roasters, caponettes, capons and pullets grown strictly for meat purposes. Since broilers account for the major share of volume, this group is hereafter referred to in this report as "broilers."

Figure 1. Channels Involved in Live Poultry Assembly, New England 1957

Poultry

from outside

New England

2.6

Chicken produced in New England

472.9

Turkey produ ced in New England 2.4

Total supply 477.9 ^

Handled in live form by ossembl/ng firms 473.0

289.4 H

Proces sing

r

Contract

^

Sold from

farms as

processed

pou Itry.

4.9

Sold in processed form

429.9

Sold in live form outside New England

43.1

• Includes 3.4 million (lbs.) delivered to assemblers by producers, t All figures — million (lbs.)

one function is clearly primary to its existence, organization, and oper- ation. The major features of each type of assembler of live poultry are listed below:

Processing plants slaughter and eviscerate poultry for sale to volume buyers. Other functions are contributory in nature. Most plants are lo- cated at country points.

Contract haulers truck poultry mainly for processing plants at a fixed contract rate per pound. They seldom take title to any poultry. Contract haulers are of two types: (1 ) Those who haul the entire volume for par- ticular plants or a share of it on a regular basis: and, (2 I those who haul only during periods of peak receipts for plants which own their own trucks.

Contractors finance growing operations. They obtain the bulk of their volume from contract growers to whom they extend financing for cash items. They commit some lots in advance to specific plants and negotiate sales of other lots when birds reach market size.

Live-poultry buyers purchase small and mixed lots of poultry from scattered, independent producers and resell them in live form.

Table 1. Pouhry Assembly Firms: Type, Number, Volume, and Market Classes of Poultry Assembled, New England, 1957

			Volume	Type	of Poultry	Hauled
		Total	Hauled
Type of Firm	Firms	Volume	From		Heavy
		Handled	Farms	Broilers	Young	Other
			1		Chickens	2	Total
		million	million
	number	pounds	pounds	percent	percent	percent	percent
Processing
plants	35	422.9	285.6	75.8	15.1	9.1	100.0
Contract
haulers	10	81.5	81.5	84.7	5.9	9.4	100.0
Contractors^	22	45.5	45.4	60.4	35.7	3.9	100.0
Live-poultry
buyers	125	56.1	52.6	11.4	50.6	38.0	100.0
Live-poultry
stores	90	6.0	3.9	41.1	41.0	17.9	100.0
Small slaugh-
terers	50	0.8	0.6	17.0	34.0	50.0	100.0
Inactive and
transitional
units	184	5	6	—	—	—	—
Total or
average	350	612.8	469.6	68.3	19.7	12.0	100.0

1 Excludes ofF-farm deliveries by producers to assemblers, but includes acquisitions at cooperative live-poultry auctions.

-Mostly fowl and roosters; includes minor quantity of turkeys.

•* Includes only firms which haul.

* Including 7 formerly engaged in processing.

•'■' Not available.

^ Insignificant.

8

Live-poultry stores sell to the Kosher trade and to other customers wishing to purchase, or select, live birds at the point of slaughter. They are part-time slaughterers. Usually they are located in heavily popu- lated areas.

Small slaughterers combine local assembly with processing, sales, and delivery to nearby retail outlets and consumers. Volume per plant is usually less than 30,000 pounds a year and operations generally are on a part-time basis.

Importance of Various Types of Assemblers

Of 350 potential assemblers of live poultry in New England in 1957, fewer than 20 percent were processing plants, contractors, and contract haulers (Table 1), but these 67 firms hauled nearly 88 percent of the volume available from farms. The remainder was hauled by 265 buyers of live poultry, live-poultry stores, and small slaughterers. About 5 percent of the 350 firms were inactive or in the process of transition to wholesale distributing or retailing operations.

Assemblers delivered to other types of assembly firms almost 30 per- cent of the 470 million pounds of live poultry they hauled from farms. The pre-dominant movement between types of firms was from contract haulers, contractors, and live-poultry buyers to processing plants. In addition, firms of like type (such as j)rocessors) sometimes exchanged poultry with each other. This exchange helped to equate supplies of individual market classes on hand with customers' requirements.

The older (and smaller) assembly firms haul a higher percentage of fowl than the newer firms. However, most assembly firms now handle a larger volume of broilers than of fowl. Although most of New England's turkey output is produced, processed, and sold by specialized units, all types of assembly firms acquire a few turkeys, mostly surplus young birds and breeders.

Supply Sources and Market Outlets

Almost two-thirds of the 470 million pounds of live poultry hauled by New England assembly firms in 1957 was from farms under contract to, or owned by, the hauler or his employer (Table 2) . About two-thirds of the volume that processors hauled was from contract sources; for contractors, the proportion was more than 95 percent; and for contract haulers, 83 percent. In contrast, more than 93 percent of the volume hauled by live-poultry buyers and almost 100 percent of that hauled by live-poultry stores and small slaughterers was from independent sources.

Fowl came largely from independent farms since integration had not developed to the same extent in New England in egg-producing enter- prises as in broiler enterprises. But almost three-fourths of the broiler volume was from farms under contract to assemblers of live poultry and their affiliates. About 4 percent of the total supply of live poultry in 1957 originated on farms owned by assembly or processing firms.

Of the total volume of 473 million pounds of live poultry handled by assembly firms and sold by producers in 1957, nearly 91 percent was

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slaughtered within New England and 43.1 million pounds, or about 9 percent, left the region alive. Movement of live poultry into New Eng- land was relatively small, about 2.6 million pounds. Live-poultry buyers accounted for the bulk of the out-movement which has declined sharply in the last decade.

Producers delivered about 3.4 million pounds of live poultry to vari- ous assemblers in 1957 and sold about 4.9 million pounds (live basis) as processed poultry. The five New England cooperative live-poultry auctions still functioning in 1957 handled only about 2.5 million pounds of poultry. The principal buyers on these auctions were live-poultry stores, processing plants, and live-poultry buyers — ■ in that order.

Area Diflferences in Asseniljly Systems

The nature of the assembly system in particular areas is determined by the characteristics of the areas: (1) surplus-deficit status; (2) degree of commercialization of production; (3) human population density; (4) distance to principal consuming centers; (5) relative importance of commercial meat chicken production to egg production; and (6) in- stitutional considerations, particularly the degree of control exercised by marketing firms over production units.

Assembly firm numbers are largest, and average firm size smallest in heavily populated areas such as western Connecticut, Massachusetts and Rhode Island where live buyers, live stores, and direct marketing by producers are important. Where concentrations of commercial process- ing have developed, as in southern Maine, eastern Connecticut, and southern New Hampshire, there are fewer, but larger firms. Firm num- bers and average firm size are small in sparsely-populated non-com- mercial poultry areas such as Vermont, and northern Maine and New Hampshire. In such areas live buyers face less competition from large processors and producers and small local firms are important in servic- ing local demand.

Maine. Broiler production is paramount. The area is surplus, sparsely- populated and remote from markets. There are few assembly firms in relation to volume. In southern Maine, large-scale commercial processors have a substantial share of volume under direct contract. Northern Maine is non-commercial. Few Maine firms pick up poultry outside the State. Few out-of-state buyers operate in Maine. Newer types of assem- blers account for 98 percent of volume.

New Hampshire. Fowl are almost as important as broilers. The area is surplus, sparsely-populated, and intermediate in distance from markets. Northern New Hampshire is non-commercial. But in southern New Hampshire, commercial processors stress fowl and many buy live poult- ry in two or more states. New Hampshire attracts a large number of ovit-of-state buyers, particularly from northeastern Massachusetts. Over 85 percent of volume is hauled by newer types of firms.

Vermont. Poultry production is small and strongly oriented toward market eggs. The State is deficit and sparsely-populated. Direct market- ing by producers and older types of assembly firms are relatively more important than in other sections remote from markets but whose poult- ry production is more commercialized. A few Vermont dealers buy out-

11

side the State, but their purchases are more than offset by the oper- ations of dealers from Massachusetts and New Hampshire who buy in Vermont. The numlier of assemblers operating in the State is small.

Rhode Island. Although poultry production is small, and strongly ori- ented toward market eggs, the State is deficit, and heavily-populated. The number of assemblers is larger in relation to volume than in Ver- mont. This results in a relatively greater role for the older types of firms. A few out-of-state firms buy in Rhode Island, and most Rhode Island firms also assemble poultry in other States.

Connecticut. Although poultry production is highly-commercialized and broilers predominate, the State is heavily-populated. The role of older types of assemlily firms and producers engaged in direct market- ing is large. Since the State is surplus, it attracts many out-of-state buy- ers. A small proportion of buyers resident to Connecticut seek supplies outside the State. The number of assembly firms in Connecticut is large, but more than 75 percent of the volume in the State is hauled by a limited number of newer types of firms.

Massachusetts. The assembly system in Massachusetts is somewhat parallel to that in Connecticut, with newer types of assembly firms handling more than three-fourths of the output. Since Massachusetts is deficit, many of the large number of resident firms seek supplies in adjacent States. Despite a substantial production of poultry meat, with supplies of broilers exceeding those of fowl, relatively few out-of-state firms buy in Massachusetts.

The Effect of Declining Resources in the Assembly System

During 1951-57 the number of firms licensed by State departments of agriculture to haul live poultry in New England declined 55 percent. The number of poultry trucks similarly licensed declined 47 percent. The number of one-truck firms declined 58 percent; firms with 2 to 6 trucks, 53 percent. Firms with 7 or more trucks increased in number, and the average number of trucks per firm increased.

Output of poultry meat in New England increased about one-third from 1951 to 1957. Hence, over the 6-year period, average volume of poultry hauled per licensed firm almost tripled and average volume per licensed truck increased 21/2 times. These increases in volume per firm and per truck helped reduce assembly costs. Higher labor efficiency re- sulted from handling fewer but larger lots of poultry and from the use of larger crews. Travel time was reduced through localization of the assembly function. Furthermore, contract production permitted econo- mies through better truck-route organization and location of producing units, but full exploitation of these possibilities has not yet been achieved.

12

II. Performance and Costs in the Present System of Live Poultry Assembly

In New England in 1957, the average volume of poultry hauled per truck year, per mile of travel, and per man-hour generally increased with the size of assembly firms. The rate of utilization of truck capacity was also higher for larger firms. Increased efficiency with size of firm may be the result, in part, of a close relation between the size and type of firm, as well as the result of cost savings as size of firm increases. Table 3 summarizes measures of performance efficiency, by type of firm, for 75 live poultry assemblers.

The decline in the number of assembly firms and changes in their characteristics have increased the overall efficiency of the assembly system. Newer types of assembly firms have realized substantial econo- mies through expanded volume and increased control over it. But the efficiency of assembly operations may still receive little attention from older-types of firms, particularly live stores and small slaughterers, be- cause of the wider margin these firms obtain from processing and/or re- tailing.

Labor Performance

Rising labor productivity in response to change in type of firms from the old to the new results from the following factors: increased crew

Figure 2. Relationship Between Pounds Handled per Man Hour of Total Time of Labor and Annual Volume, 75 New England Live Poultry Assemblers, 1957

400	unus rc.r« MAn-nn. i i_ivt dmoio;— ^
300	- X^^
	/ LOG Y = -.75220 + .70838 LOG X -.03400 LOG X*
200	'
100	■

0 5 10 15 20 25 30 35 40

ANNUAL VOLUME ASSEMBLED (MILLION POUNDS)

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14

size and specialization, larger average flock size'*, and a higher ratio of work time to travel time because of increased density of production. Figure 2 shows the relationship, calculated from survey results, between output per man hour of total time of labor and annual volume.

At the farm a major share of time is involved with catching birds and loading crates. Other jobs performed include: positioning trucks, hand- ling empty crates, tying and untying loads, covering loads during in- clement weather, weighing, making out purchase slips and paying. In some instances, only part of the crew is fully occupied at these tasks.

A substantial segment of total time elapses during travel between plant and farm units and only the driver can be considered as productively employed. As volume increases, crew organization shifts from one man per truck to one or two men riding with the driver of each vehicle. A further shift, with additional volume, is to foremen and crews who re- main in the field and load vehicles which ferry back and forth to the plant. The crew moves from farm to farm in passenger vehicles. This type of operation reduces travel time for the crew and contributes ma- terially to enlianced productivity.

Figure 3. Relationship Between Pounds Hauled per Mile of Truck Travel and Annual Volume, 75 New England Live Poultry Assemblers, 1957

POUNDS PER MILE(UVE BASIS)-

10 15 20 25 30

ANNUAL VOLUME ASSEMBLED (MILLION POUNDS)

Truck Operating Performance

The number of pounds of live poultry handled per mile of truck travel increases as volume increases (Figure 3). This is due in part to the use of larger trucks^ and a higher rate of utilization of truck ca- pacity.

^ Appendix Figure III shows the relationships of crew size to annual volume, and Appendix Table IV contains detailed data from four actual plants, showing the in- crease in average lot size which occurred with increasing plant size.

^ Appendix Tables V and VI show the distribution of truck sizes and inventory value for vehicles registered by assemblers of live poultry in New England in 1957.

15

Moreover, the largest firms are oriented toward large flocks and assem- ble poultry in the most-eonimcrcializcd areas. On the other hand, the orientation of small firms is toward small flocks and non-commercial areas. Although influenced hy the nature of local production, emphasis also shifts from fowl to broilers as firm size increases ( Appendix Table VII). This substantially increases the poultry available per stop and per mile.

In New England in 1957, three-fourths of the assembly firms operat- ing one vehicle utilized trucks of II/2 tons rated capacity or less. In contrast, for firms operating 7 or more vehicles, three-fourths of the trucks were of 21/^ tons rated capacity or larger (Appendix Table V).

Nevertheless, many firms have trucks of larger capacity than the current volume they handle would require, and there is a wide distribu- tion of ages of trucks registered by poultry handlers (Appendix Table VIII j . This is because: (1) The volume of business of many smaller firms is declining; and (2) secondhand trucks ai*e widely used by smaller firms to help reduce costs. Truck depreciation is not a major item in the total costs of the assembly firm, and obsolescence is a minor consideration. Furthermore, trade-in allowances and secondhand values are not proportionate to truck capacity. Hence, in the present system, decisions on vehicle replacement can be made solely on the basis of repair bills vs. annual depreciation.

Trailers are owned by many large firms because of their substantial capacity and assumed efficiencies. However, many firms do not use them regularly and are replacing them with large trucks because the trailers

Figure 4. Relationship Between Percent of Annual Trucking Capacity* Used and Annual Volume, 75 New England Live Poultry Assemblers, 1957

PERCENT OF CAPACITY-

40

30

20

10

LOG Y = .65653+30747 LOG X

O 5 10 15 20 25 30 35 40

ANNUAL VOLUME ASSEMBLED (MILLION POUNDS)

* Crate capacity of each truck times average weight per full crate of birds times two trips per day for 247 operating days.

16

are difficult to maneuver into position for loading at the farms and too hard to handle on many hack roads. Improvement of huildings, yard lay-outs, and secondary roads to enhance pickup efficiency has received too little attention.

Factors which influence the rate of utilization of a firm's total truck capacity, are: (1) The number of days of operation per week; (2) the typical load compared with vehicle capacity; (3) the number of vehicles on hand and the regularity of their use; and (4) the use of trucks for purposes other than hauling poultry. Figure 4 shows the re- lationship between percentage of annual truck capacity used and size of firm.

Most small slaughterers and live-poultry stores pick up poultry only one or two days per week. Most live-poultry buyers operate 3-5 days per week, and contractors, contract haulers, and processing plants gen- erally 5 days per week. On the average, the smaller the firm, the greater the seasonal variation in volume it experiences. Hence, the percentage of excess capacity may be relatively larger for smaller firms than the comparison of operating days per week would suggest.

Present Costs of Live Poultry Assembly

Total costs per pound for assembling live poultry decline as firm size increases (Table 4). This is also true for the two main variable cost items, labor and truck operation costs, as well as for fixed costs such

Table 4. Average Costs for Typical Sizes and Types of Firms Assembling Live Poultry, New England, 1957-581

Typical Firm Size:		Typ	(ical Firm Size:
Total Pounds Hauled	Estimated	Tota:	I Pounds Hauled	Estimated
per Year	Total Costs		per Year	Total Costs
	(cents per pound)		(cents per pound)
50,000	4.10		2,500,000	1.40
100,000	3.25		5,000,000	1.25
200,000	2.75		10,000,000	1.00
300,000	2.52		15,000,000	0.75
400,000	2.27		20,000,000	0.65
500,000	2.10		30,000,000	0.55
1,000,000	1.60		40,000,000	0.50 Range in
Type of Firm	Labor Cost	Other Costs Total Costs	Total Costs
		(cents per pound)
Processing plants	0.43	0.36	0.79	0.50-1.00
Contract haulers	0.47	0.38	0.85	0.70-1.00
Contractors	0.49	0.95	1.44	0.80-1.75
Live-poultry buyers	0.70	1.00	1.70
Live-poultry stores	1.52	1.982	3.502	1 1.45-10.002
Small slaughterers	3.30	4.202	7.502	■

1 For input-output data on the same firms, see Table 3. Based on a stratified random sample of 75 firms.

2 These cost levels appear excessive, and may include charges assignable to other activities.

17

as the ownership of equipment. However, the cost reductions with in- creasing firm size suggested l)y examination of average costs of actual firms may differ from those obtained by the synthetic metliod. This difference occurs because of short-run considerations which will be nulli- fied by the eventual replacement of resources, further structural adjust- ments, and by differences in basic assumptions and methods of analysis. Smaller firms, whose costs on any standardized basis seem excessive, are able to survive in the present environment by:

(1) Using "unpaid" family labor to reduce out-of-pocket costs;

(2) Paying lower factor prices;

(3) Acquiring and using secondhand vehicles;

(4j ComJjining labor and vehicle used for poultry pickup with use for farming operations, egg hauling, distributing poult- ry and eggs, or hauling other items;

(5) Absorbing any "loss" on pickup operations in other oper- ations; and

(6) Confining operations to areas of "non-commercial" poult- ry production which may be by-passed by large firms, and sometimes by paying lower prices.

In a marketing system composed of a mixture of integrated organ- izations and independent firms carrying out successive single functions, some higher-cost firms selling to volume outlets are afforded short-run protection by marketing margins established on a bulk-line basis. *^ But with continued progress toward higher operating efficiency as a major weapon of competition, the assembly margin will be progressively nar- rowed over time and its impact more apparent for all sizes of firms.

Despite the association of increasing volume and declining costs, vari- ations from the average may be substantial for any one firm size (or volume level) . These differences reflect: locational and institutional con- siderations; market-class composition of supplies; and, managerial com- petence.

While a substantial number of assembly firms may operate in most sections, the supply areas of two or more individual firms rarely coin- cide. Thus, the supply area of each firm exerts a unique effect on costs.

The rapid changes in the industry in recent years have disrupted established procurement patterns. Some assembly firms have success- fully adjusted to these forces by establishing closer tie-ins with pro- ducers or contractors and between the assembly and processing func- tions. For others, particularly older firms, with committed resources and long-established relationships which curtailed adjustment prospects, the result has been distortion of the size and shape of the supply area and excessive assembly costs.

Costs per pound for assembling fowl are generally higher than for broilers. Both average flock size and density of volume are likely to be lower with fowl. Heavier weight per bird is usually not sufficient to off- set these factors.

In an environment where independent farmers predominate, produc- ing units are likely to be located without reference to any one assembly firm. Whore contract production is involved some discretion exists as to farm size and location. But the cost reduction possibilities inherent

^ A bulk-line margin is wide enough to cover a major share of the volume needed.

18

in size and location of producing units have not been fully achieved as yet because of the heavy reliance upon use of or conversion of existing resources rather than on new investment.

Management has not yet assumed its full role in increasing efficiency and lowering costs of assembling poviltry. Moreover, it is difficult to ascertain from cost data from actual firms the degree of success man- agement has achieved in minimizing costs. This is because of the vari- ations in levels of operation, equipment, practices, market classes and weights, prices of inputs, density of the supply area' and the extent of integration of production and marketing functions. The following chap- ters examine the effect of standardization of some of these factors on the level of assembly costs. They also suggest some of the forces which have resulted in declining assembly costs and some of the changes by which present firms can further reduce costs.

III. Reducing Costs of Live Poultry Assembly

Methodology and Assumptions

Average costs for groups of firms are derived from a mixture of vary- ing situations and circumstances. A substantial number of factors in- fluence the assembly costs of the individual firm. Some factors are pri- marily geographically-oriented. Examples are: The proportions of vari- ous market classes available; the volume obtainable per square mile and per road mile; and the rate at which truck travel may be accom- plished. Other factors are primarily institutionally-oriented. Some of these are: The number, size, and age of trucks; the level of factor prices; the number and type of firms competing in a supply area; crew size and organization; labor input-output relationships; and the num- ber, type and location of farm units.

The original data, taken at a particular point in time, provides a cross-section of an industry in transition. Historical series cited, and case studies of individual firms, give further evidence of the speed and direction of changes. Chapters I and II describe the present industry and its practices and costs. This chapter translates the present indus- try, by standardizing size and some other factors, into a set of simpli- fied models representing completed stages rather than a mixture of firms in all stages of transition. This is done to facilitate the study of the effects of a continued movement toward fewer, larger, and more highly integrated firms.

By standardizing many of these diverse factors, more precise and meaningful relationships can be synthesized. These provide helpful guidelines for assemblers of live poultry by: (1) Suggesting the results they can expect by imitating their more successful (and sometimes

"^ In synthesizing assembly costs, one can project the size and density of supply areas well beyond levels which may exist in practice. Processing plants studied in 1955-56 obtained more than three-fourths of their volume within 50 miles of the plant. This held true even for the largest plants, though the size of the supply area increased with plant size. In the aggregate, the size of the supply areas for most firms has continued to shrink in recent years. Hence, a 40 mile mean radius would now appear to constitute a reasonable limitation to the supply area of most individual firms or groups of reasonably homogeneous firms. See Appendix Table IX for a dis- tribution of firms by average lengths of haul in 1957.

19

larger) coni[)etitors; (2) by explaining the reasons for the present cost structure.

However, the cost levels in this chapter are not necessarily "pure costs," as derived from a rigorous study of the relationship of size of firm to average costs, and the level of costs might be reduced somewhat by a more microscopic approach, particularly in terms of labor input- output relationships. These differences occur because the assumptions one would make under a rigorous size-cost study would not l)e identical with the procedure employed in the analysis in this chapter. Yet, the use of observed relationships as a basis of projecting what a firm might experience seems realistic and appropriate. In other words, while this analysis does standardize some factors, some beterogeniety remains. For example, this analysis does standardize firm size, as would be done in selecting model firms for a synthetic cost study. In contrast, flock size and crew size are allowed to increase with increasing firm size, as they were found to do among existing firms. In a more restricted analysis flock size and crew size might be standardized for all firm sizes. How- ever, the use of these looser assumptions is believed to be more typical of the conditions which firms have and would still encounter in increas- ing volume from given levels. Thus, the objectives of this analysis are distinctly different from those of a more rigorous study and the assump- tions used are varied accordingly.

The resulting analysis is expressed first in terms of the relationship between firm size and costs per unit of product for selected average lengths of haul. Other factors are varied with size, on the basis of ob- served practices and relationships. These include: truck size, crew size, labor input-output functions, flock size, and the percentages of broilers and fowl handled. Because of the aggregative nature of the original data, it is impossible to separate out the precise effects of each of these fac- tors on costs.

Secondly, since the assumptions of given volumes, given truck sizes, and given lengths of haul result in sets of observations where volume per mile of truck travel mav varv. the best levels of performance were selected for each of several levels of volume per mile of truck travel in order to standardize this factor. These relationships are then used to examine the effects of: fa) Holding volume constant, but obtaining it from shorter or longer average lengths of haul: (b) increasing vol- ume while holding average length of haul constant: and, (c) changing both volume and average length of haul.

The results from making adjustments relating primarily to total volume and volume per mile of truck travel may be viewed in two ways. First, given a supply of specified quality, quantitv. and geographical location, how could assembly costs be minimized if a number of firms of discreet sizes and types constituted the alternatives? Secondly, if a firm of particular size and type was able to overcome institutionalized restrictions and change to another size and type, what would the re- sults be in terms of costs?

Data were adjusted to standardize levels of operation, prices of inputs, weights per bird, volume of poultrv per mile of truck travel, travel time for specific lengths of haul, and equipment and practices. The re- sults of the survey of 75 firms assembling live poultry in New England were used to determine progressive changes, with increasing firm size.

20

in crew sizes, labor input-output relationships in handling poultry at the farm, flock size, and the proportion of broilers and fowl handled.

Some of the principal assumptions and techniques on which this an- alysis is based are:

(1) Ten sizes of assembly firms were selected. These were capable of handling the poultry requii'cd by processing plants with capacities of 150; 300; 600; 1,200; 1,800; 2,400; 3,600; 5,000; 7,500; and 10,000 broilers per hour, as established in a previous study. ^

(2) Initial cost budgets were prepared for 12 selected truck sizes found in use by New England poultry assemblers. These were capable of carrying 2, 5, 10, 20, 30, 60, 100, 130, 160, 190, 220, and 320 crates each. This selection served to establish the nature and extent of cost relation- ships without considering an almost unlimited number of truck com- binations.

(3) Firm capacity was increased by adding additional trucks of the same size as in the initial budget. Costs at 100 percent of capacity were determined with annual mileage traveled per truck at 2,500; 5,000; 6,250; 10,000; 12,500; 25,000; and 50,000. For each firm capacity and mileage level, costs were then determined at 10, 40, 70, and 130 percent of capacity. The mileage levels used were equivalent to two trips per day (for 247 operating days) of the following average round-trip lengths in miles: 5, 10, 12.5, 20, 25, 50, and 100.

(4) Truck travel time was basically determined by using average rates of speed which increased with distance (see Appendix Figure I).^ Where passenger vehicles were required to transport pickup crews be- tween farms, additions to travel time were made at a rate which de- creased per man added to the crew.

(5) Statistically-computed curves were used to establish labor input- output relationships for work performed at the farms. Output per man- hour was determined by removing travel time from the data used for Figure 2 (see Appendix Figure II). Crew size was determined from Appendix Figure III.

(6) Flock size was progressively increased with annual volume hauled as indicated in the survey. Appendix Table VII shows the in- crease from an average of 3,000 pounds per lot per farm at one million pounds annually to an average of 30,000 pounds per lot per farm at 40 million pounds and above annually.

(7) The percentage of broilers was progressively increased with annual volume hauled. The proportions of broilers ranged from 50 percent for small a!=sembly firms to 98 percent at 70 million pounds annually. Appendix Table VII shows the proportions used at selected volume levels.

(8) Since the cost projections resulting from the preceding assump- tions were made with mileage per truck held constant, volume per mile of truck travel varied. This occurred because of the increase in the

S Rogers, G. B. and E. T. Bardwell, Marketing New England Poultry. 2. Economies of Scale in Chicken Processing. N. Hamp. Agr. Expt. Sta. Bui. No. 459. April 1959.

9 Based on truck mileage and time relationships in: Rogers, G. B. and H. C. Woodworth. Distributing and Handling Grain-Feeds in New Hampshire. II. Problems in Retail Distribution. N. Hamp. Agr. Expt. Sta. Bui. 427, July 1956. Fig. 9, p. 37.

21

sizes and numl)er of trucks. Least cost-conil)inations of trucks, labor and other resources were chosen to derive cost curves for specified vohimes of pouhry per mile of truck travel, as illustrated in Figure 5.

(9) The shrinkage in live weight which occurs in hauling was not included as a cost item in this report. Shrinkage is less for short than for long hauls. Thus, reducing the length of haul would result in cost reductions in addition to those shown in this report. In practice, shrink- ages resulting from different lengths of haul are averaged out in paying prices or transfer values of live birds. Moreover, there is a definite need for a new study of the precise relationship between shrinkage and length of haul under present conditions and with the modern type of broiler.

Figure 5. Poultry Assembly Costs Related to Annual Volume and Pounds

per Mile of Truck Travel

CENTS PER POUND(LIVE BASIS)-

0.3

ACTUAL COSTS FOR SAMPLE FIRMS

— 100 —200 —.500

1 J-

3000

10 20 30 40 50 60

ANNUAL VOLUME ASSEMBLED (MILLION POUNDS^

70

(The number on each solid lined curve indicates the pounds of poultry obtained per mile of truck travel)

Effect of Firm Size on Costs of Live Poultry Assembly

Using tlic assumptions and methodology previously described, costs of asscml)ling live poultry are hereafter analyzed in terms of a set of 10 model firms. Net differences in the unit costs provide a measurement of the savings or increased revenues which the firm with the less efficient operations must accomplish by other means if it is to remain competi- tive.

This analysis does suggest that costs of assendjling live poultry can be reduced from present levels by increasing firm size and thus achiev- ing the dcsiral)lc characteristics of new type firms and by increasing the density of the sujiply area. Moreover, the cost patterns outlined help explain the reasons for the rapid concentration of poultry assembly

22

in fewer and larger hands in recent years. Inherent in this development is the spread of vertical integration, including the selection and ex- pansion of contract flocks.

For any size of assembly firm there is a substantial cost advantage in maintaining operations as close to capacity as possible. Figure 6 shows

Figure 6. Pouhry Assembly Costs for 10 Model Plants Related to Size of Firm and Use of Capacity*

CENTS/POUND (LIVE BASIS)

PERCENT OF CAPACITY

* When poultry is obtained at rate of 500 pounds per mile of truck travel. (The number on each curve indicates the capacity of the model firm in million pounds of poultry annually.)

23

derived average cost curves for 10 model firms with poultry available at the rate of 500 pounds per mile of truck travel. Similar sets of curves can be derived for otlicr levels of volume per mile of truck travel. In assembly operations, 100 percent of capacity can be exceeded only in the short-run without adverse elfects on costs. The hauling capacity of trucks (crates, birds) is an important limiting factor. Hence, in the long-run, operation above 100 percent of capacity results in a discon- tinuous average cost curve because additional equipment is required or other costs increase sharply. ^^

When derived average cost curves for the series of model plants are plotted in relation to percent of capacity, each successively larger plant has an advantage over the next smaller unit. This is because unit costs are successively lower, almost without exception, for each percentage level as firm size increases. Relative advantages are generally minimized at 100 percent of capacity, but widen below this level.

The Influence of Volume Per Mile of Truck Travel on Costs of Live Poultry Assembly

Declining costs per pound of poultry assembled, associated with firm size, result from changes in the number and size of vehicles, increased labor efficiency, economies in management and facilities, larger flock sizes, and a greater proportion of broilers hauled. Such factors often can more than oflset the effects of increased total mileage per truck and per firm as volume increases. Moreovei-, these savings can be sup- plemented substantially by increasing the volume of poultry per mile of travel. Thus, density of supplies, as well as absolute volume, is re- lated to the achievement of miniunim costs in assembling live poultry.

The density of the supply area and the average length of haul have an important effect on costs. ^ ^ Figure 5 compares the curves computed for selected levels of volume per mile of truck travel with actual aver- age costs incurred by firms of various sizes under 1958-59 conditions. Because of variations in use of capacity, input prices, and performance levels as well as volume obtained per mile of truck travel, the curve connecting the actual average costs cuts across several of the curves representing costs with volume per mile of truck travel standardized. This situation shows the greater degree of success already achieved by larger assembly firms in reducing costs. Figure 5 also illustrates the opportunities which may be open to assembly firms of a given size to reduce costs through contractiiig the size of the supply area and reduc- ing the average length of haul.

Present firm size seems related to the relative cost reductions which actual firms can realize through: (1) Increasing volume and adopting

1^' Costs predicated upon 130 percent of capacity do not represent a sustained level of operation. In the short run, 100 percent of capacity can be exceeded without adverse effects by additional crates, placing more birds in each crate, or handling birds of heavier wieght, if this can be accomplished \vithout exceeding legal load limits. Hut the methods of projecting costs, described in the Appendix, probably do not fully reflect the increased rates of use of inputs and the added repairs which sustained heavier loading might necessitate, nor the costs of break- downs during the operating week.

'1 For purposes of this report, density of poultry production and pounds per mile of truck travel are used interchangeably,

24

the techniques and practices of their larger competitors; or, (2) retain- ing their present size of husiness, techniques, and practices and increas- ing volume per mile of truck travel. Except for small firms picking up poultry at a low rate per mile of truck travel, a given percentage in- crease in volume would usually provide greater dollar savings than the same percentage increase in volume per mile of truck travel. Firms with annual volume of 2 million pounds or less and picking up poultry at a rate of less than 200 pounds per mile of truck travel can make the great- est short-run savings hy increasing volume per mile of truck travel. How- ever, once present firms attain a level of 200 pounds per mile of truck travel, their greatest gains may lie in expanding firm size.

Costs per pound for live poultry assembly will not continue to de- cline indefinitely as annual volume increases. With volume per mile of truck travel at 200 or below, miles per truck increase rapidly with in- creases in annual volume. Despite other potential savings, such as those from using larger trucks and crews, the increased time and distance is sufficient to cause an eventual upturn in costs. Hence, least cost points will be attained at smaller and smaller annual volumes as pounds per mile of truck travel declines from 200. However, in this study, continued cost reductions were indicated for levels of 500 pounds per mile of truck travel and up throughout the range of volumes studied (Table 5).

Least-Cost Combinations of Resources in Live Poultry Assembly

At most volume levels, several alternative combinations of resources and inputs will achieve the minimization of total per pound costs — within a fraction of a cent range. For most levels of volume per mile of truck travel, least-cost points for successively larger firms involve greater numbers of trucks of larger size operated at or near 100 percent of ca- pacity. Table 6 illustrates some of the alternative combinations of re- sources indicated in this study for selected annual volumes and mileages per truck. Since subsequent discussions will involve minimum-cost com- binations of assembly and processing, the annual volume levels selected are about equivalent to those for model processing plants developed in a previous report.

For example, if a firm assembles 25 million pounds of poultry by using at capacity five 21/2 ton trucks traveling 25,000 miles each, about 55,000 man hours of labor would be required, and total costs per pound would approximate 0.475 cents. At 35 million pounds, capacity use of seven 2^ ton trucks or six 3 ton trucks, traveling 25,000 miles each, would require about 71,000 man hours of labor and cost 0.440 cents per pound of live poultry assembled.

In actual practice, some individual assembly firms own and operate trucks of various capacities. Such combinations may be indicated at some volume levels to enable the firm to develop least-cost combinations under the standardized conditions involved in this analysis. Further- more, in applying this study to a specific situation, truck size may be further modified because of variations in average flock size from the levels assumed herein.

For example, if the volume of a firm lies between 25 and 35 million pounds annually, it might achieve its least-cost combination with five

25

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2^/^ ton trucks plus a tractor-trailer or plus two 2 ton trucks. But if its volume is expanded to a level of 35 million pounds annually, it might replace the tractor-trailer (or the two 2 ton trucks) with 2 trucks of the 21/^ ton size, or move to six 3 ton trucks.

Economies in truck ownership and operation can he ohtained hy: (1) Minimizing the total numher of trucks owned; (2) maximizing the percentage of capacity at which each is operated; and, (3) minimizing the numher of vehicles required to load out the average size of flock in order to restrict the numher of stops per vehicle per trip and the num])er of partial loads. However, the volume level at which the mini- mum cost per pound for truck ownership and operation is achieved may not coincide with the low-cost point for the firm.

The lahor prohlems of the assemhly firm involve: (1) Minimizing crew size, if workers regard pickup work as of inferior "status" and are difficult to ohtain and retain; (2) minimizing the amount of overtime wages; (3) moving the field crew, other than those who accompany trucks, most expeditiously; and (4) maximizing the output per man- hour.

Unless one or more of the preceding situations is restrictive, the com- hination of resources and inputs that will minimize the total per pound cost at any given volume level takes precedence. Least-cost points for the specific ohjectives rarely coincide. In studying cost reduction possi- hilities, the relative importance of specific ohjectives in the decision- making process of the firm is likely to differ in the long-run from that in the short-run. (See Chapter II for a discussion of actual costs and the reasons therefore.)

Importance of Cost Group in Producing Cost Reductions

Costs incurred in live poultry assemhly can he segregated, according to their behavior as volume increases, into three main groups. These are, in order of importance: lahor, truck costs, and management and facility costs.

Lahor costs per pound of poultry decline as volume increases. The lower per pound costs result from the use of larger crews, increased specialization, minimization of in-field travel hy crews through the use of supplementary vehicles, and handling flocks of larger average size. The precise effects of each of these factors are not ascertainable under the methods used.

Labor is the single largest cost in assembling live poultry. It accounts for 60 to 67 percent of total costs per pound. The share of total unit costs represented by labor declines as volume increases. This occurs because savings from increased labor productivity continue well beyond the volume levels where per pound costs for truck ownership and oper- ation level off. But at any one volume level, the proportion of total per pound costs represented by labor increases as annual mileage per truck or per pound increases. This results from the increase in the ratio of travel time to work time and from the greater effect of overtime wage rates.

Appendix Tables X and XI show the unit costs which resulted for selected combinations of trucks and other resources as mileage per truck and total volume increased. Appendix Table XTI indicates the truck sizes used in cost projections and the costs for truck ownership and

29

operation at capacity when hauling hroilers. Costs for truck ownership decline with increasing truck size. At a level of 5000 miles per truck per year, least costs per pound are realized at the II/2 ton size ( 130 crate capacity per load I . For greater annual mileages, larger trucks give costs per pound as low or lower than the II/2 ton size. Within the area of declining costs per pound, increasing cost per mile is more than offset hy the larger volume carried.

Truck costs per pound of poultry hauled rise rapidly, for any par- ticular truck size, as average length of haul increases. The ahsolute, and in many cases, the relative advantage of larger trucks increases as length of haul increases.

While the cost savings attrihutahle to ownership and operation of larger trucks are fully realized at small volumes,^ ^ further savings are realized on lahor costs per pound as volume increases. In addition, costs per pound for management and facilities continue to decline as volume increases.

The cost items involved in assemhling live poultry can he separated into accounting categories developed in a previous study. ^-^ The be- havior of individual cost items with increasing annual volume, truck size, and mileage per truck is shown in Appendix Table XIII. Further information on the synthesis of individual items of cost is contained in the Appendix.

IV. Some Implications of Reduced Costs of Assembly and Processing

The preceding chapter of this report discussed the extent and nature of cost reductions which assembly firms can achieve within the present system. Full realization of these savings can come about only in the long-run. Overtime, the need to replace resources will generate greater mobility. Furthermore, gradual institutional changes would be required, including further integration of the growing, assembly, and processing functions. An additional condition to the full realization of these assem- bly cost reductions would be the continued development of production technology, including adequate disease control and methods whereby diseconomies of scale in growing did not appear.

Institutional Changes Which Would Facilitate Assembly Cost Minimization

As firm numl)ers decrease further, the number of pounds of poultry available to each firm as well as that available per mile of truck travel may increase in many areas. Yet with several firms operating in an area the duplication of travel and expense would still be considerable. Fur- thermore, the random location of farms and variability in their size and layout would maintain costs above minimum levels.

Two direct steps can be taken which will aid the individual firm in minimizing assembly costs: (1) Selection, retention, and expansion of producing units of suitable size and layout as close as possible to the plant; and, (2) movement toward an exclusive supply area for the firm.

^2 Less than 6 million pounds annually for trucks traveling all mileages (S.OOO; 10,000; 25,000; 50,000) per year. Appendix Table XII. 13 N. H. Bui. No. 459, op. cit., p. 9-14.

30

Whether indepenrlrnt prorliirer.-i or contrart growers are involved, in- clusion of location anrl size as sliort-riin criteria for pavnient woulfl aid the development of a supply area of smaller radius. The potential sav- ings in assemhly costs would provide a hasis for financially encouraging nearhy growers. New resources can be located clo'^er to the plant as a policy matter if investment capital is provided contract growers or assemblers own producing units outright.

The establishment of an exclusive supplv area for the individual firm would further cost reduction in assembly. Development of contract grow- ing operations in new areas offers one Avay to do this. The firm might also try to reshuffle supplv flocks with several competitors. But exten- sive development in this direction would raise some legal and sociologi- cal problems and necessitate changing grower payment procedure. i**

The cost savings from increasing the volume per mile of truck travel can be illustrated by using as an example a firm handling 30 million pounds of poultry annuallv. If this firm picks up poultry at the rate of TOO pounds per mile of travel, it would incur costs of 0.53 cents ner pound, or $159,000, and its trucks would travel 300.000 miles. A reallo- cation of supply flocks with several competitors, to create the beginnings of an exclusive supply area could easily halve mileage, double density, and reduce costs to 0.46 cents per pound, or $138,000. a savings of S2L000. An additional $21,000 could be saved bv increasing the pounds per mile of truck travel from 200 to 500 (Table 7) . While the continued increase in the volume per mile of truck travel results in drastic reduction in miles per trip and per truck per year, cost savings per unit become smaller and smaller.

Table 7. The effect of Increased Volume per Mile of Truck Travel for a Hypothetical Assembly Firm Handling 30 Million Pounds Annually ^

Pounds per of Tra	Mile vel	Truck Miles per Year	Miles per Trip	Average Assembly Cost per Pound	As	Total ssembly Cost	Net Annual ; Additional Savings
100 200 500 3,000		(1,000) 300 150 60 10	(number) 90 45 18 3	(cents) 0.530 0.460 0.391 0.344		($1,000) 159 138 117 103	fSl,000l 21 21 14

' Assuming 7 trucks operated at capacity, 2 trips per day for 247 operating days.

Systemic Efficiency in Assembly

With 332 firms engaged in poultry assemblv in New England in 1957, systemic costs totalled S4.64 million. Most firms obtained between 20 and 50 pounds of poultry per mile of truck travel. Only a few firms obtained 100 or more pounds of poultry per mile of truck travel.

^^ Apprehension exists relative to the extent to which firms can work jointly without facing anti-trust investigation. In the present environment, the association of buyer and seller, or fieldman and grower frequently may be based on personal considerations rather than economic decisions. Furthermore, many growers experi- ence difficulty in evaluating the alternative contracts offered. One solution would be the periodic negotiation of uniform terms, practices, and supervision, with growers assigned to assemblers on the basis of proximity to the plant.

31

To proviflo a point of reference for evaluating present and prospective systems of live poultry assembly in New England, the number of firms of several sizes needed to assemble output and the systemic costs for selected density levels are indicated in Table 8.

Table 8. Number of Firms of Selected Sizes Required to Assemble 19.'57

Volume of Live Poultry in New England and Resulting Systemic

Costs at Various Volumes per Mile of Truck Travel

Firm Size	Number
	of Firms		Pounds of Poultry per	Mile of Truck Travel
	20	50	100		200	500	2000
(mil. lbs.)				Total Systemic	Costs
(annually)			(million	dollars)
1.17	401	5.78	4.44	3.74		3.25	2.47	2.19
2.37	198	5.34	4.24	3.58		3.11	2.27	2.04
4.61	102	4.98	4.02	3.36		2.89	2.11	1.88
8.85	53	4.63	3.68	2.98		2.57	1.95	1.74
12.88	36	4.45	3.46	2.77		2.41	1.86	1.65
17.02	28	4.28	3.23	2.59		2.26	1.79	1.59
25.21	19	4.12	2.99	2.35		2.06	1.70	1..52
34.66	14	4.08	2.85	2.22		1.92	1.62	1.46
51.96	9	4.32	2.76	2.06		1.77	1.55	1.43
69.24	7	5.02	2.94	2.11		1.76	1.49	1.40

The present live poultry assembly system in New England is char- acterized by the existence of excess capacity. Tf all the trucks owned by assembly firms operating in the region in 1957 had been used at 100 percent of capacity, volume handled through the system could have been more than tripled. Processing plants alone could have handled the entire volume. Or. the truck resources of any two of the three next largest groups — contract haulers, contractors, and live-poultry buyers — would have sufficed (Table 9).

Table 9. Characteristics and Capacity of the System of Live Poultry Assembly

in New England, 19.^7

				Percent of	Capacity	of Present
Number	of 1957	Average	Capacity at	Firms	if Each
	Firms	Volume	Volume	which Group	Operated at 100
			per Firm	Operated ^	Percent <	jf Capacity
	Total	Per Firm
		(mil. lbs.)	(1000 lbs.)	(percent) (mil. lbs.)	(1000 lbs.)
Processinp Plants	35	285.6	8,160	40.0	714.0	20,400
Contract Haulers	10	81.5	8,150	38.0	214.5	21,450
Contractors	22	45.4	2,064	19.0	238.9	10,859
Live-Poultry Buyers	125	52.6	421	18.5	283.8	2,270
Live-Poultry Stores	90	3.9	43	9.5	41.1	457
Small Slaughterers	50	0.6	12	7.0	8.6	172
Total	332	469.6		—	1,500.9	—
Average	—	—	1,414	31.3	—	4,521

1 Based upon the number and capacity of trucks if each used to haul two full loads per day for 247 operating days.

32

Substantial reductions in firm numbers from 1957 levels are likely. Even with no change in density of production, systemic costs would be reduced materially due to increased volume per firm. But the reduc- tion in firm numbers may also be accompanied by increased volume per mile of truck travel for mo«t firms, and hence, further cost reductions. Savings in the system, as for individual firms, would be augmented by efforts to increase the volume per mile of truck travel beyond the level resulting from reduced numbers of firms.

Tf the firms engaged in poultry assembly in 1957 took steps to double the pounds of poultry per mile of truck travel, systemic costs could be reduced from $4.64 million to S3. 93 million, or a saving of more than $700,000 annually (Models I and IT. Table 10). These results could be achieved by more attention to flock selection and by movement toward exclusive supply areas.

Table 10. Number of Firms Required and Aggregate Costs of Alternative Model Systems of Assembling New England Chicken Output

		Model I	Model 114	Mc	.del III 5
Firm Size Volume	No. of	Assembly	Assembly	No. of	Assembly
and Typei		Firms2	Costs 3	Costs	Firms	Costs
fmil.lbs.)		a 000 dollars)	(1000 dollars)		aOOO dollars)
Processing Plants	285.6	35	2,256	1,914	28	1,448
Contract Haulers	81.5	10	693	587	8	451
Contractors	45.4	22	654	554	11	384
Live-Poultry Buyers	52.6	125	894	763	40	552
Live-Poultry Stores	3.9	90	117	94	25	78
Small Slaughterers	0.6	50	27	20	12	19
Total	469.6	332	4,641	3,932	124	2,932

^ Under each type, firms of different sizes occur.

2 From Table 1.

3 Average per pound costs from Table 4 except unit costs for live-poultry stores and small slaughterers are adjusted to 3.00 and 4.50 cents per pound, respectively, on the assumption vehicles are used for purposes in addition to live poultry assembly. Pounds per mile of truck travel from Table 3.

4 Same number and volume, by types of firms, and rate of use of truck canacitv. as for Model I. Pounds per mile of truck travel doubled from rates in Model I. Unit costs in Model I adjusted by using percentage changes from data for Table 5.

5 Use of a more limited number of vehicles at 100 percent of capacity, a reduction in firm numbers based on the preceding plus known mortality. Unit costs derived from data for Table 5. Pounds per mile fractionally higher than in Model XL

Further developments to create exclusive supplv areas plus a suffici- ent reduction in firm numbers to enable operation at 100 percent of capacity would further increase savings. The reduction in firm numbers would approximate 60 percent, and the additional cost savings a million dollars annually (Model III. Table 10).

Combining the Assembly and Processing Functions

By combining the assembly and processing functions under one man- agement, savings can be achieved in unit costs. These arise from the

33

elimination of a duplicate set of personnel engaged in managerial, buy- ing, and office duties and from the economies obtained by including gar- age and bolding space in the greater square footage of a processing plant rather than in distinct facilities for an assembly firm. The magnitude of unit savings decrease as firm size increases (Table 11). In the 1957 system, it was estimated that 70 percent of the 469.6 million pounds handled bv assembly firms was already included under combined-func- tion firms.

Table 11. Annual Savings Obtainable from Combining the Poultry Assembly and Processing Functions under One Management

"					Savings Obtainable	from
Model Plant		'^olume	Combining	Assembly	and Proces	>sing
Number	Annual ^	Per	Fii	rm		Sy^emic ^
	(million	lbs.)	(cents per		(dollars)		(1000 dollars)
				pound) -
I		1.17		.129		1,509			606
II		2.37		.110		2,607			517
III		4.61		.093		4,287			437
IV		8.85		.075		6,638			352
V		12.88		.065		8,372			305
VI		17.02		.063		10,723			296
VII		25.21		.058		14,622			272
VIII		34.66		.051		17,677			239
IX		51.96		.042		21,823			197
X		69.24		.042		29,081			197

^ If system composed of firms of successive uniform sizes. See Table 12.

2 Live weight basis.

'•''N. H. Sta. Bui. 459, op. cit. At 100 percent of rapacity, 150 broilers or 120 fowl per hour vs. 10,000 broilers or 6,000 fowl per hour. Broilers weighing 3.5 pounds each and fowl 6.0 pounds each.

Figure 7 shows the combined cost curves (assembly plus processing) for selected levels of volume per mile of truck travel. At levels of 1,000 pounds per mile of truck travel and over, unit cost savings for any par- ticular plant size become exceedingly small as volume per mile of truck travel increases. But the dollar savings, at any level of volume per mile of truck travel, may be substantial as plant size increases.

For example, suppose poultry is available at the rate of .500 pounds per mile of truck travel. One large firm could assemble and process 69 million pounds of poultry for 2.898 cents per pound, or Si. 999. 620. Costs for the same voluiue handled by two firms, each with half the capacitv of the larger firm, would erfual .3.162 cents per pound, or $2,181,780 (Table 12). Of the total saving** of $182,160 economies in processing would account for $165,220 and economies in asseniblv for the balance of .SI 6,940.

Combination of the assembly and processing functions further in- creases the advantage of large plants as compared to small plants. For the processing function alone, the cost savings from the smallest model plant to the largest model plant ^ '' is estimated at 1.75 cents per pound live weight basis. For the combined functions, comparisons of the small-

34

Figure 7. Costs for The Combined Assembly and Processing Functions at Various Annual Vohimes and at Selected F*ounds per Mile of Truck Travel

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36

est to largest plant (or the smallest plant to the low-cost point for low levels of volume per mile of truck travel) indicate a spread of 1.9 cents per pound or more, live weight basis.

Greater flexibility in operations of the firm can be secured by com- bining assembly and processing. Either a single-function firm (engag- ing only in assembly) or a combined-function firm (engaging in both assembly and processing) may realize economies by: (a) Increasing density of supplies while holding volume constant; or (b) increasing \olume at a given density. But a single-function firm would face in- creased costs per pound for assembly if it expanded volume by enter- ing a supply area of lower density. On the other hand, the preponderant intluence of decreasing per unit costs of processing upon the total per unit costs of the combined-function firm would make feasible expansion of \ olume by entering a supply area of lower density.

This feature may find application mainly as a short-run expedient. Over a longer period, the competitive interests of the firm would be en- hanced by reducing the size of the supply area and reducing both assem- bly and processing costs.

The following example illustrates the extent to which increased costs per pound in assembly could be offset by economies of scale in process- ing. Suppose Firm A is assembling and processing 20 million pounds of poultry and Firm B, 40 million pounds, in a supply area where poultry is available at the rate of 1,000 pounds per mile of truck travel. If Firm A can increase volume 20 percent, it can reduce processing costs from 3.036 to 2.965 cents per pound. Firm A's assembly costs can be increased from 0.327 to 0.398 cents per pound, or the volume per mile of truck travel reduced from 1,000 to 300 pounds, without increasing total unit costs. Firm B, in increasing volume 20 percent, can reduce processing costs from 2.777 to 2.715 cents per pound. This means assembly costs can be increased from 0.305 to 0.367 cents per pound, or the volume per mile of truck travel reduced from 1,000 to 200 pounds, without increas- ing total unit costs.

Cost reduction, of which integration of the assembly and processing functions is but one method, will encourage further development of stratified competition. At present this feature is most noticeable in the alignment of small farms, small assemblers and processors, and small outlets versus large farms, large assembler-processors, and volume out- lets. But declines in firm numbers and further adjustments of firms to supply areas will accentuate the sectional aspects. For example, small local slaughterers and firms servicing alternative marketing channels (live-poultry stores and live-poultry buyers) will constitute the main outlets for producers in non-commercial areas. In contrast, large com- bined-function firms will dominate in commercial areas. The partici- pation of smaller and older types of firms will be limited to filling limited needs for certain market classes at favorable prices, buying small and mixed lots, and handling excess fowl.

Optimum Adjustments for Selected Supply Areas

The establishment of a least-cost system for a particular supply area initially depends on maximizing the efficiency of the operations of the individual firm. The accumulation of these efficiencies, plus the develop-

37

uieiit oi exclusive supply areas, will make a substantial contribution. But lurther reduction in systemic costs can be achieved by elimination ol redundant resources and the realignment of supply areas.

In any gi\en area, the least-cost combination of resources will involve maximizing the number of the largest feasible plant sizes. Taking the upper limit of projections in this and an earlier study ^'* — 70 million pounds annually at 100 percent of cajiacity — as the present technologi- cal limit, one plant of tliis size would sulfice if usable volume i' in the area was 70 million pounds. If volume in the area were less than this level, one plant of a smaller capacity would provide the best adjust- ment. If volume exceeded 70 million pounds, one 70 million pound plant plus one additional smaller plant, rather than two or more medium sized plants, would provide the least-cost combination. In an area where volume exceeded 140 million pounds, two large plants and one smaller plant would be optimum.

The least-cost system for an area might place certain plants at a com- petitive disadvantage. Hence, in practice, if usable volume would sup- port more than one large plant, such plants would tend to approximate each other in size. The competitive position of a small plant would be enhanced if it concentrated on fowl, with larger plants concentrating on broilers where economies of scale are greatest.

At the time data collection for the study of live poultry assembly was begun there were 28 commercial poultry slaughtering plants ^'^ oper- ating in i\ew England, excluding those engaged in processing specialty items. By mid-1959, only 21 were still operating. Figure 8 shows the areas lying within 10, 25, and 50 miles of these plants and the areas where there are two or more plants within 10 and 25 airline miles. This illustrates the extensive overlapping of supply areas which can exist in the present environment.

In contrast. Figure 9 shows how exclusive supply areas could be de- vised for a more limited number of firms of larger average size than at present. Such a system assumes eventual moliility of capital investment, a distinct possibility with rapid depreciation of plant equipment and the pressures of intra-regional and inter-regional competition. The re- alignment of supply areas results in 10 commercial plants — excluding those handling specialty items and those oriented toward supplying both the Kosher and poultry store trade.

Since preceding comparisons in this report were based on the 1957 system, the cost estimates in Table 13 are presented in these terms. Residual demand for live poultry outside New England and for live and processed birds through the older marketing channels is held constant. The difference in the cost estimates relates to the substitution of the exclusive supply areas and reduced numbers of plants of larger average capacity for the commercial assembly and processing structure existent in 1957. The reduction in systemic costs could approximate 35 percent, or a savings of $8,000,000. To a considerable extent, the exclusive supply

16 Ibid.

17 "Usable volume" may be defined as that available from producing units of a size sufficient to warrant assembly or purchase by commercial plants. Excluded would be small and mixed lots which might better be handled through alternative marketing channels.

1^ Annual volume exceeding one million pounds.

38

Table 13. Aggregate Costs of Model Systems of Assembling and Processing

1957 New England Chicken Output

Volume Model IVi Model V2

(million pounds)

Assembled by New England firms 469.6 469.6

Processed by New England firms 429.9 429.9

Live Poultry Hauled from New England 43.1 43.1

Systemic Costs (million dollars)

Live Poultry Hauled from New England 1.3 1.3

Assembled and Processed within New England

By Commercial Plants 20.8 12.8

By Other Plants 1.7 1.7

Total Assembly and Processing 22.5 14.5

Total Costs 23.8 15.8

1 The 1957 Assembly System.

~ Fewer but larger plants with exclusive supply areas handling same volume.

areas in Figure 9 permit continued operation by remaining plants in many sections where they traditionally operated or which would have been advantageous to them on the basis of Figure 8.

In the Maine supply area, one plant would be concentrating on fowl and the other three almost entirely on broilers. In Vermont, fowl would predominate. In the New Hampshire, Massachusetts, and Connecticut areas fowl would be more important than in Maine. Hence, all of these plants would handle 15-25 percent fowl. These adjustments are necessi- tated by the availabilitv of particular market classes from local pro- duction and influence the maximum plant size considered feasible in the various supply areas in Figure 9.

Just as assembly cannot be viewed in isolation from processing, so the combined assembly and processing functions cannot be viewed with- out regard for distribution. Minimization of the movement of poultry between plants and ultimate consimier, including saturation of local needs from adjacent production, can be accomplished with a model system similar to that shown in Figure 9. This would be true whether a least-cost distributing system involved an expanded role in direct-to- store delivery by plants or service from centrally located distributing points in each geographic area.

39

Figure 8. Duplication of Live Poultry Supply Area for Commercial Poultr Processing Plants, New England, 1958-59

KEY

10 25

Planfs •

50

mile radius

Number of plants competing

within 10 mile radius - 2 or more •??

within 25 mile rodius— 2 3 4

\XXX/^

^ ^

og econ 9/59

6

7

40

Figure 9. A Model System of Poultry Assembly for Commercial Poultry

Processing Plants, New England"'

og econ 9/59

* Exclusive supply areas based on 1957 volumes.

41

APPENDIX

Methods of Standardizing Individual Cost Items

Wages

Travel time was basically rlctormined hy route mileage (Figure I). A.S route mileage increases, the average rate of speed rises to a maxi- mum level. ^ However, hours in travel were adjusted for the nundier of men accompanying trucks and for in-field travel via passenger vehicles. For 1 and 2 truck models, three men were assume<l to be carried per truck, including drivers. For other models the total number of men carried on trucks was as follows: 3 trucks. 7.5; 4 trucks. 9.0; 5-10 trucks, 10 men; 11 trucks, 11 men; 12 trucks. 12 men.

In-field travel time per crew member above those carried on trucks varied from 0.7 of truck travel time with one man to 0.4 with 8 men, 0.3 with 13. and 0.2 at 55 and over.

The number of foremen was as follows: 1 with 6-10 in the crew; 2 with 11-22; 3 with 23-33: 4 with 34-44; 5 with 45-55: 6 with 56-66: and 7 with 67-77. The salaries of foremen were related to volume, and their hours were limited to 1976 (247 days of 8 hours each) for purposes of calculating overtime wages. With volume below 5 million pounds annual- ly, the annual salary of a foreman was $4,000: with volume up to 20 million pounds annually, §4.500. In larger operations some were valued at $5,000 and others at $4,500.

Where part of the crew travelled in passenger vehicles, the cost of operating passenger vehicles was included at 7 cents per mile. It was assumed each vehicle could haul up to 8 men. The first such vcdiicle operated was assumed to travel the same distance as trucks. Thereafter, the distance travelled per passenger vehicle ranged from 0.6 the truck travel distance for the second vehicle to 0.4 per vehicle for the second and third, to 0.2 per vehicle when 7 additional vehicles above the first were required.

Work time involved in loading and related functions were combined in these analyses. The levels of output per man hour were determined by reference to Figure IT. These relationships probably contain some inefficiencies subject to reduction through detailed time-and-motion study or improvement of farm facilities. These data were derived from information used in Figure 2, with estimated travel time, as established in Figure I, being substracted from the asrgregate hours of labor.

Wage rates used were $1.50 per hour for drivers and $1.20 per hour for helpers, plus 5 percent fringe benefits. Time-and-a-half was paid for work by the crew beyond 1976 hours (247 days of 8 hours each) per year. Figure III shows the relationship of volume and crew size, as determined from survey records.

1 Travel lime for routes of 60 miles round trip or less determined by reference to: N. H. Sta. Bui. 427, op. oil.. Fig. 9, p. 37. This fipure derived from records on de- liveries to farms by grain trucks traveling over New England routes. Above 60 miles, a constant speed of 46.2 miles per hour was used.

42

Figure I Relationship Between Route Mileage and Truek Travel Time

Figure II

Calculated Relationship Between Annual Volume and Pounds Handled

per Man Hour of Labor in Loading Live Poultry*

LBS. PER MAN HOUR (LIVE BASIS) I — : — r — I — I I II ri) — ■■ — I — I — rr

600

500

400

300

200

100

rrri m ■ — i 1 — i i i i 1 1 1 ■ — i 1 — i i i i i n — i 1 — i i i i 1 1

Log r = -108768 +.96ri7logx- 05906 log x' .

Log /- 6.03260 - L68393 logX +.18070 logx ^ -

-Logy=2.3ZI2l-.70293logX +.13936 logx

I I I I I I I : 1 1 1 I I I I I I : I 1 1 I [ I 1 M : 1 1 ' I I I I I

t»w*uiNr rou.^uiNr i«w*.yiN-~ row.^tn.-^- rsj

o o o o o o S o o o o o g o b o b o o p

o ooooog §g§§§§ §

ANNUAL VOLUME ASSEMBLED (THOUSAND POUNDS) ag.ecoa"9/59

Truck Costs

Repairs and Maintenance. These costs depend basically on truck size, age, miles travelled, rate of loading, and road conditions. For purposes of this study road conditions were assumed to be constant and rate of loading to have a negligible effect.

As truck size increases, repair and maintenance costs increase, but not in proportion to truck capacity or purchase price. Over the range of truck sizes studied, capacity increases more than 150 times, but aver- age costs per mile for repairs and maintenance only four times. The larger (and more costly) the truck, the higher the repair bill for any particular job, but the greater the "length of life," or the miles which can be travelled before major overhauling becomes necessary. In these calculations, for example, major overhauling was specified at 60,000 miles for pickup trucks and at 90.000 miles for 3-ton trucks.

For any particular truck size, repair and maintenance costs per mile tend to increase with mileage travelled at an increasing rate until it becomes necessary to carry out a major overhaul or replace the motor. However, time depreciation affects repair and maintenance costs. If, for example, a truck travels 50,000 miles in one year, the repair bill per

0009 ooooo

000

* (Excluding truck and crew travel time.)

44

Figure III

Relationship Between Annual Volume and Average Number of Men in

Pickup Crew, 75 New England Live Poultry Asscmblert^, 1957

mile is likely to be lower than if the 50,000 miles is spread over five years. This point requires some modification of the relationship of re- pair costs to total miles travelled when annual mileage travelled varies.

In these analyses it was assumed that vehicles would be traded prior to major overhauling or engine replacement. Aormal mileage per year was assumed to be 10,000. Based upon data from assembly firms, dollar costs per successive 10,000-mile intervals were constructed for each truck size. The accumulation of these through the 10,000-mile interval preced- ing major overhauling or engine replacement yielded the "cycle cost." Regardless of age or mileage, some "maintenance" work is required, providing an irreducible base to which "variable repairs" are added. Maintenance is estimated at 1 percent of new cost per year.

The following formula was used to calculate repairs and maintenance:

RM = 'C + (Y-X.01 N> ^, m

In the preceding formula:

RM := annual $ cost of repairs and maintenance for specified

annual mileage m'. C = "cycle cost" — based on increasing rate per mile for

period prior to major overhaul. Y ^ number of years to major overhaul at m' miles per year. X = number of years to major overhaul at 10,000 miles per

year. N = new cost of vehicle in dollars (truck -)- ^ body or

trailer, if separate) . m =: miles in cycle to major overhaul, m' = specified annual mileage.

Oil. Costs per mile decrease with annual miles travelled. Although oil consumption increases with aggregate mileage, calculations in these analyses are centered on average rates of consumption for the life cycle of the engine. Furthermore, proper servicing requires oil changes based on time periods when annual mileage is low. Hence, it is assumed oil will be changed every 2,000 miles or 90 days, whichever results in most frequent changes. Oil consumption for periods between changes is esti- mated at one quart per 250 miles for vehicles of 5-quart crankcase ca- pacity, with consumption for vehicles of different capacity proportional to this rate. A price of 30 cents per quart was used.

Lubrication. Costs per mile decrease with annual miles travelled to the minimum level and are constant beyond this point. It was assumed vehicles would be serviced every 2,000 miles or 90 days, whichever occurred most frequently. Costs per job were increased with truck size.

Tires. As truck size increases, the size and ply of tires increases. Hence, the cost of a new tire or of a recapping rises. However, as size and ply increase, the original mileage obtainable, the number of re- capping possible, and the mileage per recapping increase. The number of tires per vehicle increases as dual wheels become standard (or as a tractor-trailer is used) .

46

The mileage obtainable per tire cycle — original plus recapping mile- age — is modified by the time factor. As more years are involved in the cycle, total mileage falls. Hence, a modified iiormiila, similar to that derived by Clarke and Bressler,- was used to determine total mileage obtainable with various levels of annual mileage:

TY =

m' + 4,240

In the preceding equation, T Y := tire life in years; m = normal miles obtainable from tires for the particular truck size; m' =: annual miles of travel. To obtain the annual cost for tires (and tubes), the fol- lowing equation was used:

r

TC =

TY

in which C =^ the dollar cost per tire cycle for original purchase plus recappings and TC r= the annual dollar cost.

Gasoline. As truck size increases the number of miles obtained per gallon declines. On the basis of data obtained in the survey and from secondary sources, gasoline con^iumption was assumed to decline from 16 miles per gallon for the smallest truck size to 5 miles per gallon for a tractor. A price of 25c per gallon of gasoline was used.

Other investigators have divided gasoline consumption into a fixed amount per day plus a variable component related to miles travelled." However, the size of the fixed item is likely to be of minor importance for trucks such as those used in poultry assembly, whereas for delivery truck* making numerous stops it would be relatively larger.

Other Fixed Operating Costs. These include: registration and license fees, bonding charges, and purchase of anti-freeze. Registration and bonding costs were established in relation to truck capacity by inter- polatins fi'om information obtained on field schedules. License cost's were established at $3 per vehicle, the modal value of charges levied by the New England states when transfer costs were included. Cost of anti-freeze. at $2 per gallon, was determined by radiator capacity. Pro- vision was made for temperatures of -30°F.

Federal Excise Tax. This has been included at $1.50 per year for each 1,000 pounds taxable gross weight paid by registrant on truck combi- nations over 26,000 G.V.W.^

- Clarke, D. A., Jr., and R. G. Bressler, Jr. Efficienry of Milk Marketing in Conner- ticut: 6. Truck Costs and Labor Requirements on Milk Delivery Routes. Storrs (Conn.) Agr. Exp't. Sta., Bui. 248. June 1943, p. 8.

Y ^ ; Y =r years of life; R ^ the annual rate of travel.

R + 4,240

This formula was intended to apply only to tires with a life of 20,000 miles. For other situations the factor of 4240 should be adjusted.

■'' Clarke, D. A. Jr., and Bressler, R. G., Jr., op.cit., p. 4.

* Motor Truck Fnrts, Automobile Manufacturers Association, Detroit, Michigan, 1957 Edition, p. 28-33.

47

Other Taxes. Other Federal excise taxes on motor truck sales, tires, parts, accessories and gasoline, general State sales taxes. State gasoline taxes, tolls, special city and county taxes, etc.. are assumed to be in- cluded under other cost items.

Hi ehxvay-lJ ser Tax. Taxes are levied by States against truck operators on the basis of mileage or value. However, these generally exclude oper- ators of vehicles not for hire. Hence, since contract haulers would be the only group of poultry assemblers materially affected, no cost has been included for highway-user taxes in these analyses.

Devrociatinn — Trucks. A standardized list of percentages of oriainal cost, by years of age. was derived by using published "book values" for trucks.'' These percentages decline progressively — from 25 percent in the first vear to 3.2S percent between the 9th and 10th years. Appendix Table T summarizes these rates. Depreciation rates established by refer- ence to automotive industry pricing are presumed to reflect "normal" wear depreciation and time depreciation. Vehicle age and aggregate mileage were a«sumed to offset each other and "condition" was assumed as standardized at trade-in time bv the repair and maintenance pro- gram. New cost prices were established by 19S7-58 values quoted by poultrv assembly firms in New England.

Furthermore, it was assumed that trucks would be traded every 10 years or prior to a maior overhaul or engine renlacement. whichever occurs first. For vehicles where chassis and bodv can be purchased separately fin this study. 1-ton trucks and larger with nlatform bodies), it was assumed the body would be traded half as frequently as the chassis, or at least every 10 years.

Interest — Trucks. Annual costs were determined according to the formula:^

(r) fn + l)

(P — S)

(2) ( n )

where I represents annual cost. P the original investment, r the rate of interest, n the years of expected use. and the S the salvage value at the end of the useful life. Charges for chassis and bodv. with different years of expected use. were separately determined and combined into the total charge.

Property Taxes — Triick'^. The "normal" denreciated values, described under the section entitled "denrec'ation-trucks." were used a« a basis for calculating the property tax. This was levied at the rate of 3 mills per dollar of value for the particular number of years of age. with a minimum charge of S4.50 per year per truck.

Insurance — Trucks. Rates for trucks of various sizes were inter- polated from information on field schedules. Considerable variation ex- ists from State-to-State. and rates are also influenced by distance travel- led and extent of coverage desired. Herein, modal values were used.

^ Offirial Automobile Guide, Price Edition, Recording and Statistical Corporation. 87th Edition, Jan. 1958.

® Clarke, D. A. Jr., and R. G. Bressler, Jr., op. cit., p. 14.

48

Other Co8l8

Management. Annual costs for buying, management, and office func- tions were determined for each truck size, and for mukiples of each truck size up to 12. These were based upon fractional allocations from data for these and other functions, plus selling, for the entire operation of a poultry processing plant.' Allowance for selling live birds is not included in the "management" group figures for this study. Multiple unit firms (additional trucks of the same size) are able to realize econo- mies of scale in management. Economies also exist in moving from a given truck to one of larger capacity provided volume is expandable.

Depreciation — Crates. Crates are an item of considerable expense to poultry assemblers. Probably careful handling, periodic repairing, and minimizing exposure to the elements would reduce costs below the present levels.

Tn this analysis, depreciation was varied according to the percent of capacity at which the unit operated. Each 10 percent change in volume was accomnanied by a charge of 10c per crate per year for depreci- ation. For example, at 50 percent capacity, the charge was $1.50 per crate per year, and at 100 per cent capacity, $2.00 per crate per year.

The number of crates owned was determined to be proportionate to numbers established in an earlier study involving model processing plants.'^ Crate numbers are more than double the number per truck to allow for crates held at loading and unloading points and in the pro- cess of repair. The number of crates required was approximated by the following formula:

Annual volume in pounds

„ . at 100 percent capacity

I\o. oi crates = = — ., , ,^„

11,667

Buildings

Building space provided for model assembly firms includes provision for areas devoted to an undercover unloading dock, platform for full and empty crates, crate cleaning and storage, weighing, and office. Most assembly firms do not provide garaee space for vehicles: at best, some misht back vehicles into the unloading area. Although some firms pro- vide space for repairing and servicing vehicles, herein, no provision is made for special areas for these purposes. While some firms may have space devoted to holding birds in batteries, such is regarded in these analyses as related to processing or selling rather than assembly. Hence, no batterv area is included under building space.

The scTuare feet of building space provided for assembly firms was de- termined in relation to annual volume. The amount of space was de- termined in proportion to that provided in an earlier study of process- ing nlants for the same purposes enumerated above. The total cost of such space was established by using the costs per square foot for pro- cessing plants of like area.^

Appendix Table II shows the rates used to determine certain fixed overhead costs, and Appendix Table III the dollar investment required for selected model firms.

7 N. H., Sta. Bui. 459, op. cit.. Table 8, p. 30.

^ Op. cit.. Appendix Table I, p. 52.

^ Op. cit., data used to calculate Tables 5 and 6, p. 24 and 26.

49

Appendix Table I. Depreciation Rates on Trucks Used for the Assembly of Live Poultrv

Year

1 2 3

4

5

6

7

8

9

10

11

12

Trade-in Value as	Annual
Percentage of	Depreciation
New Value i	Rate-
75.00	25.00
60.00	15.00
51.00	9.00
43.00	8.00
36.00	7.00
30.00	6.00
25.00	5.00
21.00	4.00
17.50	3.50
14.25	3.25
11.75	2.50
10.00	1.75

1 End of Year

- Relative to new price

Appendix Table II. Rates Used to Determine Certain Fixed Overhead Costs per Year for Firms Assembling Live Poultry

Item

Percent of New Cost

Depreciation — buildings

Repairs and maintenance — buildings

Insurance — buildings and equipment other than trucks

Property tax — buildings and equipment other than trucks

Interest — trucks, buildings, equipment

5 3 1 1

3

Appendix Table III.

Investment Required for Selected Model Firms Assembling Live Poultry

	Firm			Investment
Model	Annual Volume	Trucks	Buildings	Crates	Total	Per pound of
No.					Ai	nnual Capacity
	(mil. lbs.)		(dollars)			(cents)
1	1.17	2,400	4,000	300	6,700	0.57
II	2.37	3,050	4,700	600	8,350	0.35
III	4.61	4,800	5,800	1,200	11,800	0.26
IV	8.85	8,250	7,300	2,400	17,950	0.20
V	12.88	11,250	8,375	3,600	23.225	0.18
VI	17.02	15,750	9,300	4,800	29,850	0.18
VII	25.21	22,500	11,100	7,200	40.800	0.16
VIII	34.66	30,000	12,600	9,000	51,000	0.15
IX	51.96	45.000	15,100	13,500	73,600	0.14
X	69.24	60,000	18,500	18,000	96,500	0.14

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a

9

o

Oh

SI

Appendix Table V.

Distribution of Sizes of Trucks Registered by Assemblers of Live Poultry, New England, 1957

		Firms with Specified Numbers	of	Trucks
Item	1 truck		2-	-3 trucks 4-6 trucks	7	or	more trucks Total
Firms Trucks Classification:	232 232 D	istrib	( number) 82 15 184 69 ution of Truck Sizes by Tonna	ige	13 342 131 616 Classification
Va 1 \y 2 VA 3 Trailers	18.1 11.4 18.1 27.3 22.9 2.2 0.0 0.0			(percent) 4.4 4.9 8.7 3.3 11.5 6.6 24.0 9.8 33.3 39.3 9.3 3.3 2.2 18.0 6.6 14.8			0.0 8.5 2.8 7.8 4.2 11.8 4.2 19.3 15.5 25.9 18.3 81 15.5 6.0 39,5 12.6
Total	100.0			100.0 100.0			100.0 100.0

Appendix Table VI. Inventory Value of Trucks Owned by Assemblers of Live Poultry Registered in New England, 1951-57^

	Assembler	Size by Number of Trucks	2	Value	Average
					Value
	1	2-3	4^	7 or more	all	Trucks Each
Year	Truck	Trucks	Trucks	Trucks	Trucks	Assembler
			(dollars)
1951	428,536	332,401	131,673	58,717	951,327	1252
1952	397,256	305,057	119,780	92,211	914,304	1293
1953	345,644	280,276	91,746	117,434	835,100	1338
1954	321,402	251,223	59,465	109,164	741,254	1303
1955	283,084	217,898	75,606	109,164	685,752	1353
1956	236,164	173,464	59,465	133,974	603,067	1426
1957	181,424	158,083	59,465	109,164	508,136	1486

^ At 1957 price level Automobile Guide" - Boston 25, Mass.

^ Includes trucks and truck trailers

Retail value averaged for several makes as given in "Official 87th Edition — The Recording & Statistical Corporation,

52

Appendix Table VII. Proportions of Young and Mature Chickens and Average Lot Size Hauled by Selected Sizes of Model Assembly Firms

		Young	Mature	Average Lot
Firm Capa<	:ity	Chickens ^	Chickens -	Size per Farm
(million pounds	(percent)	(percent)	(pounds)
hauled annually)
0.5 and ]	less	50	50	3
1.0		56	44	3,000
2.0		60	40	4,600
3.0		63	37	5,500
4.0		67	33	6,400
5.0		70	30	7,000
7.5		75	25	8,000
10.0		80	20	9,000
12.5		81	19	10,000
15.0		82	18	12,500
17.5		83	17	15,000
20.0		84	16	20,000
25.0		86	14	27,000
30.0		90	10	28,000
35.0		94	6	29,000
40.0		95	5	30,000
50.0		96	4	30,000
60.0		97	3	30,000
70.0		98	2	30,000

^ Broilers, caponettes, roasters, pullets. 52.5 pounds per crate.

- Fowl and roasters. 60.0 pounds per crate.

3 From 40 pounds at 2,000 pounds annually to 1,400 pounds at 500,000 pounds annually.

Appendix Table VIIL Age of Trucks Owned by Assemblers of Live Poultry

Registered in New Hampshire, 1957

Age

in

Years

Assembler Size by Number of Trucks^

1	2-3	4-6	7 or more	All
Truck	Trucks	Trucks	Trucks	Trucks
	(percent)
6.8	2.2	2.0		2.9
4.5	20.0	9.8	6.1	10.4
18.2	26.7	17.6	27.3	21.9
18.2	4.4	11.8	3.0	9.8
13.7	4.4	17.6	18.2	13.3
9.1	17.8	9.8		9.8
9.1	6.7	13.7	18.2	11.6
4.5	11.1	11.8	6.1	8.7
15.9	6.7	5.9	21.2	11.62
100.0	100.0	100.0 (years)	100.0	100.0
5.7	4.8	5.3	6.0	5.4

1

2 3 4 5 6 7 8 9-18 Total

Ave. Age

^ Trucks and truck trailers.

- 24 percent of trailers are from 9-18 years old. 9.5 percent of trucks are from 9-18 years old.

53

Appendix Table IX.

Average Length of Haul for Live Poultrv Assemblers, New England, 19571

		Numb(	er of firms whose	a vera]	?e	W	eight!	sd average
Firm size		round-trip	haul was	given			route length
			number of miles	;			in	miles
	Less	26-	SI-	76-	101-	Over	Total
Annual Volume	than 25	50	TS	100	125	125
(1,000 pounds)
Less than 50	2	5	S	2	0	0	14		51.1
50-300	0	0	7	5	3	1	16		85.3
300-1,000	0	0	0	2	5	4	11		116.3
1,001-4,000	0	0	0	1	8	3	12		119.8
4,001-10,000	0	0	2	4	1	1	8		86.6
10,001-20,000	0	0	0	3	5	0	8		102.7
Over 20,000	0	0	1	4	1	0	6		88.0
Total	2	5	15	21	23	9	75

1 Based on a stratified random sample of 75 firms.

Appendix Table X. The Effect of Increasing Truck Size and Annual Mileage

on the Cost of Live Poultry Assembly l

Model number	Annual Volume	Cost Group	Annual Milea;	?e per Truck
and description 2	5,000	10,000	25,000	50,000
E % Ton-30 crate	(1,000 lbs.) 965	Labor Other	.605 .231	(cents per .674 .264	pound) .916 .344	1.244 .462
capacity		Total	.836	.938	1.260	1.706
H iy2 Ton-130 crate	3,535	Labor Other	.342 .155	.396 .166	.559 .198	.792 2iS
capacity		Total	.497	.562	.757	1.040
K 3 Ton-220 crate	5,924	Labor Other	.333 .145	.373 .153	.514 .181	.695 .224
capacity		Total	.478	.526	.695	.919
L Trailer-320 crate	8,572	Labor Other	.289 .147	.335 .154	.449 .182	.615 .226
capacity		Total	.436	.489	.631	.841

1 At 100 percent of capacity.

2 Single truck operation.

54

Appendix Table XI. The Effect of Increasing Firm Size and Annual Mileage on the Cost of Live Poultry Assembly ^

Number of	Annual Volume	Cost Group		Annual Mileage	per Truck
Trucks 2	5,000	10,000	25,000	50,000
1	(1,000 lbs.) 5,924	Labor Other	.333 .145	(cents .373 .153	per	pound) .514 .181	.695 .224
		Total	.478	.526		.695	.919
3	17,464	Labor Other	.275 .123	.306 .130		.398 .152	.510 .190
		Total	.398	.436		.550	.700
5	28,825	Labor Other	.251 .115	.267 .123		.321 .145	.397 .183
		Total	.366	.390		.466	.580
7	40,061	Labor Other	.243 .108	.257 .116		.274 .138	.365 .177
		Total	.351	.373		.412	.542
9	51,431	Labor Other	.239 .103	.251 .110		.282 .132	.331 .171
		Total	.442	.361		.414	.502

1 At 100 percent of capacity.

~ 3 ton trucks of 220 crate capacity — Model K.

Vrfjic

55

Appendix Table XII. Costs of Operating Various Sizes of Trucks at Various Annual Mileages per Truck in Assembling Live Broilers ^

	Truck S	ize	Annual volume	Annual Mileage	per Tru(	•k
Model	Tons	Crate
No.		capacity		5,000	10,000	25,000	50,000
			(1,000 lbs.)		(cents per pound)
A	Homemade^	2	52	.042	1.418	2.568	4.297
B	Homemade^	5	129	.405	.607	1.080	1.798
C	Homemade-	10	259	.220	.325	.576	.948
D	V2 ton	20	519	.128	.187	.324	.527
E	% ton	30	908	.083	.119	.203	.328
F	1 ton	60	1,556	.056	.078	.133	.217
G	1 ton	100	2,594	.041	.055	.093	.152
H	IV2 ton	130	4,372	.035	.048	.081	.133
1	2 ton	160	4,150	.037	.048	.079	.126
J	21/2 ton	190	4,928	.039	.049	.078	.125
K	3 ton	220	5,681	.042	.050	.079	.124
L	Trailer-^	320	8,299	.055	.062 (cents per	.091 mile)	.136
A	Homemade^	2	52	9.78	7.36	5.33	4.46
B	Homemade^	5	129	10.48	7.85	5.59	4.65
C	Homemade-	10	259	11.42	8.43	5.98	4.92
D	y2 ton	20	519	13.30	9.69	6.73	5.47
E	% ton	30	908	15.04	10.79	7.40	5.96
F	1 ton	60	1,556	17.30	12.09	8.27	6.74
G	1 ton	100	2,594	21.16	14.23	9.64	7.89
H	IV^ ton	130	3,732	23.74	16.06	10.92	8.99
T	2 ton	160	4,150	30.94	19.78	13.05	10.43
J	21/2 ton	190	4,928	38.86	24.34	15.44	12.31
K	3 ton	220	5,681	47.28	28.64	17.97	14.08
L	Trailer^	320	8,299	91.56	51.36	30.24	22.61

^ At 100 percent of capacity-15 broilers, 3.5 pounds each, 52.5 pounds per crate. Includes: repairs, maintenance, oil, grease, lubrication. Fed. excise tax, tires, gas, registration, license, bond, anti-freeze depreciation, interest, insurance, property tax.

- Car and trailer or bomemade pickup truck.

3 Tractor-trailer combination.

56

ApiXMulix TabFo XIII. (Ihaiigrfi in Per Pound Coiitb of Poultry A??senibly of Selected Items with Changes in Vohinie, Truck Size, and Miles Travelled

Co!?t Group

Change in Cos-t per Pound:

Item

As firm volume increases

As truck size increases

As mileage per tru<'k increases

^ ariahle operating

T,aI)or 1

Truck repairs and maintenance

Decreases Decreases

Decreases Decreases

Increases Increases

Constant-unit operating

(^iisolinc -'

Oil, li)l)ricat'on

Tires -

Fed. excise tax ■

Decreases Decreases Decreases C-onstant

Decreases Decreases Decreases Constant

Constant - Constant - Constant - Constant

Fixed

operating

Management Miscellaneous ^ Truck insurance

Decreases Decreases Decreases

Decreases Decreases Decreases

Constant Constant Constant

Fixed overhead

Truck depreciation Truck interest Truck property tax Crate depreciation Building costs •''

Decreases De<Teases Decreases Decreases Decreases

Decreases

Decreases

Decreases

Constant

Decreases

Constant Constant Constant Constant Constant

1 Drivers, helpers, foremen.

- Gasoline consumed in starting and idling, oil changes and luhrication at time intervals, and time depreciation (age) on tires constitute an initial cost. Thereafter, rates of use related to mileage.

•' Flat rate per pound on largest trucks only.

' Registration, license, bonding, anti-freeze.

•' Depreciation, interest, taxes, insurance.

'57

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