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How to make meat business more effective

How to make meat business more effective

A case of Ukraine Anatoliy G. Goncharuk

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Odessa National Polytechnic University, Odessa, Ukraine Abstract Purpose – The purpose of this paper is to find ways of improving the efficiency of the meatpacking business by achievement of a few sequential aims: an estimation of efficiency, determination of its key factors, revealing of the reserves of input reduction and potential growth of efficiency, and defining the ways of its improvement. Design/methodology/approach – A few models of the data envelopment analysis (DEA), three-factor production function and other tools of competitive and international benchmarking are used to analyse the efficiency of meatpacking companies. A two-criteria analysis tool named the efficiency-profitability matrix is used to determine the factors that influence efficiency. The results are based on the samples of 29 Ukrainian and 53 foreign meatpacking companies. Findings – Significant reserves of inputs reduction by the domestic meatpacking companies are revealed. The offered ways of using the potential of efficiency growth for the Ukrainian meatpacking producers are connected with the use of both their internal ability (modernization of equipment, motivation of personnel) and successful experience and resources of domestic and foreign companies through the tools of co-operation, exchange of experience, merger or friendly acquisition. Research limitations/implications – The research is limited to a single industry that is explained by requirement of technology (product) homogeneity while using DEA tools. Practical implications – The results contain the data and recommendations that can be practicable for meatpacking companies’ management, present and potential investors and proprietors. Originality/value – This is the first study that adopts various analysis and benchmarking tools for the versatile research of efficiency in the meatpacking industry and finding ways for its improvement. Keywords Meat, Food industry, Cost effectiveness, Benchmarking, Ukraine Paper type Research paper

1. Introduction Strengthening of international competition on the meat market forces manufacturers to search for ways of increasing production efficiency and competitiveness of production. An obvious example of a low efficiency of meat business is a meatpacking industry of Ukraine. This country is entering into the World trading organization having big problems in agriculture and processing of agricultural products that according to many parameters are far from a world level and cannot compete with foreign manufacturers under equal conditions. In spite of the fact that Ukraine due to favourable climatic conditions has one of the greatest potential of development of agriculture in the world in the field of crop production and its processing and in the sphere of animal breeding and manufacture of meat products, its share in a general world output of manufacture of meat amounts only about 0.6 per cent (FAO, 2007). Last years dynamics of industrial production of meat in Ukraine had no steady tendency and changed within the limits of 1.4-1.7 million tons a year (FAO, 2007).

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While total amounts of consumption of meat have considerably grown (see Figure 1), that has been caused by growth of incomes of population and internal demand for meat and also non-saturation of a home market. It is reflected by the following figures: in 2006 consumption of meat per capita has made only 60 per cent of 1990 level; it makes only about 80 per cent of the average consumption in the world and correspondingly on 87 and 83 per cent below than in Poland and Russia (SSCU, 2007; FAO, 2007). Lag of the domestic meat production from consumption is caused by the following: . by annual reduction of a number of cattle that at the beginning of 2008 amounted only 60 per cent of 2001 level and is connected with unprofitability of domestic stock farming (average annual profitability has made minus 34 per cent); and . high dependence of a greater part of domestic animal breeding on productivity and prices for wheat that is used as a basic feed. And only owing to dynamical development of poultry farming, the livestock in which in 2001-2007 has grown on 45 per cent (SSCU, 2008), and to increase in import of raw materials, domestic meatpacking plants have provided positive dynamics of manufacture for the whole investigated period. The recent studies of various aspects of efficiency in meat industry can be conventionally separated into two groups. The first is connected with adaptation different industrial paradigms, analytical or managerial tools, for example, Lean manufacturing or Auditing, to meat production to provide continuous improvement (see, for example, in Hepner et al., 2004; Simons and Zokaei, 2005; Manning et al., 2008) or to make some processes more effective (Mousavi et al., 2002; Cox et al., 2007). The second concerns influence of various factors on meat production efficiency and quality (see, for example, Khatri and Collins, 2007; Goncharuk, 2007). But there is no study that fully give the answer to the questions about how effective is meat business today, what are its defining factors and potential growth, how to raise efficiency of meat industry up to the world level. This article tries to answer these questions with respect to Ukrainian meatpacking business.

Figure 1. Meat output and consumption indices for Ukraine in 2000-2006 (1999 ¼ 100 per cent)

2. Methodology We offer to study an efficiency of meatpacking plants under the following scheme: . an estimation of technical and scale efficiency with a ranking of plants; . establishing of influence of key factors on activity of plants; . revealing of reserves of input reduction and potential growth of efficiency of plants; and . defining the ways of improving of efficiency of Ukrainian meatpacking plants up to the world level. Unlike manufacturing of tobacco or alcohol products, production of the meatpacking industry does not render harmful influence on people and is not limited by the state. Expansion of its output in conditions of growing demand and limitation of a raw-material base is the important problem of management of meatpacking plants. Thus increase of efficiency of companies of the given industry can be provided by decrease in own inputs and by growth of output. Therefore to research efficiency of meatpacking plants it is expedient to use an additive model of the Data Envelopment Analysis (DEA), i.e. the model oriented on simultaneous decrease in inputs and increase in output based on efficiency by Pareto-Koopmans and first offered by Charnes et al. (1985). For an estimation of reserves of input reduction and growth of output, the additive model (ADM) will be used. It will ensure an objective quantitative measure for possible reserves of decrease in inputs and growth of output on each plant and industry as the whole. DEA is a non-parametric frontier method, first offered by Charnes et al. (1978) that has received wide theoretical development and practical application for the last three decades in a management of various fields of human activity, for example, in education, health care, sport, defense and police, banking, manufacturing, transportation, quality control etc. Meat production is not an exception; there are some studies of efficiency of this industry using DEA (Ali, 2007; Yusuf and Malomo, 2007). DEA essence consists in use of methods of linear programming for construction of a piecewise linear convex surface (frontier) for enterprises sample, and estimation of efficiency concerning this surface. Among the other efficiency measuring methods (like OLS, SFA, etc.) DEA must be the most expedient tool for analysis of efficiency of the meatpacking industry. The choice of the given method is predetermined by the following advantages: . it gives an opportunity to include in a model few inputs and outputs that allows to estimate efficiency without calculation of a sole parameter of input or output; . absence of necessity to choose the functional form of production function; . it allows to analyse the efficiency in cases when it is difficult enough formally to explain relation between numerous inputs and outputs of production system; . it enables to estimate the contribution of each of inputs to overall efficiency (or inefficiency) of the companies and to estimate a level of inefficiency of each input; and . besides an estimation of technical efficiency, it enables to estimate different kinds of efficiency, for example, technical, economic etc. Besides DEA method supposes simultaneous use both cost and physical units that allows to generalize heterogeneous input and output parameters.

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The main limitation of DEA is its high sensitivity to errors in initial data. For an estimation and ranking of the companies, DEA model of super-efficiency offered by Anderson and Petersen (1993) will be used. It eliminates the lack of majority of DEA models – restriction of efficiency scores by an interval [0,1] as a result of which the significant part of DMUs lays on a best-practice frontier and it is considered effective without an opportunity of the further ranking and construction of full hierarchy by efficiency, that essentially limits efficiency of the analysis. Using super-efficiency model will allow to specify the best companies of industry and to estimate efficiency of meatpacking plants. Mathematically the input-oriented model of super-efficiency for m inputs, r outputs and n DMUs can be formalized in the following way: min z ¼ u sup subject to: n X

sup xij lj þ s2 xiq ; i ¼ 1; 2. . .m i ¼u

j¼1;–q n X

yij lj 2 sþ i ¼ yiq ; i ¼ 1; 2. . .r

ð1Þ

j¼1;–q

l; s þ ; s $ 0; where u sup is a scalar, lj is a weight of DMUj, xij, yij are inputs and outputs of DMUj, si, sþ i are input and output slacks. To estimate an influence of production scale on enterprise efficiency and define a scale effect, the parameter of scale efficiency will be defined on the following ratio: SE ¼

TE CRS TE VRS

ð2Þ

where TE CRS is technical efficiency score for constant return to scale CRS model and TE VRS is technical efficiency score for variable return to scale (VRS) model (Coelli et al., 2005). For an establishment of a cumulative scale effect to industry and a valuation of elasticities of output with respect to major factors (labour, materials and capital), three-factor production function (Goncharuk, 2006) is used here. With a view of division of impact of external and internal factors on efficiency of companies, the efficiency-profitability matrix (EPM) first offered by Dyson et al. (1990) and advanced later by Camanho and Dyson (1999) and Todoroki and Carson (2003) will be used. The basic idea of the given method is placement of the firms of sample in bidimentional co-ordinate. The horizontal axis shows their efficiency scores, and the vertical one shows values of profitability, and there is grouping by four quadrants: “sleeping”, “stars” “dogs” and “duds”. According to location of the firm in this or that quadrant it is possible to judge the general character of influence of exogenous factors such as government regulation, an environment, a level of business activity and public income, regional features etc. on its activity. The EPM has some similarity with the matrix of the Boston Consulting Group (BCG matrix), which is the popular tool of the

product portfolio management, however this likeness is limited to only two names of quadrants are «stars» and «dogs». The EPM allows not only to look at the efficiency in two aspects and to present it in two-dimensional view, but also enables to receive the expanded notion about efficiency of analysed sample of the firms, about their relative performance and potential development. For definition of ways of improving of efficiency of meatpacking plants up to the world level the tools of international benchmarking are used.


3. Data collection A basic sample includes 29 Ukrainian meatpacking companies, basic activity of which according to SIC is 15.11 “Production and preserving of meat”, and total volume of output of which in 2006 has made about 2,2 billion hryvnya and there are 10,700 people employed. An additional sample for implementation of an international benchmarking includes 53 meat companies of the USA (16), Russia (16), Poland (eight), Brazil (three), New Zealand (two), Holland, Germany, Spain, Italy, Denmark, Finland, China and Mexico. Material costs, depreciation and number of employees are used as inputs. The net sales of meat are used here as output. Considering the results of DEA are sensitive to errors in initial data, the unified indicators of annual reports of the companies (from EDGAR, 2008; Hoover’s, 2008; SMIDA, 2008; PFTS, 2008 and other reliable sources), reliability of which is confirmed by the auditor conclusions, were used as a source of information. The descriptive statistics of companies’ samples is framed in Table I. 4. The results of research 4.1 Estimation and ranking of efficiency The results of an estimation of super-efficiency scores, scale efficiency and returns to scale and a ranking of Ukrainian meatpacking companies of sample are reflected in Table II. There are seven companies on the industry efficiency frontier: five of them are medium and two are large plants. All of them have optimal production scale, high technical efficiency and belong to large companies. The majority of them are the part of regional branch holdings. Thus it specifies a presence of an effective proprietor at the plants of the top of an efficiency rating.

Variables Material cost Depreciation Number of employees Net sales

Ukrainian meat companies Mean Median Standard dev. 6.771 161 369 9.889

3.432 83 296 5.149

9.572 214 356 13.243

Foreign meat companies Mean Median Standard dev. 116.1930 27.179 9.277 136.2967

160.553 4.551 2.660 243.126

261.7741 53.980 17.469 282.3335

Notes: SDR (special drawing rights) is a basket of major currencies used in international trade and finance – euro, the pound sterling, the Japanese yen and the US dollar; (in thousands SDR’, except employees) Source: Annual reports and own calculations

Table I. Descriptive statistics for companies samples

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Table II. Super-efficiency scores and scale efficiency for Ukrainian meatpacking and poultry-packing companies

Company name Ivano-Frankivsk meatpacking plant Zolotonoshmyaso Ritm Meatpacking plant “Yantar” Lysychansk meatpacking plant Dolynska poultry-packing plant Lugansk meatpacking plant Melitopol meatpacking plant Berdychiv meatpacking plant Chernigiv meatpacking plant Krasnodon meatpacking plant Kozyatyn poultry-packing plant Pryluky meatpacking plant Khust meatpacking plant Perevalsk meatpacking plant Meatpacking plant “Myasny standart” Novoselytsya poultry-packing plant Uman meatpacking plant Konotopmyaso Ivano-Frankivsk poultry packing plant Odessa meatpacking plant Zahidny Bug Trostyanets meatpacking plant Meatpacking plant “Simferopolsky” Ivano-Frankivsk Vinnitsamyaso Bar poultry-packing plant Lubny meatpacking plant Novograd-Volynsky meatpacking plant Nizhyn meatpacking plant Average on sample

No. in rating

Super-efficiency score (%)

Scale efficiency

Return to scale

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 87.5

160.8 111.1 109.5 107.7 102.4 102.3 102.3 98.5 97.5 96.8 94.0 93.4 91.6 91.4 90.8 89.8 85.8 84.7 84.4 84.1 82.5 78.8 77.0 74.7 74.1 73.8 73.0 71.3 67.3 0.981

1,000 1,000 1,000 1,000 1,000 1,000 1,000 0,985 0,992 0,996 1,000 0,999 0,974 0,914 0,999 0,997 0,998 0,967 0,995 0,996 0,989 0,788 0,994 0,909 0,999 0,999 0,998 1,000 0,996 1,031

! ! ! ! ! ! ! # " " ! " " " " " " " " " " " " " " " " ! "

The industry leader by efficiency Ivano-Frankivsk meatpacking plant is owned by British Merrick Ventures Ltd (through its subsidiary LuxPromExpo). This plant has the highest labour productivity level in industry (it 3.8 times as high than an average level), high capital productivity (3.3 times as high) and output-staff cost ratio (four times as high). High rates of output growth (30.5 per cent) in 2006 is provided by qualitative management and activity diversification: except for traditional manufacture of meat and by-products plant two affiliated enterprises are created (agricultural firm “Tysmenytsya” and “Ivano-Frankivsk sausages”), providing the company with a raw-material base (cattle and pig breeding, plant growing) and retail trade of finished goods. Thus, leaning on foreign investments, company has created a full cycle of manufacture and sale of meat products that provides it with the highest efficiency score. The other plants of the top of rating have one of the highest values on various production efficiency measures: capital productivity (Dolynska poultry packing plant and Zolotonoshmyaso); output-materials ratio (Lysychansk meatpacking plant and meatpacking plant “Yantar”) and labour productivity (Ritm and Lugansk meatpacking plant).

The whole group of plants (with average efficiency) are very close to the industry efficiency frontier. They do not reach high efficiency on any particular productivity measures. The worst in the rating of efficiency [0. . .0,8] are small and medium plants owned by domestic proprietors: by several physical persons or not profile holdings. Almost all of them combine a technical inefficiency with a scale-inefficiency, and external factors render essential influence on them, in particular, shortage of raw material, a rigid competition and financial restrictions. Practically all of them, except for Zahidny Bug, are unprofitable, the majority has obsolete equipment (average deterioration of a fixed capital is more than 50 per cent), an inefficient management and motivation of personnel (the average monthly salary makes only 618 hryvnya at correlation with labour productivity – 0.6). 4.2 Defining influence of key factors on output Defining a degree of influence of key production factors – materials (purchases) M, fixed capital (depreciation) K, and labour (number of employees) L on output and a general character of a scale effect on industry, three-factor production function has been constructed: Y ¼ 2; 036 · L 0;079 K 0;069 M 0;882

ð3Þ

Model (3) is reliable and specifies that the volume of output at Ukrainian meatpacking plants more than on 99 per cent is defined by three factors: personnel, a fixed capital and material inputs. Moreover material inputs play defining role in formation of an end product that is appropriate for all industrial activity. The sum of elasticities of output with respect to all factors in model (3) is above one (1.031), that specifies a presence of increasing return to scale in Ukrainian meatpacking industry, i.e. with increase in sizes of plant and volumes of spent resources an output grows by accelerated rates and efficiency increases. Of a sample nine out of 29 plants have a constant return to scale, i.e. optimal scale of production, one has decreasing scale effect and the majority (19) has an increasing scale effect (see Table II). It means that extension of manufacture for the majority of meatpacking plants is a positive factor that raises efficiency. Value of residual (2.036) in model (3) specifies an average current level of production efficiency (output-input ratio) in meatpacking industry (sample) of Ukraine. 4.3 Two-criteria analysis For two-criteria estimation of efficiency of enterprises of a sample the matrix of efficiency- profitability (see Figure 2), in which levels of super-efficiency have been compared to profitability of total assets of the companies, has been constructed. As shown in the quadrant “sleeping” there are four companies only: Novoselytsya poultry packing plant, Ivano-Frankivsk poultry packing plant, Odessa meatpacking plant and Zahidny Bug. The given plants have low relative efficiency, but owing to a great demand on their production and other positive factors of internal and external environment, they have an opportunity to receive positive financial results and shut eyes to the low efficiency in short-term prospect. However, any adverse market changes or strengthening of the other negative factors in a long term can shake their position and shift them to the quadrant “duds”, therefore they should put received


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Figure 2. The efficiency-profitability matrix for Ukrainian meatpacking plants for 2006

profit in development of manufacture and an innovation capable to raise a current level of their efficiency. The basic directions of improving efficiency are the following: . for Novoselytsya and Ivano-Frankivsk poultry packing plants – investment in high-efficiency equipment and advanced training of workers; . for Odessa meatpacking plant – decreasing of material capacity of production by elimination of excesses, losses and improvement of production technology, perfection of motivation of personnel; and . for Zahidny Bug – replacement of obsolete equipment (depreciated on 66 per cent) and material motivation of personnel to effective work (a wage level is one of the lowest on industry). There are 14 companies in the quadrant “stars”. Their high profitability is provided by both market factors – stably high and growing demand and prices for production in the market, and a high efficiency. The most profitable of them are Lugansk, Perevalsk, Krasnodon, Lysychansk, Berdychiv meatpacking plants, meatpacking plant “Yantar” and Kozyatyn poultry packing plant. The given enterprises are located in the central and eastern part of the country. The first four of them are the part of regional meat holding Luganskmyasoprom, which owing to competent management, effective system of motivation of personnel and quality control, effective purchasing and marketing policy, has provided annual growth of sales up to 27 per cent at decreasing of material capacity of production on 2 to 7 per cent. Meatpacking plant “Yantar”, having updated industrial equipment on 21 per cent, introducing new technologies and carrying out a successful marketing policy, has lowered raw material consumption on 12.4 per cent, has increased sales by 7.5 per cent and net profit in four times, despite of significant losses of the company over embargo of export of production to Russia (loss of 15 per cent of proceeds) and other negative factors (a rigid competition, lack of qualitative raw material, etc.). The success of the company is

defined by qualitative management, including quality control, owing to which its trade mark is recognized as “The best trade mark of Ukraine”, and presence of own full production and trading cycle, beginning from preparation and primary processing of cattle and coming to the end by a wholesale and a firm trade with finished goods. Success of Berdychiv meatpacking plant is connected with successful finish of readjustment of enterprise that has allowed to increase sales in 3,8 times and lower material capacity of production on 19 per cent. The further development of this small company will depend on effectiveness of its new proprietor and management. Kozyatyn poultry packing plant is one of a few enterprises of industry owned by foreign investors. Share of OSI International Holding GmbH, a part American OSI Group, which is the supplier of meat semi-finished items at McDonald’s restaurants in more than 75 countries of the world, in its stock capital, makes more than 86 per cent. Owing to the partial updating of equipment on 24 per cent and to qualitative management, the enterprise manage to increase sales by 34 per cent for a year and to lower material capacity of production on 8 per cent due to the net profit of company has increased in 6.5 times. Other plants of the quadrant “stars” under influence of various external and internal factors were low profitable. In the quadrant “dudes” there are nine companies: two small and seven medium plants. They are located in the west, south and in the centre of the country. In spite of the fact that by quantity their number makes almost third of all sample, total amount of production on them in 2006 has made only 11 per cent of the general output, they possess 30 per cent of total assets and 33 per cent of total number of employees of a sample. At the same time, through the inefficiency of business dealing and management, motivation of personnel (correlation between efficiency and the size of the salary here makes minus 0.65), purchasing and marketing policy, unwillingness or impossibility of proprietors to invest in their modernisation (the average degree of deterioration of a fixed capital here exceeds 50 per cent), the plants of the given group do not stand for the conditions of a rigid competition and resource restrictions and are obliged to accumulate losses. The most unprofitable plants here are Novograd-Volynsky and Trostyanets meatpacking plants and Bar poultry packing plant. The given companies sustain losses over imperfection of purchasing, financial or marketing policy, as a result of which they have been reluctant to reduce output correspondingly to 38, 25 and 20 per cent. Their location in regions with enough high competition both in the market of finished goods and in the market of raw materials specifies fiasco of the given plants in competitive struggle because of inability of their management to work under conditions of rigid competition. The other plants of the quadrant have similar problems, the basic of which are: . high competition on the market of meat and meat products; . reduction of a livestock and shortage of raw material for manufacturing and as consequence the growth of procurement prices; . poor quality of raw material; . increase in tariffs for gas, electricity and water; . high interest on bank credits; and . low effective demand.


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Under influence of the listed factors almost all plants of the given quadrant reduced output and sales. Total falling of the net sales on all quadrant “duds” has made 24 per cent. In our opinion, the basic problem that does not allow the given plants to develop is the subjective factor – absence of effective proprietor and qualitative management. Not profile firms and private persons, and also separate inefficient regional groups, not having a sufficient operational experience in the given sphere, financial, personnel, raw or other necessary resources have appeared to be unable to manage the companies in conditions of toughening of competitive struggle. In this connection, the best way out from the current situation is coming of the new proprietors capable to make technological re-equipment, to involve qualified personnel, to provide an adequate raw-material base and to arrange sales. There are only two plants in the quadrant “dogs”: Meatpacking plant “Myasny standart” and Chernigiv meatpacking plant. These companies having high production efficiency have faced the problems that do not allow them to receive a profit. The most important of these problems are: . falling of output and sales; . having an optimal production scale, these plants have the lowest output-staff cost ratio among the plants of a sample that specifies unwarranted high level of salary and wages and an inefficiency of motivation system; . the highest in the industry degree of deterioration of a fixed capital (more than 72 per cent) and low labour productivity on Chernigiv meatpacking plant specifies a high share of manual labour and necessity of modernization of the equipment of plant; and . absence of effective proprietor and high probability of discrepancy and conflicts between minor shareholders (three offshore companies and two Ukrainian enterprises owning packages less of 24 per cent) of Meatpacking plant “Myasny standart” not capable to provide an efficiency of plant management; for this reason in August, 2006 the plant has been completely stopped. The way out from the unprofitable condition of the given plants lays in replacement of proprietors and management of plants by more effective ones, modernisation of manufacture and improvement of personnel motivation system. Summing up the two-criteria analysis we can draw a following general conclusion: in conditions of a rigid competition and limitation of a raw-material base the major factor of success of meat companies is presence of effective proprietors and management capable to carry out technological re-equipment of manufacture, to involve qualified personnel, to provide an adequate raw-material base and arrange sales. 4.4 Estimation of internal reserves and potential ADM and computer program DEAFrontiere have been applied with the purpose of revealing of potential growth of efficiency of Ukrainian meatpacking industry, therefore the reserves of inputs reduction for each plant have been estimated. The total results are presented in Table III. Calculations specify existence of significant reserves of reduction of capital and labour inputs at almost constant volumes of output and reserves of materials reduction.

The greatest reserve on depreciation specifies presence of surpluses of a fixed capital or the share of their unproductive part (33.4 per cent), which the plants can escape at achievement of the highest capital productivity level on industry. A high reserve of reduction in number of employees (26.4 per cent – above 2,800 workers) testifies to significant gap in a labour productivity level of efficient and inefficient meatpacking plants. Zero reserve of material inputs reduction testifies to absence of gap in a level of material capacity of production between efficient and inefficient companies of industry, and in the aggregate with a low reserve of growth of output (5.7 per cent) specifies the basic problems of industry – shortage of a raw-material base and a rigid competitive struggle for the buyer. These circumstances do not allow it to draw to a conclusion how much effectively raw materials on the Ukrainian meatpacking plants are used.


4.5 International benchmarking results In this connection we had been carried out an international performance benchmarking, in which alongside with Ukrainian 53 foreign meatpacking companies were analysed. By the results it has been established, that on the efficiency frontier there were 11 (of 82) companies: two American (Diamond Ranch Foods LTD; National Beef Packing Company LLC); two Polish (PKM Duda S.A.; ZM Herman S.A.), Spanish Campofrı´o Group, German Moksel Group, Dutch VION Holding N.V., Brazil-European Doux Group, Russian Cherkizovskiy Meat Processing Plant and two Ukrainian plants (Ritm and Dolynska Poultry Packing Plant). Defining a degree of influence of key factors on output and the general character of a scale effect on the international sample (82 companies), three-factor production function has been constructed: Y ¼ 2; 432 · L 0;050 K 0;101 M 0;847

ð4Þ

Model (4) is reliable and specifies that the volume of output at the meat companies more than on 99 per cent is defined by three factors: the labour, a fixed capital and material inputs. In comparison with model (3) the role of materials and labour in formation of an end product has noticeably decreased, and the role of a fixed capital has increased. It specifies greater capital intensity and lesser share of manual labour and material capacity at foreign meat companies. The sum of elasticities of output with respect to all factors in model (4) is about one (0.998) that specifies presence of constant return to scale, which considerably below than among the Ukrainian plants. In comparison with an increasing return to scale determined in domestic meat industry, the given circumstance specifies exhaustion of potential of extension of production by foreign companies for providing accelerated growth of efficiency and achievement of an optimal size. And on the contrary it testifies to unused potential of growth of production efficiency due to consolidation at domestic plants.

Material cost 0.04

Reserves of inputs reduction (%) Depreciation 33.39

Employees 26.41

Potential growth (%) Output Efficiency 5.65

10.8

Table III. Potential growth of efficiency and reserves of inputs reduction of Ukrainian meatpacking industry

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Value of residual (2.432) in model (4) is higher than in model (3) that specifies relatively low productivity of Ukrainian meatpacking companies in comparison with an average world level. International benchmarking has allowed expansion of reserves of possible inputs reduction for material cost from zero to 0.7 per cent, for the labour from 26.4 up to 78 per cent, and also potential growth of output from 5.7 up to 10.6 per cent and efficiency of Ukrainian meatpacking plants from 10.8 up to 16.1 per cent. The insignificant reserve of material inputs reduction specifies a defining role of raw materials in formation of general cost for production in meatpacking industry all over the world. Thus Ukrainian meatpacking plants have a significant reserve of decrease in expenses with capital input (31.7 per cent) and labour input (78 per cent) at simultaneous growth of output (10.6 per cent), which provide high potential of growth of their efficiency (16.1 per cent). Achievement of specified parameters is possible at studying and introduction by domestic plants of the best foreign practices in own operational activity. The benchmarks most suitable for implementation of benchmarking have been established for each of Ukrainian meatpacking plants. Since carrying out of competitive benchmarking in a home market is highly sophisticated problem, as the majority of the companies here is direct competitors and is not interested in the growth of efficiency of other participants of the market, more preferable variant for the majority of domestic brewing companies is carrying out of international benchmarking. 4.6 The ways of efficiency improving The implementation of international benchmarking is expensive and inaccessible to the majority of small and medium Ukrainian meatpacking plants. Hence an optimal variant from the point of view of preservation of the competition in a home market and improving of efficiency of Ukrainian meatpacking industry is their friendly acquisition by firm-benchmark, for example, by Doux Group of Pryluky meatpacking plant or Melitopol meatpacking plant, or the merger with firm-benchmark, for example, Polish PKM Duda S.A. and Ukrainian Ivano-Frankivsk Vinnitsamyaso. Another variant of improving of industry efficiency is friendly acquisition of inefficient plants, for example, Uman meatpacking plant, Konotopmyaso, meatpacking plants “Myasny Standart” and “Simferopolsky” by domestic meat holding Luganskmyasoprom with the subsequent implementation of internal performance benchmarking and adaptation of the best practices of the Lysychansk meatpacking plant on them. However the given variant can negatively affect the degree of competition on the internal market where after such absorption the number of “players” will be considerably constricted, therefore it can be used only when it is impossible to realize the other improving variants. The third variant is the using of a merger tool between small and medium plants. For example, Ritm with Nizhyn, Odessa and Trostyanets meatpacking plants and bar poultry packing plant with subsequent implementation of internal performance benchmarking and adaptation to the best practices of the Ritm at the plants of new association. In conditions of an increasing return to scale and internal benchmarking such a merger will allow improvement of production efficiency of the given companies. The fourth variant is co-operation with the purpose of studying by the efficient plants, for example, Zolotonoshmyaso, Melitopol Meatpacking Plant or Berdychiv

Meatpacking Plant an operational experience (operations, technologies, a control system, etc.) of foreign firm-benchmark, for example, Cherkizovskiy Meat processing plant that are in the Russian vertically integrated group “Cherkizovo”, and its adaptations in own operational activity. Thus, implementation of the results of international benchmarking and adaptation of the best practices of specified firms-benchmarks to their own activity will allow the Ukrainian meatpacking plants to provide improvement of quality and competitiveness, and also to raise a level of production efficiency up to the world-class level. 5. Conclusions By the results of the study of efficiency of meatpacking industry of Ukraine it is possible to draw the following conclusions: . In comparison with high rates of growth of meat consumption in the country, its industrial production practically does not develop over the limitation of a raw-material base (reduction of a number of cattle), financial difficulties, a deterioration of a fixed capital, and also a rigid competition on the meat market and not competitiveness of the majority of Ukrainian meatpacking plants. . An increasing return to scale in industry is determined, which in comparison with a constant scale effect on the international sample specifies that the domestic meat companies have not used a potential of increase of efficiency due to consolidation of manufacture, that causes importance of association (mergers, acquisition) and extension of business to improve production efficiency and provide competitiveness. . The organizational and subjective internal factors like proprietors and management are the key factors of providing of efficiency of meatpacking plants. Vertically integrated companies with a full cycle of production and sale of meat products owned by foreign investors and some regional meat holdings capable to make technological re-equipment of manufacture, to involve qualified personnel, to provide an adequate raw-material base and to arrange sales, are the most effective in industry. Not profile firms and physical persons, and also separate inefficient regional groups, not having a sufficient operational experience in the given sphere, financial, personnel, raw or other necessary resources, have appeared to be unable to manage plants effectively in conditions of toughening of competitive struggle. . Significant reserves of inputs reduction by domestic meatpacking companies are revealed: for capital input on 33.4 per cent, for labour input on 26.4 per cent. International benchmarking has allowed considerable expansion of these reserves and potential growth of efficiency of the Ukrainian meatpacking plants has risen to 16.1 per cent. It is possible to use this potential at studying of foreign experience and application of the best practices by the domestic companies during their own operational activity. . The offered ways of use of potential of efficiency growth for the Ukrainian meatpacking producers are connected with use both their internal ability (modernization of the equipment, motivation of the personnel, etc.), and successful experience and resources of domestic and foreign companies (benchmarks) through the tools of co-operation, exchange of experience, merger or friendly acquisition.


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Further reading Banker, R.D., Charnes, A. and Cooper, W. (1984), “Some models for estimating technical and scale inefficiencies in data envelopment analysis”, Management Science, Vol. 30 No. 9, pp. 1078-92. Corresponding author Anatoliy G. Goncharuk can be contacted at: [email protected]

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