Turn Cost Centers into Profit Centers

Jan 14, 2024 | Uncategorized

For all their many faults, one of the things many big, publicly traded companies are good at is turning their cost centers into profit centers. An example is Walmart and Amazon providing 3rd party fulfillment services to other businesses; where they took what used to be a cost (logistics & warehousing) and now provide that as a profitable service to other companies.

Many achieve this through what’s known as vertical integration. Not only are they trying to reduce costs along the supply chain, they are looking for opportunities to generate revenue on things that were once merely expenses.

I was recently speaking with a guy who manages a feedyard for one of the giant outfits. This company appears to be pulling the cost centers → profit centers page out of the big companies playbook.

The vast majority of their revenue (and profit) comes from feeding cattle. Hundreds of thousands of head each year. But, they also have other side-businesses (often referred to as subsidiaries) that are affiliated with the main company.

  • Farm Co.
    • An obvious one, as they can now grow their feedstuffs vs buying.
  • Fuel Co.
    • They source & transport fuel for their various feedyards as well as outside customers.
  • Irrigation Co.
    • Compliments the Farm Co. and services other clients with irrigation needs.
  • Feed Pelleting Co.
    • They were pelleting feed for their own cattle, so why not offer those services to local feed mills.
  • Manure Hauling Co.
    • Service their feedyards as well as other feeders in need of their services.
  • Trucking Co.
    • Hauling liquid feed and cattle for themselves, but also providing those services to others.

Now, these subsidiaries only provide a fraction of the overall revenue to the main company, but they’re not designed to be the big moneymakers. They’re designed to have the feedyards as their #1 customer, and if they can offset some of the costs by hiring out to others, that’s just adding to the bottom line.

I’m not convinced we need to be huge publicly traded companies or even large privately held companies to use some version of this model.

The gist is, what are large cost areas in each of our ag businesses that may be pain points for others? Identify where we could invest in the assets to solve our problem PLUS make a better return on that investment by offering those services to others in the industry.

I’d love to hear about more examples people have of folks turning cost centers into profit centers.

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