The turnaround rule for printers

Mad @ Mgmt addresses the concerns of middle-market companies, including banking, family and succession issues, turnarounds and performance improvement, and economic life in general. Walter Simson is founder and principal of Ventor Consulting, a firm dedicated to middle market companies.

The graphic arts have experienced a long-term spate of hard times. This is not only because of cyclical economic recessions, which can cause declines in advertising and business activity in general. Certainly, the Great Recession of 2008-2010 qualified on that score. But we also are suffering from longer-term trends that affect the industry: a reduction in the use of paper, books, newspapers, and other publications; substitution of electronics for other business services, such as tickets, contracts, and warranties; and changes in the use of paper in packaging and labels.

According to the Economics & Research Center, industry shipments declined by 4.7% in dollar terms in the 12 months ended November 2011. The industry’s capacity utilization is at 61.8%, down 2.1 percentage points from already poor figures a year earlier. And employment and capacity are both showing continuing declines.

The most common advice given to printers who face lower demand, withering price competition, and cash flow issues is: cut costs. For printing presidents who know their P&L statement better than they know their own children, it must feel like hollow advice. I don’t necessarily agree that costs are always the main issue, but it is true that all printers have a cost issue that they have never recognized.
That issue is hidden costs. Not costs that aren’t captured on the P&L, but costs whose origin is hidden – and when the origin is hidden, so is the ability to control.
Most, but not all, occur on the manufacturing floor. Here are some examples:

The Protected Machine.
You bought an elegant, special press 10 years ago. You have always believed that it could be a breakthrough technology, but the market has to be developed. How do most printers want to develop the market? By providing extra-low rates on the press. Just until the market gets off the ground, of course. But in the meantime, the effect of lower press rates on one press is to increase costs to other presses.

It’s a hidden cost. Have you ever seen a line item that says “Cost of Developing an Elegant Market”?

Make Ready Assumptions.
You are a multi-part printer with a complicated response device. You have been selling it well, and it appears to be making money. Then you discover that the production manager and the estimating department decided to make simplifying assumptions about make-ready time (this is the working time that it takes the pressmen to prepare the job for printing). The estimator will assume a certain number of hours of make ready, and the production department will report a similar number of hours. In the meantime, the costs are unmanaged. Any costs will be, you guessed it, hidden.

The Key Customer. This isn’t a production error. It’s a sales strategy. You are a quality house, and years ago you decided that giving a bank pricing concessions on everyday work would help get the annual report. It may have worked at one time, but over the years the purchasing agents at the customer have all changed, and no one seems to remember that the pricing was supposed to be a short-term strategy.

One customer gets preferential pricing, and the hidden costs are hitting the bottom line as hard as recognized costs.

I have never worked with a printer who has not had unrecognized costs. You want to get control of the operation? Cutting costs might not be the first thing to do, but recognizing your hidden costs is a necessary part of any turnaround plan.

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