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A Truck Full of Melons -- Dickeson

May 2001
I have a truck with a load capacity of 1,000 melons. There's an area near the Mexican border where they grow the most delicious honeydews you've ever tasted.

In addition to my truck I have $1,000 in free cash. Being an entrepreneur, I drive my truck to that border spot and buy a thousand melons from the farmers for a dollar a piece. I head straight to Phoenix where I sell the honeydews to the wholesaler for $1.50 each. I've just made $500 gross profit. But the trip cost me $250 for expenses. So I netted $250 on my free cash in two days!

That's a 17 percent return on sales and a 25 percent return on my cash. I repeat the trip. Now I have $500 and a 50 percent return on cash. Suppose I do that 20 times and wind up with $5,000. I've earned 500 percent on my original thousand.

What's illustrated by this crude example is the value of inventory turnover. The more times we turn inventory over, the more cash we take to the bank. The faster we turn over our cash, our liquid resource, the greater the profit. Does it really work that way?

Sam Walton knew it did and built Walmart, the largest retail business in the country—maybe the world—by increasing turnover velocity. With a computer system and intense concentration on rolling over his stock of goods, the lower he dropped his prices, the more merchandise he sold, and the faster he sold it. He became a volume billionaire.

Another benefit Walmart has is its accounts receivable. They don't have any. Walmart sells for cash. As commercial printers we have both raw materials inventory and accounts receivable to slow our turnover profitability. On average, per the Messrs. Margolis in the Printing Industries of America Ratio Studies, we printers turn our inventories 12 times a year and our receivables eight times.

Dirty Little Secrets
Another little secret of our industry is that we don't get our invoices out for an average of two weeks after delivering jobs. Walmart is making a profit on fast turns. We are not!

Taiichi Ohno, of Toyota, taught us the value of JIT—Just in Time inventory management. The shorter the time interval between receipt of raw materials and incorporation of them in the manufacturing process, the greater the profitability. Walton and Ohno both stressed the value of velocity.

Peter Drucker, in earlier writings, emphasized three aspects demanding management concentration: productivity, liquidity and being in business tomorrow. Turning over inventories and receivables is a pivot point of liquidity. Today, proponents of e-commerce are stressing supply-chain management and time compression as enterprise value-added using Internet communication. Once again we are addressing velocity—resource turnover—as a key profitability issue.

If we could demonstrate a credible valuation model for increased resource turns we'd shake managers into turning inventories and receivables at least 24 times a year, issuing invoices the day of shipment and climbing aboard e-commerce. We'd have a new group called the "High Velocity Printers." But, alas, we aren't trucking honeydews to Phoenix.

Although there's a kernel of truth in that illustration, life in commercial printing isn't that simple. If we examine the Margolis Ratio Study information, we see that the upper one-fourth of printing companies (profit leaders) are returning about 19 percent profit on assets employed. Let's take a moment to stare at the table above.

PIA Ratio Studies 2000
Average Assets$8,155,058$7,798,684$7,888,572
Average Sales$13,323,295$13,151,369$13,194,734
Average Income$1,535,421$271,127$590,019
Return on Sales11.52%2.06%4.47%
Return on Assets18.83%3.48%7.48%
Number of Firms198587785

The other three-fourths are returning 3.5 percent on assets. They'd do better by putting their cash in a money market account if these numbers are typical. All 785 firms with 7.5 percent asset return are not doing sufficiently better than a money market account would. That level of return doesn't justify the risks involved in printing.

Accepting the study results is saying, in effect, that if we increased liquidity resources by accelerated inventory and receivable turnovers and reduced transaction time we still could not expect a reasonable risk/return on the funds released. Even as a profit leader it takes more than five years to recover the cost of capital invested. Doesn't this table clearly reflect the imbalance of productive capacity in our industry?

The rate of return on enterprise assets is not acceptable under any rational circumstances for the printing industry. It is particularly unacceptable today when the rate of change is accelerating in our economy.

Statistics Don't Lie
Isn't it remarkable how statistically close together the average assets and sales of both "Leader" and "Other" firms are on those two measures? It's the average income where the disparity is hardly credible. Average income of "Leaders" is 5.5 times better, as both a return on sales and on assets employed, than for the "Other" companies.

If we look just at the "costs" of slow turns we might value the loss of profitability at the current cost of interest on short-term borrowing. For example, if we decreased our average inventories by $100,000 we've saved costs at the rate of, say, 10 percent—$10,000. But we're not bankers; we're entrepreneurs. We must regard that $100,000 released to us at an entrepreneurial rate of return, an opportunity rate. It should not be less than 25 percent. Invest in nothing related to printing that doesn't appear to return the investment in four years or less! And at that it's only 6 percent greater than the present profit leaders.

The $7.9 million the average printer has invested in resources must yield just under $2 million in earnings. The objective of WOW III is a 25 percent return on enterprise resources.

As Captain Picard, of Star Trek, would say: "Make it so." It will require "right sizing" the business for the market to be served—excess capacity is unacceptable. Inventory will turn over twice each month and accounts receivable will not exceed, on average, 15 days. Non-use and misuse of productive capacity will be vigorously attacked with Activity-based Costing. Internet communications will be developed to optimize the supply chain and compress transaction time.

—Roger V. Dickeson

About the Author
Roger Dickeson is a printing productivity consultant based in Tucson, AZ. He can be reached by e-mail at, by fax (520)903-2295, or on the Web at


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