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Does Productivity Influence Profit? --Dickeson

January 2003
Increased productivity doesn't translate directly to increased profits.

"The main cause is a profound misunderstanding of the relationship between productivity and profits. Everyone from Alan Greenspan and Wall Street economists to corporate chieftains and financial journalists made the assumption that higher productivity and new technology would inevitably translate into higher profits." (From the cover story of Business Week, November 4, 2002, pg. 108, "The Painful Truth About Profits." )

Perhaps, in the long run, increased productivity converts to increased profits. But wasn't it Lord Keynes who said, "In the long run we shall all be dead?" It's a cold comfort to realize that it's not just printers who misinterpreted the benefits of productivity increase.

Other industries and some very smart people have also gone astray. Increased productivity means more output per applied labor hour. Increased capacity is the direct, and desired, result.

Q. How is increased capacity utilized?

A. By increased sales.

Q. How shall I increase sales?

A. Lower your prices.

Q. But won't lower prices decrease my sales gross margins?

A. Yes.

Q. Must I increase my productivity?

A. Yes.

Q. Why?

A. In order to remain competitive with other printers that are increasing their productive capacity and reducing prices.

Q. Can't I reduce my capacity and lower my costs?

A. Yes.

Q. How?

A. Downsize by reducing the number of people you employ.

Q. You mean lay off my friends?

A. Yes.

Q. Why?

A. You must decrease your expense burden by reducing headcount through a combination of attrition and discharge.

Q. Have I only choices between increased lower margin sales volume and letting people go?

A. Yes. In reality, those are the gains and penalties, the joys and sorrows, of increased productivity in a free economy.

Q. What happens if I don't increase sales or release people?

A. You will suffer from costly excess capacity and endanger your business survival.

This is the stark, naked truth about increased productivity. In 1811 the Luddites of Great Britain learned of this inevitable result and tried to destroy new automation in the knitting mills. Thus, it should really come as no surprise 200 years later. We want productivity to increase. We want more output per labor hour.

When we get it we have to pay the price by eliminating people, painful as that always is, or subsidizing excess capacity by depleted earnings. We can't join the latter day Luddites or put the genie back in the bottle. Recall the dismal fate of 10,000 hand manuscript monks after Gutenberg's achievement.

Hourly job costs have been the great productivity deceiver in printing for many companies. Increased productivity apparently reduces job costs because it reduces the hours charged against jobs. We forget that hourly job costs aren't real—they're expedient fictions. Reducing hourly job costs by lesser job chargeable hours doesn't decrease out-of-pocket cash expenses a penny.

There's no way lower job costs alone can increase profits of a printing business. Increasing productivity is but the first step. If we don't take the second step we wind up with a burden of unused capacity. And that's where we are today, isn't it? We're an industry with chronic overcapacity because we're constantly increasing our productivity! We have to continuously improve output per labor hour because we must—but it's also a painful penalty.

The trouble is, when we go to the trade shows, association meetings and listen blindly to equipment salespeople, profit sugar plum fairies dance in our heads. This or that new gizmo will reduce our costs by X percent! Why? Because it will increase our productivity. Yipee!! Where do I sign? How soon can it be installed?

The alternative to downsizing is to increase process value-added by increasing sales volume. Is cutting prices the only way to increase sales? No. Even lowering prices may not increase sales volume. Cutting prices is an effort to take market share from another printer. It generally provokes retaliation and a downward spiral of value-added margins, often with no volume increase at all.

That loss must be currently replaced to stay even in volume. Then we strive for an additional 10 percent sales volume to justify enhanced capacity resulting from increasing productivity. Seems we're caught in a deadly loop, aren't we?

All of this logic leads to the mergers, acquisitions and printing company attrition we continue to observe. Unfortunately, the track record of the merging and acquiring printers is singularly unimpressive per the share values of the publicly traded firms that have resulted. Commercial printing is primarily a relationship business, not a commodity production, with sets of complex culture paradigms that rarely mesh in an effort to achieve the magic "synergy."

This leaves us with the gloomy, but realistic, outlook that the editors of Business Week exposed so well in their cover story. Increased productivity is a painful, difficult and mixed blessing for the economy and for printers.

—Roger V. Dickeson

About the Author

Roger Dickeson is a printing productivity consultant based in Tucson, AZ. He can be reached via e-mail: rogervd2@cox.net.
 

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