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Explaining Value Added -- Dickeson

January 2004

We're using crew hours that we guess for scheduling. Finally, we're using real dollars of materials actually consumed, plus crew hours actually worked, multiplied by rates we've configured by assumptions for comparisons.

Whew! I'm confused. For estimating, why don't we just stick with the real dollars of materials? You know, when you look back at those ratio values, that's really what were doing to arrive at a price, isn't it? Otherwise why would materials be so consistent as a percentage of manufactured sales over the years?

Let's get back to that point of deflection between materials and processing costs. We can attribute real dollars to materials by job. Once we do that, we can make pricing estimates we can depend on. We can't do so with processing costs. (And aren't we really doing that anyway?) Of course that might put some accountants, estimators and statisticians temporarily out of a job—until they dedicate themselves to supplying information that's really useful to decisions that have to be made.

The fact of the matter is that we really don't need job processing costs at all, do we? They're misleading. They lead us to believe that real costs are going up or down when job processing costs are going up or down. They're convoluted when it comes to price estimating. Besides, we're not really using those estimated processing prices at all, are we? They bear little or no relationship to general ledger income statements.

Taking Stock

We need to estimate materials that are required for a job. That's all. If a customer wants to use low grade stock, the price goes down with the cost of the waste. Higher priced stock bears a greater burden of waste cost and, consequently, a higher price. If we're doing a good job of holding the waste down we can expect to gain more from that job. That's one job cost directly related to job profitability.

When you Target Price a job as a multiple of material costs, the profitability of a job can be forecast much more accurately. Why? It's because you're basing your Target Price on a multiple of real dollars—dollars of materials—instead of real dollars, plus some fictitious assumption of processing costs.

By all means encourage customers to supply the paper. When they do, they're supplying a great part of the Value Added costs. Don't cling to the ancient notion that you're getting more "mark-up" when you supply the paper.

That's plain foolishness. Price is the equivalent of a multiple of the raw materials that you're processing. When the customer supplies the paper he's bearing a major portion of the cost of the job—including the cost of the receivable! Every day that a receivable remains unpaid is a day of lost possible revenue for your company.

My strong suggestion is that you learn your VA or PVA, whatever you want to call it. Watch your actual Value Added weekly. Have it in your head when you go to sleep. Wake up with it. Study your Estimated VA weekly on sales orders captured. Know your weekly break-even point.

You'll come much closer to managing a successful business if you do!

—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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