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INDUSTRY CAPACITY -- Matching Marketplace Realities

March 2002
BY JACK RICKARD


During uncertain economic times, prudent graphic arts companies formulate reasonable strategies to combat underutilization of production capacity. There are right and wrong ways to accomplish this goal.

In my opinion, fighting for market share by lowering prices is fraught with danger. The more thoughtful of the price discounters at least try to set prices such that each job contributes a reasonable amount to existing overhead. While there may be some merit to this line of reasoning, it is only applicable for the very shortest of time frames.

When the printing market contracts, those who believe that the demand for their services is highly "elastic" are tempted to cut prices to gain volume. While this may or may not work in the short term, you would be much better served over the long haul by matching your production capabilities to a sustainable level of demand.

Over the long run, management/ownership energies can be best utilized by adjusting production capacity so that it matches market reality. Let's be clear: Short-term pricing games are no way to hide from what is going on in the marketplace. One of the reasons why people discount is because they instinctively know that a hard look at their operations will reflect poorly on their past decisions—and this is difficult to face squarely.

Capacity Times Three

Let's turn our attention to capacity for a moment. There are three kinds of capacity and each must be handled differently.

1) Core competency capacity. This is the activity that your company does well and usually is the centerpiece of your business. It must be what "lights your fire." Generally, you want enough capacity in your core competency areas to do the work available during busy periods, but not so much that you never outsource. This generally is the capacity you do not want to reduce or emasculate in any way.

2) Non-core business areas of activity. These are the services and products you provide that are different in nature to your core business. For printers, these might be design, prepress, postpress and fulfillment activities. These areas should be analyzed very carefully before you decide to jump in. If you make the decision to do so, then that piece of business should be consciously sized to always run at full capacity.

For my company, Rickard Bindery, this means we look at the amount of work we have suited to an operation in the slowest time of the year and size that capacity to be 80 percent of that slowest period.

This allows us to outsource the work that doesn't fit well and keep outside vendors at least somewhat busy during slow periods, which has many loyalty benefits. It also gives us a department that is always contributing to its share of overhead and, as we all know, things just run better and with fewer errors when running at or very near capacity.

During expansion periods, equipment manufacturers sometimes offer additional non-core equipment as incentives for taking action on large core purchases.

Undeniably, it's tempting to consider these offers. However, equipment "bargains" such as these are riddled with hidden costs like: diversion of management attention that should be devoted to core business; loss of your production floor space that could be used to build core business; reduction in core business working capital; and full-price variable labor.

Regarding labor costs, we have yet to find any employee willing to work at a 50 percent wage rate to match a 50 percent machinery discount.

3) Support capacity. This is the capacity that is not actually needed to operate and control production activity. Delivery, accounting, marketing and legal services are a few examples that come to mind. Most companies are wise enough to outsource their legal services. Many outsource the payroll function of accounting, but why not everything else? Rickard Bindery does. As a result, good things have happened. For example, our bean counting costs have been more than halved.

Faster Delivery

In addition, our management team has realized that we can't run the most efficient trucking operation. In general, most companies would benefit from outsourcing this service instead of struggling to keep it in-house in an inefficient, vertical integration attempt. Customers would benefit from faster and more reliable delivery service and, yes, their costs would be the same or lower over the long run. With outside trucking you only pay for what you use, and there is absolutely no internal cost, which is of significant benefit when business is slow.

Likewise, other functions can follow the same path. We all need good marketing, but this service costs a lot of money. What do we do? We either attempt to do it ourselves or we hire less than the best. Why not hire a professional for two or four days a month and get a good job done, staying within your budget?

Most of us have competitors that operate profitably at a fourth, half or twice our volume. The reason they are able to do this is because their overhead and capacity numbers fit their market reality. The size of your top line and the number or your employees don't determine profitability. Instead, it's your ability to match overhead and company resources to what you realistically can sell that does.

During good economic times, it's easy to let a little extra overhead creep into one's cost structure with the thought that current momentum will continue. However, when fighting a downturn, it's important to replace addition skills with subtraction.

Don't Drop Prices

When operating in a changing environment, the real challenge is not to reduce the price on a job to get the next order, but to adjust capacity—including overhead—to reflect marketplace reality. This is very painful, especially if we must face our own previously poor decisions. Or, worse yet, good human beings who through no fault of their own just aren't contributing enough to the overall effort because we haven't provided work at which they can be productive.

In difficult times, company leaders often view themselves as being failures, yet the irony is that other people are the ones that lose their livelihood. Many of us hope we can somehow weather the storm and come out intact. Sometimes that happens but, in an uncertain future, we perform best if we recognize changing business landscapes as quickly as possible.

The real skill today is determining actual business realities and having the courage to adjust expectations to be in line with that reality. You do not want to cripple yourself for when things do turn around, but you must be able to survive until that time. Then you can safely turn on your company's engines and roar past your previous best performance levels.

One of the great benefits of outsourcing is that the outsourcing function has minimal overhead costs. It's a wonderful preserver of cash because you only pay for that which you buy. Contrast this to internal, non-core production capacity. In this case, companies pay for their ability to produce instead of that which they produce. This is a profound difference that has a significant economic impact, especially when bouncing in the winds of economic turbulence.

For the past decade, much of American business has migrated toward an outsourcing model on the theory that companies should focus on their core competencies and outsource the rest. It's puzzling why some in the graphic arts continue to ignore this widely accepted, profitable course of action.

About the Author

Jack Rickard is the president of Chicago-based Rickard Bindery, and a former president of the Printing Industries of Illinois & Indiana, Binding Industries of America and Graphic Finishing Industries of Illinois. His company's Website is www.rickardbindery.com.
 

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