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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.
 

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