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Readers Weighing In — Dickeson

June 2006
WITH REVERSE auctions, printers are starving themselves based on hourly rates and production speeds. In order to keep up you must buy the newest equipment and pass the running speed savings on to the customer. Where does the money come from for future investments?” asks one writer. He goes on to say, “We have been using market pricing technology for 30 years with great success. Not leaving money on the table has been our secret. Not easy to calculate...”

This is the comment from one respondent. I received well over 100 e-mail responses to my March issue article titled “Am I Wrong Here?” Most of them were requests for copies of “Monday Morning Manager,” a PDF e-book that I offer free of charge. But several contained comments I think you’ll find of considerable interest.

Another writer said, “...We are with you all the way regarding capacity utilization and cycle time reduction as the path to profitability. The nice thing about this is that one of the most important client demands is: ‘how fast can you do it?’...That said, we still do our pricing with a traditional budgeted-hourly-rates (BHR) approach. The reason is simple; that is the best way for us to predict where our competitor’s price will be. Once we know where they are, we can use PVA factors to make smarter pricing decisions than they do...The point is that as long as the rest of the world hasn’t yet changed their thinking, then we need to look at pricing both ways.”

Still another noted, “...We’ve been losing commercial jobs at or below our prime cost, and that upsets us and leave some presses idle for weeks. We believe that our competitors don’t have a clue on covering their fixed costs or even how to reach break even point, or perhaps it is us.”

Deepening Discounts

For a refreshing view, this printer wrote, “...We stopped using budgeted hourly rates to set pricing five years ago. Well, sort of. Our custom-developed estimating system is built around BHR, like I’m sure every estimating system is. We just stopped updating the BHRs. May 2000 is the last time our accounting department invested into updating them. That was the beginning of the downturn in our industry...and we concluded that it made no sense to spend the time to update the system, just to have the estimators deepen the discount needed to meet the market. Over the years, the estimators have continued to use the system because that is all they know. They have had to learn to calibrate the selling against the competition.

“We are now beginning to address the customer’s perception of value with our estimating and selling system,” the printer continued. “The old estimating system is getting long in the tooth technologically, so it is time to replace it with something else. And it won’t be, as you say, based on our fictitious internal costs...We have focused on precisely the things that you are recommending like receivables and velocity of throughput. It has paid off so far, with last year being one of our most profitable years ever. That said, there is still much to be done.”

If anything, what we learn from these comments is that “budgeted” hourly rates are the way prices are set for commercial printing. They are NOT set like one would expect from Economics 101 where demand and supply curves rule. No, not at all. Prices are set in the commercial printing industry based on a construct of “budgeted” internal costs of printing companies.

Well, sort of. These constructed prices are adjusted or calibrated by judgment calls of estimators and sales personnel of what the competitive pricing will be using “budgeted” hourly rates—perhaps—well, sort of.

Now the word “budgeted” is the same as “forecasted” or “estimated” or “guessed” for some future period of months—typically, although not necessarily, 12 months. “Budgeted” seems a scholarly, well thought-through word. Instead of saying “budgeted hourly rates,” let’s say “guessed hourly rates” for 12 months. Means the same thing but “guessed” lacks that scholarly tone, doesn’t it? Now if we said “guessed” we’d certainly insist on checking the “guessed” rate for a month against the real rates for that month, wouldn’t we?

Has anyone ever done that? Seems so simple, doesn’t it? Just changing the word without changing the context at all.

No. We wouldn’t want to do that because, if we did, we’d find ourselves like monkeys chasing our tails round and round. Instead, we send our estimators off on tasks to do that tail chase—constantly recalibrating our target prices to approximate those of our competitors—when those target prices don’t even approximate our own at the moment!

Were it not so laughable it would be tragic. And that’s what it will be when the history of the current printing industry is written—a tragi-comedy. How many times have I thrown down the challenge? Compare, side-by-side, the monthly profit and loss statements of a printing business using the general ledger and the budgeted hourly cost system figures for a year? What printing company has accepted that challenge? How dare we think we can foretell competitive prices when we can’t even reliably forecast our own?

Truth is, we can’t forecast or “budget” for a period of 12 months, or even six or three months. So let’s just stop this “budgeting” or “guessing” nonsense. Let’s stop our estimators from doing that monkey tail-chasing game of ever-calibrating “competitive” rates, because “that’s all they know how to do,” and start them behaving like practical business people.

(There’s one very nasty side-effect to this BHR prescription we haven’t mentioned. It tends to get communicated to the manufacturing floor and those good people are inclined to believe that budgeted hourly rates are the true costs.

“After all, management wouldn’t use them for pricing if they weren’t true, would they?” Analyze that one! When we increase the speed of a binder, the costs go down. Right? Wrong! Sorry, costs only go down if you decrease the number of hours of labor employed and paid. And that doesn’t show up in budgeted hour rates, does it? As an ex-lawyer, I wish there were someone we could bring a class action suit against for that deadly side-effect. We’d recover millions!)

It takes time. It’s hard. It’s slow-going. But I think we’re making progress, nonetheless.

—ROGER V. DICKESON

About the Author
Roger Dickeson is a printing consultant located in Pasadena, CA. He can be reached at rogervd@sbcglobal.net. A PDF copy of his recent book, Monday Morning Manager, is available without charge by e-mail request.

 

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