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Readers Weighing In — Dickeson

June 2006

“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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