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We Need Better Tools --Dickeson

September 2001
Commercial printers convert paper for customers for many types of jobs: books, pamphlets, newspapers, business forms, catalogs, lists, leaflets, magazines, posters, bibles, hymnals, greeting cards, programs, calendars, albums.

There are thousands of printers throughout the world, from Helsinki to Auckland, from Vladivostok to Capetown, from Beirut to Hong Kong. No two print jobs are identical, no two print shops are the same, and the needs of no two print customers are exact counterparts.

The basic economic problem of printers is pricing their conversion service for hundreds of different jobs using technology that is shifting—even as we write. Price is what customers will pay for the value they perceive—"what the traffic will bear." Pricing is not constrained by a printer's costs. Prices are based on a customer's value perception and restrained by the prices offered by various print competitors.

Printers try to predict—estimate—the cost of a job in order to mark it up for pricing. Thousands of dollars are spent on computerized systems and many hours of effort are devoted to job cost predictions.

All the while, printers know that internal cost computations are not relevant to customer value perception and the competitive environment. It is the ultimate trivial pursuit. One writer suggests that one would do as well in pricing by examining the entrails of road kill. Another used his computer to generate random numbers and doubled profitability. So why do printers try to predict costs? "Tradition!" It's our own fiddler on the roof.

Trouble is we've come to regard job cost accountancy as revealed truth. We adapted the General Motors cost accounting system for mass-produced auto parts in the 1920s to printing jobs in order to provide a predictive cost base. Then we came to accept those costs as the business model for printing decisions, even though we didn't appreciate all the implications of absorption costing.

Change Is Needed
Computer application software suppliers and printing trade associations enshrined job cost as "The management decision support system for printers." And here is printing today with chronic over-capacity and risk return rates that do not justify investment in the business. The Japanese don't even use cost accounting!

Should we now change our economic model? What do we change to and how do we accomplish the change? These are questions framed by Eliyahu Goldratt in his TOC—"Theory of Constraints"—first presented in his classic novel "The Goal" in 1986.

Our job cost statistical system is a policy constraint on our industry, imposed and supported by management. This is what Peter Drucker suggests in "Management Challenges for the 21st Century." It is urged by Goldratt. It's what we learn from Activity-based Costing as opposed to Job Cost Accounting. It is inconsistent with Contribution Analysis. Job cost accounting is outmoded, thinkers and writers in the field of management accounting are saying today.

"But if we shift to some new statistical system for management decisions, how will we mark up estimated costs for pricing?" we ask. That's a profound question because it raises the issue of how change is to be made. If Socrates were present he might ask, "How are you really setting your prices now?" Another troubling question: "What pricing system are we changing from?" Are we really marking up predicted job costs to set our prices? How can we be doing that when it isn't how price is set in our market economy? Aren't we confused, saying one thing but doing another?

So what statistical model shall we change to? Is there a system presently existing we can use for the printing industry? We adapted Job Cost Accounting from General Motors 80 years ago.

Should we adapt from an existing system or systems in use in other industries today? Shall it be Goldratt's Theory of Constraints? Or should it be Activity-based Costing? Or Contribution Analysis? Or the Value Added principles of the PIA Ratio Studies? Or the Kanban—Just-in-Time—insights of Taichi Ohno of Toyota? Or some combination of those systems tailored to fit the needs of the printing industry?

None of these, nor any combination of them, is going to tell us how to price a job—reveal a customer's value perception or what competitors will propose.

In 1977 the Graphic Communications Association published a booklet I wrote entitled "Printrol" that argued the case for shifting our model to Contribution Analysis, assuming direct labor was a variable cost. Now, I realize that direct labor is not a variable cost in printing. We just don't (and can't) lay off our technicians to reduce operating expenses. Skilled people are too hard to find and train; we've invested too much in them and, besides, labor's just too scarce these days.

If our people increase production efficiency, it's morale-destructive to lay off the very individuals whose efforts made the gain possible. So we accept the increased capacity, driving down our pricing and under-utilizing the capacity we develop. What to do?

Suppose we use Contribution Analysis, but this time around we treat only the job materials—the paper, ink and outside job purchases—as variable costs. All the rest of our costs are OE—Operating Expense. Let's call it "Printrol II" for a working title and incorporate the teaching of Drucker, Deming, Goldratt, Ohno, Margolis and others. Let's develop an operating business model that's more consistent with our General Ledger accounting and reporting systems.

No, "Printrol II" isn't going to produce a TSP—Target Selling Price. We cannot come up with a statistical system that produces a magic number to "mark up" and hand to print buyers.

There is no Santa Claus, no tooth fairy, no digital Aladdin's Lamp that can assay the perception of value in a buyer's mind and balance it against competitive pressures. Nor is there any writer of books or trade magazine articles, computer programs, any super consultant, nor any e-commerce Internet service that can do it for us. That's the task of the entrepreneur covered with the grime of failures called experience. All we can do is hand that print manager a better tool—a sharper axe—better decision support to work with.

—Roger V. Dickeson

About the Author
Roger Dickeson is a printing productivity consultant based in Tucson, AZ. He can be reached by e-mail at roger@prem-associates.com, by fax (520)903-2295, or on the Web at http://www.prem-associates.com.
 

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