Not all Value-Added is Created Equal
Most printers are familiar with the concept of value-added. Simply stated, value-added is the revenue generated from the activity of the company’s internal operations and is calculated as gross sales less paper, ink, toner and outside services expense.
The value-added theory implies that the higher the value-added as a percent of sales, the more profitable the company will be. Therefore, following this logic, it would seem that in order to increase value-added, printing companies must maintain all services in house—i.e., bindery, mailing, fulfillment, data management, etc.
While this may hold true—that adding additional services may and probably will improve your value-added percentage—what happens to profits?
Here’s the issue: value-added theory ignores two important elements related to profitability. The first is the initial and ongoing investment expense of maintaining the product or service capability, and the second is the capacity utilization of that capability. Both of these elements affect profitability and ultimately cash flow.
The fixed cost of adding and maintaining capacity or capability (people and capital) and the inefficiency from under utilizing the capacity (peaks and valleys, starts and stops), in many cases, offsets any improvement in value-added. Therefore, I submit to you that improved value-added by itself does not equate to improved profitability.
As a matter of fact, the most profitable companies in our industry over the last three years have very little in the way of equipment and their value-added in many cases is below 60 percent. Such companies tend to invest in knowledge and relationships and outsource the manufacturing.
I suggest you to think twice before assuming that all services must be in-house. Do customers care where their work is being produced? Some do, but most don’t. As long as you manage the process, deliver on the promise and maintain the relationship, they will follow.