Dickeson--Buying Decisions? It's In Your Own Numbers
I had a call from an investment banker wanting information about the printing industry. In effect, he said: "We understand that the printing industry has a problem of chronic overcapacity, which drives down prices and makes printing companies less than attractive investments. Is this true? If so, why? Is this changing? Where is the data of printing industry capacity to be found?"
What shall we say to the banker?
For as long as I've been around, the buzz has been exactly as the banker put it: Excess capacity drives down price margins. Agree? William Davis, president of R.R. Donnelley & Sons, put it this way in his "Ground Truths" speech more than a year ago. "…Printing also has a lot of overcapacity—a lot of idle press time."
"What's with you guys in the printing business?" That's the question a printing company attorney asked at a directors' meeting, which I attended a few years ago. "You're not making a decent return on investment. You borrow to buy a new press, fill it up with low-margin work and then borrow more to buy more capacity, in order to print more poor-margin business. I don't get it!"
What shall we say? "Guilty as charged, your honor"?
Obviously our capacity decisions aren't logical, they're emotional.
"Hey, we're in the business. We don't know anything else."
"It's a place to go in the morning and keep busy all day."
"It provides work for the kids and my wife's brother."
"You're right. The margins are terrible, but I can make it up on volume."
"I'm making my payments, and the insurance company will lend me more money."
Cynical? I wonder sometimes.
What information do we use to make equipment addition decisions? There isn't any industry capacity data, to my knowledge, or that of the investment banker who called. It must be on "gut" feeling. We tell ourselves that, with more volume, we'll spread the overhead costs further. But an inner voice hollers, "Wait a minute. Volume creates its own overhead." If added volume doesn't generate excellent margins, it's quicksand. Volume is "activity" and activity consumes resources. That's why "activity-based costing" has become popular. Do we have any objective information to provide support for our capacity decisions?