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?
Some. If we use it.
The evidence is at hand in our job-cost system database. By attrition, luck, natural selection, or whatever, we've survived, to date, with a portfolio of customer accounts.
Develop a marketing profile by a series of QRAs (quartile ranking analysis) of that job-cost database. Ranking is sorting a list from best to worst. Quartile is dividing the ranking into four parts: UQ, UMQ, LMQ, and LQ—jargon for upper quartile, upper-middle quartile, lower-middle quartile and lower quartile.
Here are the data columns I suggest for the QRA tables: job name; customer name; salesperson; job type; net sell; materials; production value-added; manufacturing job cost; and job contribution.
Get the picture? We'll wind up with a series of tables with these data columns. There are four subtotals—one for each quartile—and a grand total.
For our first QRA table, sort all the jobs for some period (date range) on best to worst "contribution." Add a computed column called "cumulative contribution," adding the value of each job to a running total balance. Add a computed column for "percent of total contribution," dividing the contribution for each job by the "contribution grand total." Now, we need an additional column showing the "running percent total."
Aha! A light bulb flashes when we look at the result of that first QRA table. Seventy-five percent of "total contribution" from all jobs for the period came from the UQ—the upper quartile—didn't it? That's the usual result. What percentage came from the LQ, the lowest contributing group of jobs?
We've converted that job-cost data to a bit of decision support information, which we pass on to one of Peter Drucker's "Knowledge Workers," (KWs)—probably our CEO or chief marketing officer.
"Not sufficient for the profile," the KW cries. "Drill down; tell me more." Good information always breeds demand for more, doesn't it? The process is called DIKE: data to information to knowledge worker to execution.
Now, group the job information by account and sort it from best to worst. Then, sort it by product type. Next, by salesperson. On and on. The result is a marketing profile of where the "need" is that can be filled at a profit!
Where did we find support? There it was in our own data warehouse, called the job-cost system. All we had to do was select, group, sort, use arithmetic and think. Piece of cake.
There will never be complete information, but there will be enough to provide some support for a decision about that additional capacity. We'll never have all the pieces of the jigsaw puzzle, but we'll see enough to discern a picture. Now we can answer bankers and lawyers when they ask about capacity, can't we?
—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.
- People:
- William Davis