Musings on Material Multipliers -- Dickeson
Peter Doyle of Action Printing in Fond du Lac, WI, and I have concluded that printers use job costing simply for the purpose of pricing jobs. Most don't do post-production variance analysis or compare actual results with estimates. Nor do they do any variance analysis comparing actual job costs with General Ledger results. If they did, the variances would be devastating.
Maybe they did so a time or two in the past but, because we're so frustrated by the differences, they just toss a dust cover over that "elephant in the living room." So why do we persist in using job cost estimates for pricing? Tradition? Because we don't know any other way to price jobs? Or is it because we just don't realize the fragile construct of critical assumptions involved?
How's that for a shotgun generalization? Let's follow on with another.
Estimates of materials to be used on jobs are within acceptable variances when compared with actual results in most shops. Paper, ink and outside job purchases are fairly predictable.
Materials costs are NOT hourly job costs. There's no chargeable/non-chargeable nonsense involved with materials. Nor is there guessing at capacity and capacity utilization for materials a year into the future. Nor are we making dubious assumptions that allocate overhead costs to production center rates for paper and ink. We don't use assumptions about sales, depreciation or obsolescence of materials.
So why don't we use just the materials estimation part of our systems as a base for some kind of pricing perspective? Shove that job cost portion of any estimate into a place where the sun does not shine. Is that too basic and simple? To this point, the only critical assumption we make is that we can acceptably predict paper, ink and outside purchases for jobs. Check it out for yourself. Compare your average materials estimates with average materials actually consumed for three or four groups of 10 to 12 recent jobs. Okay?
Do you recall an ancient rule of thumb that said, "Your price should be three times your materials?" I do. Many old-timers (BC—Before Computers) will recollect the rule. Well, if we can do a fair job of estimating materials, why not use some variation of that ancient wisdom? Estimate your materials costs, multiply by three and see what pops up. Remember that the result is not the price. It's just a bogey, a support number, a starting point for evaluating past history, competition, market conditions, which way the wind is blowing and all those elements of a SWAG (Scientific Wild-Ass Guess).
Hitting Pricing Bogeys
Maybe we'll want to use a different materials multiplier number for setting pricing bogeys. Or even a series of multiplier numbers depending on work variations could be used. What you want is just something that provides a little decision support—some cold comfort. Odds are 10-to-one it'll be better than what you're doing with a computer system for estimating job costs to mark up for a price quote. Again, check it out. Divide sales dollars by materials dollars in that set of samples you just did and see what materials multipliers you've actually been using.
Here the critical assumption is that printing is a process that converts paper and ink to products! How much should you be charging to convert $500 of paper and ink into 1,500 units of product? $1,500? Isn't that what we should be thinking about and the way we should be thinking?
Now here's another Dristan to clear your mental sinuses. We can't forecast sales or job mix worth a hoot, but we really can predict operating expenses reliably. So, let's find the total of our operating expenses for the past 12 months. That includes labor, sales and administrative costs, interest, depreciation—everything but materials. Divide that 12-month total by 52. That was our weekly breakeven point for the preceding year.
That gave us the weekly "contribution" needed to have neither profit nor loss; that's the BEB (Breakeven Bogey). "Contribution" is equal to sales less materials. It's the value the printer adds to the basic raw materials. If we had less contribution than breakeven, we had a loss.
Now adjust that total for predicted increases and decreases in the coming 12 months and divide by 52. That's our weekly BEB—Breakeven Bogey—for the year ahead. Do it by quarter and divide by 13 weeks, if you wish. Assume we're shooting for 10 percent profitability. Divide the BEB by .90 and get a WTC (Weekly Target Contribution) bogey. Y'see, we haven't tried to predict sales numbers, number of hours or hourly chargeable cost rates. All we're predicting are operating expenses. That's it. We purposely call them "bogeys" to remind us that they're not real, just one stroke more than par on the golf course.
If you've never done this exercise before, stop right now and do it. Indeed, it will immediately clear your mental sinuses or "your money cheerfully refunded." Logical and quite simple, isn't it? If the goal is to make a profit from a printing business, this points us straight at what we must do to get there, week-by-week.
If we're running below our Weekly Target Contribution we must either a.) increase sales volume or prices, b.) decrease materials waste, c.) decrease operating expenses, or work some combination of these three. We look at the actual results compared to the bogey at 9 a.m. every Monday to focus our minds on what must be done this coming week.
A faster press or binder, moving to computer-to-plate and working harder or more efficiently won't change the operating expenses or increase sales volume or prices. Brutal as it may be, we must downsize, outsource and change the marketing approach to the printing conversion process and services. We must simplify. We must clarify our understanding by trashing the confusing and misleading assumptions that led us into overcapacity.
Our base is now grounded in our ability to reasonably estimate materials for jobs and to predict the business operating costs for limited future periods. If the essence of management is the ability to predict reliably, then we're now prepared to manage our business.
—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 email@example.com, by fax (520)903-2295, or on the Web at http://www.prem-associates.com.