RR Donnelley -- Giant Transformation
By Erik Cagle
When your company is the largest printing communications conglomerate in the United States (second biggest in North America after Quebecor World)—in a manufacturing industry that is fourth largest in this country—suffice to say all eyes are on you.
It makes no difference if the onus of an entire industry is wanted or warranted. Your company becomes a reflection of all that is wrong with the industry. The most layoffs, most plant closings, the biggest dip in year-to-year sales—if you want to know what's wrong with an industry, look for the giant with a huge target on its back.
That giant is RR Donnelley.
The Great American Printer from Chicago has some of the biggest scars, most publicized problems and, in the end, becomes symbolic of the state of the industry. And this is an industry that has been in severe pain for two years now, and the campaign prior was more than a bit uncomfortable.
But there is a silver lining. In 2002, RR Donnelley opened a plant in Shanghai, China; a premedia digital solution center in Pontiac, IL; and premedia facilities in Portland, OR; Warsaw, Poland; and Shenzhen and Shanghai, China. Additionally, a logistics distribution "supercenter" will open in York, PA, by the end of the second quarter 2003. Despite the sales dropoff and the decline in stock price, RRD greatly outdistances its U.S. competition in sales and boasts a balance sheet that owes few apologies.
|The RR Donnelley management team, pictured from the left, includes Steven Zuccarini, Michael Allen, Susan Henricks, Haves McNeal, Edward Lane, Daniel Knotts, Robert Pyzdrowski, Mary Lee Schneider and William Davis.|
The venerable, 138-year-old institution, bulging at 45 facilities and 30,000 employees, shelled out $250 million in capital expenditures during 2002, with an equal amount tentatively scheduled for 2003. But the giant is undergoing a transformation. Bill Davis, chairman, president and CEO, envisions a market-driven company with a new set of tools that enable customers to realize maximum potential. A major cultural shift has played a large role for the company.
"We've made a shift from a place where we were looking out for ourselves to one where we are conscious of our values and accountable for moving the company forward," Davis says. "RR Donnelley has a new culture that embraces innovation, respect for others and shared leadership as it puts customers first. Over the past two years, we've advanced our transformation efforts and maintained a strong financial position, despite a severe downturn in the economy. By aligning our structure and culture with our strategies, we are better positioned to service our customers and provide them with solutions that help them save more, sell more and build their brands.
"We're going to change the model for customer service in our industry, with additions such as ongoing customer scorecards—shared and developed with clients—and centralized premedia digital processing locations," he declares. "We opened our first one for the mid-range magazine and catalog business in Pontiac, IL, in April of 2002, and it's been an extreme success. It has allowed customers to process their work easier.
"You'll also find that our sales and marketing people provide customers with substantial enhancements to their own ability to perform better in their businesses. I believe that much of what we're doing will strongly enforce the Donnelley difference."
Given the economic crunch of recent years, RR Donnelley finds itself listening to customers in a different way than it has historically, according to Michael Allen, executive vice president and co-leader of RR Donnelley Print Solutions. "Maintaining a rich dialogue with our customers and understanding how their businesses continue to evolve are key," he says. "We've added a number of marketing experts and market researchers to help us understand how to better run our business for our customers.
"We've got a very strong balance sheet—I would argue the strongest balance sheet in the industry. And we have very strong cash flow, even in times where overall market demand has been soft. So, when you compare us to some of the other large printing companies, we continue to invest at the same rate that we were five years ago."
The fact RRD continues to plod forward with capital expenditures is a tribute to sticking to its guns, though the company could hardly be faulted if it chose to curtail some expansion plans. As rough as 2002 was across the board, the financial printing market was especially taxing. Playing a significant role in capital markets, RR Donnelley felt a tight squeeze.
"The financial printing markets are down more than 50 percent from where they were two years ago," Davis notes. "Fifty percent is substantial, and it has put a strain on our overall performance."
RR Donnelley is in the final year of an $80 million investment initiative designed to implement a standardized technology and metric platform across all of its commercial printing plants. As more customers gravitate toward the just-in-time manufacturing model, the need for a planning tool was essential, according to Haves McNeal, senior vice president of optimization for RR Donnelley. The tool is part of the company's business process redesign (BPR) and will reportedly allow the printer to fully maximize open capacity, in real time, across the board.
"Most publishers are trying to maximize their value and, in doing so, it's requiring us to be very flexible and nimble," McNeal says. "My goal is to be able to move product around from one facility to another. In our old model, it was managed on a plant-by-plant basis, so a given plant would only have visibility to whatever assets they had in their facility. Now we have visibility across the entire company. That reduces our cycle times."
Over the last few years, RRD has done a lot to give customers more time, improve quality and lower supply chain costs by investing in equipment, processes and people, reveals Bob Pyzdrowski, president of operations and RR Donnelley Print Solutions co-leader. "We've added equipment that enhances our ability to satisfy our customer needs for product flexibility, personalization and targeting," he says. "We've established and improved business processes to offer our customers more uniform and timely products and services across our network of plants. We've invested in our people to enhance their skills and improve service to our customers. And we've made significant progress in supply chain management, resulting in reduced costs and improved quality for our customers. We're using these improvements to raise the bar on customer service."
"Part of the process work we've been doing is significant investment in continuous improvement," he states. "We're striving to become a world-class manufacturer, and our continuous improvement focus will allow this to happen. It's a way of life at RR Donnelley; part of our culture. The continuous improvement methodologies we use include Six Sigma, process variability reduction, 5S and total productive maintenance," Pyzdrowski adds.
"We're also investing in ISO (certification) to ensure we have well documented processes. Continuous improvement is involved in just about all of our cost improvement initiatives, including Web-enabling the company, standardizing business processes and defining information requirements."
On the supply chain management end, RR Donnelley has been a leading participant in driving industry standards for digital file management, postal requirements and the paper supply chain.
RRD has been a leading sponsor for papiNet, an organization that has defined industry standards to manage the messages and transactions of the paper supply chain between the mills, printers and customers. For digital file management, it has been the leading driver for the DDAP PDF X1a standard, which results in additional flexibility and time savings for customers. And, in terms of postal reform, the printer is strongly advocating the need for reform on the behalf of its customers. As a charter and current member of the Mailing Industry CEO Council, Davis promotes the critical role that mail plays in business and commerce.
The industry standardization initiatives have gone relatively smooth, Pyzdrowski says. "It's getting people aligned around common goals, objectives and methodologies. We're also focusing on creating a safe workplace environment," he adds. "We've reduced our OSHA lost time accidents by 80 percent in the last four years. We're quickly heading to world-class levels in safety."
RR Donnelley is also a true believer in Six Sigma. "There aren't that many companies in the country that are truly Six Sigma companies," Pyzdrowski says. "We are the first one to bring Six Sigma into this industry, and we're also requiring our key suppliers to develop Six Sigma skills and competencies.
"It really touches everything that we do. We use data-driven processes to provide shared insights to the root cause issues," he reveals. "Combining the skill of our people with state-of-the-art, continuous improvement methodologies can take our process and manufacturing ability to a new level. All of this has helped us build a more efficient manufacturing platform that provides significant flexibility, responsiveness, cycle time reduction and cost savings that benefit our customers."
The following is a look at each of the five business segments that operate under the RR Donnelley Print Solutions umbrella: books, telecommunications, magazines, catalogs/retail and premedia.
The company realized more than $705 million in U.S. sales for the book publishing services segment during 2002, serving niches such as trade, elementary-high school, college, religious, children's, professional and reference.
RR Donnelley has invested in the segment, according to Allen, as it takes on more of a global approach to doing business. It now boasts book facilities in Latin America, China and Mexico.
"In talking to our customers several years ago about their business challenges, we realized that the book distribution model is not effective, particularly for mid-list/second-tier titles," he explains. "The problem becomes that a title printed 15 years ago might only have annual unit demand across the U.S. for, say, 100 books.
"People talk about print-on-demand and digital printing, but it hasn't been particularly impactful in the trade book business, and there's a reason for that. Digital printing is a product-centered approach to the problem. Our book business has developed an inventory management solution. We work with book customers to develop a more integrated solution, a component of which may include the use of digital printing technologies."
The solution needs to take into account a number of variables, according to Allen, including the management of short-count transactions, inventory cover ratios, total warehousing costs, cost of capital, cash flow goals, what type of interfaces are needed and how to project how many units of demand are likely to occur for a specific title. In short, we look at the total cost of ownership in addressing the issue of inventory management, not just the traditional print unit cost.
"Ours is a more holistic approach to thinking about a solution," he notes. "We're investing in inventory management solutions that leverage off our expertise and knowledge around our customers' business, content management, digital distribution of content, printing, as well as working with the distribution channels and our customers to move their product to where the consumer demand is."
Davis believes that the book industry has made great strides over the past few years, particularly in the education segment. "We did a very good job of maintaining on-time deliveries during a very busy educational book market last year. That was definitely a high point," Davis notes.
This business ($679 million in 2002 sales) is broken into two segments: directories (yellow and white pages) and just-in-time manufacturing and distribution of technical manuals. Of the former, Donnelley has grown into the largest printer of directories in the world, according to Susan Henricks, president of telecommunications solutions, with 10 directory-dedicated plants in the United States, Chile, China and the United Kingdom.
According to Henricks, RR Donnelley has developed electronic applications that walk hand-in-hand with the printed product. "We've learned to extend the value of customers' content across print and electronic channels," Henricks states. "We did some consumer research in tandem with one of our major directory customers. This research showed us that through multi-channeling—in other words, having yellow pages in different media—content usage actually increases. Electronic and print, in this particular world, are very complementary. So we've also moved into offering electronic solutions for our yellow pages publishers."
Last year proved to be a challenging campaign, with the ownership of several major directory concerns changing hands. The yellow pages industry grew in the low, single-digit range as small businesses, the bread-and-butter advertisers, continued to demonstrate volatility in their staying power.
Henricks cites RRD's value proposition behind telecommunications' success: innovative business solutions, hassle-free service, on-time delivery and operating as a trustworthy partner. "This is what RR Donnelley can do to make our customers successful," she says.
RR Donnelley combines the magazine segment with catalog/retail in breaking down its sales figures, with $1.585 billion logged in 2002. Reduced ad pages and revenues caused the overall market, both the consumer and business-to-business (B2B) segments, to struggle as a promising start to 2002 wasn't sustained. B2B was hit particularly hard, namely manufacturing and financial titles. A number of publications fell victim to the economy, and perhaps the lone consolation for publishers was the steady depression of paper prices, notes Dan Knotts, president of RR Donnelley's magazine solutions.
"In terms of RR Donnelley, we feel very good about our performance in 2002," Knotts says. "We were able to secure a significant amount of volume in terms of contract renewals, as well as winning new business. We captured market share in 2002, and feel very good about the new structure that we put in place."
In order to add value for its customers, Donnelley has devised a threefold approach, beginning with a service distinctiveness strategy, according to Knotts, which entails augmenting overall service quality for customers (increased training, customer scorecards).
Secondly, RR Donnelley has unveiled new solutions including a digital premedia center that serves B2B clients from the Pontiac, IL, facility. This consolidation of premedia operations allowed the printer to use a standardized workflow management solution. Customers, meanwhile, can utilize the Ad Spring online ad management solution that allows for online soft proofing. A similar consumer publication solution is due to be unveiled this year.
The third area where the magazine group has bolstered its value proposition is distribution efficiency, which is broken into three subsets: a dynamic mail entry program, a co-mailing pool that increases penetration while saving time and money, and a co-palletization program that was slated to be rolled out this spring.
As for 2003, Knotts sees uncertainty on the consumer side due to both the sluggish economy and military action in Iraq. Since business spending drives B2B, he envisions a lengthy recovery period.
"From RR Donnelley's perspective, a lot of the wins we had in 2002 are kicking in this year," Knotts says. "We're installing new equipment in both our consumer and B2B magazine platform to keep up with the growing demand. A lot of that equipment will come online in the second half of this year. The bulk of that is to meet increased demand from market share gains, as well as organic growth from existing customers. We feel cautiously optimistic about 2003."
On the heels of a year that saw the industry's Standard A mail volume drop roughly 7 percent, RR Donnelley's outlook is extremely bright, according to Steve Zuccarini, president of catalog/retail solutions. Zuccarini sees the overall market performance garnering steam in the second half of 2003. In the first quarter, Donnelley already has a leg up on the competition—augmented by securing more than $250 million in the lifetime value of contract renewals and new accords.
Understanding the needs of catalog/retail customers is to understand their end-consumer's shopping preferences, Zuccarini reveals. "In addition to utilizing print catalogs, many of our catalogers are moving into brick-and-mortar stores, as well as enhancing their Internet sites and experimenting with e-mail marketing," he says. "In response, we're delivering better content management solutions and streamlining our creative production workflows for our customers. We've developed tools with our Premedia group that are going to ensure brand and product consistency across all of their mediums."
Significant investments have bolstered Donnelley's catalog/retail segment in 2003. Three wide-web gravure presses are slated to roll this year, along with three additional offset presses in the Lancaster, PA, catalog facility. Bindery equipment with enhanced targeting capabilities has been added across the entire platform. The segment has benefitted from the logistics investments that have helped provide maximum postal savings for catalog customers, while providing reliable delivery accuracy, he notes.
Going forward, he feels the biggest task his customers face is knowing the right balance to follow in the multi-channel marketing approach. "The greatest challenge is understanding the optimal mix of media in which to improve the return on investment," he says. "Our catalog customers need to be able to balance catalogs, the brick-and-mortar store and the Internet in order to achieve the greatest return. That's why we've invested in our marketing expertise, to be able to bring that market research data to our clients to help them make better informed decisions."
Perhaps no one business segment underwent the facelift that Pre-media has experienced. When Mary Lee Schneider took over as president, there were six operations—pretty much prepress houses—and only one of them was located on-site with a customer.
"It became obvious to us back then that prepress, as a business, ultimately goes away," Schneider says. "Since digital photography comes on board and people are multi-channel publishing, prepress becomes a limited set of capabilities. So, number one, we realized we needed a new set of capabilities and, two, we needed to be in locations that mattered to customers."
Thus, Premedia was born, complete with photographic and color management services and digital asset management, among other things. There are now 33 operations, 18 of which are located on customer sites. Donnelley Premedia now finds itself in China, Poland and Latin America, completing the proverbial paradigm shift.
"While we focused on providing a lot of those capabilities upstream to customers, we've also focused those same skill sets and talents downstream to make the printing process more efficient and to improve quality," she says.
Digital solutions centers are sprouting up at a healthy pace. The Pontiac (IL) center was created last year by merging four preflighting operations. That facility has a 50,000 digital ad repository for the short run, B2B magazine niche.
Premedia hopes to capture the same magic in Glasgow, KY, with a digital solutions center comprised of six offset plants that will fill the needs of long-run consumer titles.
Although technology changes constantly, Schneider stresses cutting through the flash and finding meaningful substance. "There's a lot of great, sexy technology out there that won't make a bit of difference as to how you do things. What's important is getting the truth about technology and making sure you implement it in a way that actually improves the process. It's knowing what is worthwhile and what isn't."
The 2002 campaign saw much of Premedia's clientele become more focused on their core businesses. It saw a record number of companies looking to outsource functions such as creative and page production, helping propel the group to $121 million in sales. That helped to counter high levels of price erosion in a year that saw many smaller premedia businesses fold.
"If you stand still in this business, you're dead," Schneider say. "A lot of folks who couldn't afford to make that step last year, in light of difficult times, didn't continue forward."
Premedia enjoys the benefits of being both affiliated with Donnelley and as a standalone services house. Clearly, its goals for 2003 center around partnering with customers. Understanding their needs, as well as the technologies and processes that best speak to those needs, will be most critical moving forward.
"Printing is just a piece of the supply chain; you have to take a much more expansive and broader view of it in order to be successful," Schneider says. "And that's just what we have done."
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As for the future, Davis believes the company's transformation process—and the commitment by Donnelley's employees—has it geared toward success.
"We have a great deal of momentum right now," Davis says. "I'm confident that the work we're doing on our transformation in this difficult economic environment will pay off for a long time to come. Furthermore, I believe that some day we will look back upon this period in our company's history and recognize that the effort to transform RR Donnelley was pivotal. We could not have done it without our employees. They deserve thanks for the sacrifices and commitments they've made, and for living our values during a time when we've had to take difficult actions. Their dedication and hard work have made RR Donnelley a stronger, more flexible company. And, in the long run, our employees, customers and shareholders will benefit."
INSIGHT INTO EVERY STEP OF THE COMMUNICATION PROCESS
RR Donnelley provides products and services covering all aspects of the communications value chain. Shown here is an example of products and services that have been bundled for one of the world's leading publishers of books and magazines.