Money Talk: Right Sizing Your Firm for Optimal Performance

As we make it through the first quarter of 2010, some things are quite apparent: Everything is changing, and As things change we must change things. That being said, in our client companies, rightsizing seems to be an inevitable conclusion. Although sometimes misused, rightsizing is not necessarily a dirty word. In the media, rightsizing is often interchanged with “layoffs or staff reductions.” Although layoffs can be a component of rightsizing, the two words are not interchangeable.

When thinking about rightsizing, think about your company's scalability. As sales shrink or grow, what does your relevant cost structure look like? Why can't a printer earn a profit at whatever sales level they are? In many cases within a printing company, the first measurement to figure if the company is “right sized” or if its relevant cost structure is appropriate for its sales is to look at the company's “Utilization Factor”.

Utilization Factor = Chargeable Hours dived by Total Hours Paid (of direct labor)

The utilization factor is a particularly important ratio to consider in the direct labor area. The higher the utilization factor is, the more time the employee is producing value added sellable product. The lower the factor is, the more time the direct laborer is sitting, waiting for the next job. It's hard to earn a profit if your direct laborers are spending less time producing and more time waiting for work.

Typically we strive for an 80 percent Utilization Factor or higher. In the last year or two, most printers are reporting utilization rates between 60-75 percent. A healthy company in the Northeast reported that, “Efficiency has gone down because we've downsized and are asking people to do a variety of work. When you're busy and fully staffed, it's much more efficient….Nowadays, it's hand-to-mouth, waiting for the next job to come. Our Utilization Ratio dipped to 65-70 percent, and it shows (with low profits or losses).”

The effect on profitability can be disastrous. When the Utilization Factor dips below 75 percent, it becomes very difficult to make money. As an industry, we price jobs so that at normal utilization factors, we earn a profit. However, when the Utilization Factor drops and employees are standing around, we lose money. This leaves owners wondering, “Can I continue to pay these production employees? How can we rebound?”

Many printers report that the recession has caused them to take a fresh look at work coverage, shifts and job efficiencies. Creative ideas like having two-shift turnovers in a 24-hour period instead of three, or running 13-hour crews instead of eight-hour crews have proven effective for some.

If sales projections seem aggressive or even scary, it's probably time to consider scaling back on critical components to accommodate realistic sales levels. For example, let's say you ran a six-color press last year 4,000 hours, but this year it's down to 3,500. You need to figure out how you will save the payroll costs to cover the diminishment of 500 hours. One printer we spoke to eliminated a shift and built a part time shift to come in only when there was printing to be done.

Next, it is prudent to consider costs beyond production. Consider the Support Efficiency Ratio, the ratio of Management and Overhead Payroll to Direct Labor Payroll:

Support Labor Efficiency Ratio = Support Labor Cost divided by Direct Labor Cost

In other words, find out how much support labor cost you spend for every dollar of Direct Labor payroll you spend. It's critical to not over support production labor and burden your cost structure. Support labor is defined as all other labor that is not direct, which includes management and indirect factory labor, and all administrative and sales labor. Too much support labor cost will squeeze your cost structure and make it impossible for you to recover your cost in your sales price. Historically, this ratio has been 1:1 to 1, as reported in the Ratios Study published by the Printing Industries of America.