Looking for a Profit in 2009?

value-added, value added, print services, value added management, PIA Ratios, increase profits

Everyone is looking for creative ways to stay in the black for 2009. Surprisingly, the use of value-added in estimating, costing and pricing is still foreign to many printing managers. However, understanding value-added enables managers to gain a better understanding of the behavior of costs, and apply a manufacturing strategy that leads to a competitive advantage and helps maximize profits.

Each year, significant dollars disguised as unrealized potential profits go out the door. Take the manager who sends work out, even though he could do the job in-house. What he’s really doing is sending profits down the street. Example: A sign and digital printer supported each of its three principals on comfortable salaries. The company’s operating report was always the same: $750,000 in quarterly sales, and a pre-tax profit of $75,000. Suddenly, profits dipped to $25,000 in a single quarter.

In reviewing the report, outside service costs were high. Management justified it by saying when an internal estimate on a sign job is too high, they bid the job out to two sign printers in another part of the country. “The other firms can do the job cheaper which allows the company to sell the job at a lower price and consequently log a profit on the cost sheet,” they said.

What they had done, however, was pay for the job twice. They understood they had paid the outside sign printer. What they didn’t realize was that they already paid for the job in the cost of their operation—payroll, factory, administration, selling and other costs. Since they could have done the job without any incremental cost, the outside purchase was an unnecessary expense.

This is not uncommon, but it illustrates the danger of unnecessarily sending services out. Sometimes, of course, a job must be sent out. A company can’t produce a wide format banner if it doesn’t have the equipment to do it. It can’t produce a job if it is operating at full capacity. Nor can it produce two jobs on one press at the exact same time (yet). Except for unavoidable circumstances like these examples, however, it’s always advantageous to keep jobs inside. Successful companies figure out ways to make “unavoidable circumstances” avoidable.

Why is this concept still an unsolved mystery to some? Because companies can have a significant sales increase while seeing value-added and profits fall. If a management team is focused solely on sales, they can miss significant factors. We all understand there can be many reasons for poor operating performance. However, in the hundreds of printing companies we’ve consulted, in many cases, poor performance stems from failure to stick to this premise.

Profits are made from the sales of products or services that a company “manufactures.” Find your niche. Find your sweet spot. Communicate it to your sales team.

The value-added concept is a practical and easy way to look at the effect of marginal contribution. A basic rule to remember is: “Value-added,” or “Sales less materials and outside services,” contributes to cover overhead.

To understand the behavior of costs, let’s take a look at the following example (simplified to demonstrate the effect of variable costs on contributions):

A printer had sales that went from $800,000 in the first year to $1 million in the second (an increase of 20 percent). The value-added increased by the same percentage, or $134,000. The variable-overhead cost also increased by the same ratio, with fixed costs remaining the same as the previous year.

A marginal contribution of $92,800 was realized. The entire marginal contribution went to the bottom line.