By Mark Porter, president, Dienamic Software

Costs are important to every business. Probably the most important equation in any business is:

Sales – Costs = Profits    

Costs must be calculated to determine profits. Sure, at the end of the year, businesses can add up all of their bills and invoices to determine if they made a profit. But if there is detailed data of costs and production data, that information can be leveraged to make decisions on individual jobs, machines and people throughout the year that will maximize those profits.

Employee costs aren’t just direct wages; they get benefits and vacations. They aren’t always busy doing what they are paid to do. There are people who have to be paid to run the office. There are many costs that must be accounted for throughout the year.

Machines aren’t just the cost of the machine: There are financing charges; the machine takes up floor space and electricity; and they require certain materials that can’t be charged back to a specific job. It takes employees to run the machines, and the machines must absorb part of the rent, taxes, electricity, insurance, depreciation and so on. The machines must be assumed to work so many hours a week and; if things are slow, that can affect costs. Running one, two or three shifts can affect the cost of a piece of equipment.

The benefit of taking the time to calculate these costs and apply them to daily operations allows for making decisions daily to maximize profits – not just hoping and wishing for profits at the end of the year.

Estimating vs. selling: Not every job equals profit

Very few finishers or binders know what their machines actually cost per hour. In fact, the vast majority of businesses use selling rates per hour for their machines. They know they can get $100/hour for that machine or that they can get $45/m – again, a selling value. This puts them at a huge disadvantage. Imagine how much more profit they would make if they could determine their most profitable work – especially when they are busy. Sales efforts and machine usage should be directed to this type of work.

Businesses need to be aware of the concept that estimating and selling are two different functions. Most companies respond that the market dictates the price. This is absolutely true, but the market does not dictate costs to produce the job. It doesn’t stop companies from evaluating if this job, at the market price, covers their costs and provides the desired return (Table 1).

Costs are determined by production standards achieved in the plant. This data can be obtained through a variety of different methods that will be discussed shortly. The standards then can be multiplied by hourly cost rates that accurately reflect the cost of running the machines on an hourly basis. These rates are called budgeted hourly rates (BHR), and there are different ways to calculate them. They encompass all the costs listed previously – machine cost, labor, sq.ft. allocation of rent, utilities, insurance and much more.

When these hourly rates are applied to the production standards that have been determined, companies will have an accurate representation of how much the proposed job will cost to produce. They now can evaluate the risk, set the desired return and markup the quote to determine the selling price. If the market will not bear the desired price, companies now have all the data required to evaluate at what price they are unable or unwilling to bid on jobs. There may be times to bid on jobs below cost – but they will know they are below cost.

Once time standards are established, it is vital to constantly monitor production processes to ensure they are consistent with the standards used when estimating. For example, if estimating the speed of the press at 5,000/hr but actually only achieving 4,000/hr on the shop floor, companies are losing money on the job as soon as they win it. Conversely, if estimating at 4,000/hr and actually achieving 5,000/hr on the shop floor, it means losing jobs that could have been produced profitably. This monitoring can be done through software that measures productivity and compares estimated vs. actual values for every estimate.

Cost accounting and management information systems are vital to any job-oriented manufacturing business (such as finishers and binderies), no matter how big or small. The results will be more data, allowing companies to manage their businesses in a more profitable manner.

Budgeted hourly rates (BHRs)

BHRs are determined by simply identifying all of the costs for each cost center in the plant. The purpose is to recover all costs incurred in the production, sales and administration of products. Companies have to be careful not to include costs that are not part of a production process and, conversely, not miss costs associated with a production process. Either error will cause the hourly rate to adversely affect profitability.

The process of determining BHRs begins with identifying the processes performed in the plant. Then determine and collect the related data. Just because ABC Finisher and DEF Finisher have the same folder does not mean they will have the same hourly cost rate. ABC Finisher may have paid cash for its folder, its facilities rent may be less expensive, it works three shifts and it hires less-skilled employees. This will lead to a lower cost per hour for ABC Finisher.

A sample BHR sheet for a folder is included to demonstrate the type of information that is required for the BHR calculation (See Table 1).

The Manufacturing Cost per Chargeable Hour is not the Budgeted Hourly Rate. It is useful if house errors must be charged back to the company (See Table 2).

The BHR reflects all costs incurred to produce the product, as well as the sales and administrative overhead. BHRs are not the prices. The calculation of the BHR multiplied by the time estimate should reflect the true cost to produce a product with no profit.

One note regarding overtime and multiple shifts: If a cost center is reaching 40% overtime, a second shift should be considered. The advantages of the second shift are the reduction of overtime and the ability to spread the fixed costs over a larger time block. This can result in substantial savings. Software is available to easily calculate BHRs based on industry-specific guidelines.

Production standards

The estimating system now has accurate hourly cost rates. The second piece of the puzzle is accurate production standards. Production standards are a measurement of output achieved on a certain machine by a certain employee under a certain set of circumstances.

A finishing or binding company can determine its production standards in six ways:

1. Data Collection
2. Intuition
3. Published Results
4. Competition
5. Manufacturer
6. Time and Motion Studies

Methods two through five use outside information that does not reflect actual conditions and, therefore, are of very little benefit. Method six is accurate but is very expensive and is not an ongoing process so not continually updated.

Method one represents the best method as it uses the company’s own data and is gathered in a continuous and real-time process that constantly reflects changes in output. Shop floor data collection devices are used to constantly send data to labor analysis and/or job costing software where the data can be sorted and analyzed by different jobs, machines and employees.

Production standards are used by the estimating system to provide the time element of the quote. Production standards constantly must be monitored to ensure the estimating department is using standards that accurately reflect the production capabilities on the shop floor.

Both components of the estimating system – BHRs and production standards – constantly can change. Equipment gets old, new employees with less or more skills start working and other factors change the production achieved. BHRs change with increases to rent or utilities, new equipment purchases and the addition of shifts.

A good system will allow for monitoring both components of the estimating system with an actual vs. estimate report for each job. This report will allow companies to see at a glance how they estimated the job compared to how it actually was produced. Any variations should be examined.

Weekly and monthly production analysis reports for both the processes and employees will allow companies to spot changes in production standards. This will ensure that the estimating system always is using the most accurate data and allow companies to obtain the type of work that can be produced with the most profit.

This is a good policy in good times and slow times. In good times, when there are never enough hours in the day, why work overtime to produce jobs that don’t provide a good return? In slow times, it is vital that the exact profit position be known when customers demand price cuts. Software is available to easily help perform all these functions, leaving more time to manage the business in a way that is well informed and profitable.

The biggest cost in any postpress company is labor. Automated labor management systems can track every second of every employee and every machine to know exactly what those people and machines are doing. This is valuable and dynamic information that can be used to make vital decisions.

A labor management system allows companies to track employees’ chargeable and nonchargeable time. If an employee has only 50% of his time that can be charged against jobs, then the role of that person should be questioned. Companies can see how employees rank in order of productivity. Machines can be monitored as to how much time is spent on makereadies, running, waiting, repairing and maintaining – and investment decisions can be made. When adding the BHRs to this time, there now is valuable costing information to maximize profits.

Mark Porter is the president of Dienamic Software. Dienamic offers a wide variety of software products and services designed specifically for trade binderies and print finishers. For more information, call 800.461.8114 or visit www.dienamicmis.com.

By Brittany Willes, editor, PostPress

As the saying goes, “The only thing that remains the same is everything changes.” Anyone involved in the printing, binding and finishing industries in the last several years has seen a number of those changes firsthand. From evolving technology to entirely new processes, there is no denying the industry has experienced significant changes, some of which are requiring binders and finishers to reevaluate their methods and offerings to remain competitive in an ever-evolving marketplace.

“I’ve been in the industry 44 years,” said Greg Greenwald, sales manager for Lander Binding & Finishing. The St. Louis-based company has been serving the industry since 1921, during which time it has seen a number of shifting trends. “I go back to the time when there were printers that had no paper cutters, no folders and no finishing equipment to speak of,” he continued. “They would send jobs to the local binderies. As time went on, printers started to add their own finishing equipment.”

As printers began adding folders and cutting equipment to their own shops, it had a noticeable impact on finishers.

“A lot of local binderies were a little uncomfortable taking in a folded signature and putting it on their saddlestitchers,” said Greenwald. “What if the printer didn’t do a good job? Or did it wrong? It was a learning process and kind of a scary relationship for everyone that created a lot of drama.”

That scary relationship would continue to evolve as many printers eventually put in their own saddlestitchers as well, further impacting the binding and finishing side of things. “Work started to leave the binderies as the printers started doing it themselves,” Greenwald explained. “In the St. Louis market, we had some finishers that were huge, and they’re gone now. That was a sad thing to have happen.”

Naturally, not all finishers had the same experience with the challenges and changes. For instance, Universal Bookbindery, Inc., San Antonio, Texas – which specializes in hardcover and softcover books using high levels of automation rather than traditional fold/gather/stitch/trim, etc. methods of binding – has had a somewhat different experience with the shifting industry.

“We’ve been around for a long time, so the company has been through all kinds of evolution and changes,” explained President Trip Worden. “Our forte is using automation to make short-, medium- and long-run hardcover and softcover books, turned edge ring binders and packaging, and more. We also do highly decorative covers. One of the big changes we’ve seen, especially in the last few years, is a shift in buying preferences.” One of these shifts came from the music and entertainment industry. For many years, Universal had been a large supplier of hardbound, deluxe edition sets. Now, that market has almost completely dried up.

Another big shift Worden noted was the significant shrinkage in the graphic arts market as a result of the rapid acceptance of digital printing. “It’s like the Walmart-ization of our industry,” Worden said. As the world continues to move at an ever-faster pace, customers now want and expect projects to be done cheaper and faster. Digital does allow for greater flexibility, but it brings its own challenges to the profession. As Worden noted, “In the world of digital printing and binding, oftentimes there’s plenty of money to ship the product to the end customer, but there’s no money to ship printing to a finisher to finish and then ship to the end customer. So, products pretty much have to be finished where they’re printed. That puts finishers like us in a tough position. You either have to embrace printing or partner with a printer close by to provide a turnkey solution. However, that can be hard to do.”

Despite the challenges presented by shifting trends within the print industry, finishers and binders are managing to find ways to meet those challenges. For starters, being able to offer specialized services and technical advice often gives binders and finishers an advantage over shops that focus primarily on printing.

“Good finishers that have a trained staff, this is what they do all day, every day,” Greenwald affirmed. “The printer may or may not be doing this sort of thing every day. The efficiency of the binders, of the finisher, inherently puts them in a position of setting the job up and turning it around faster. Plus, they often have more resources in-house to get the job done faster than a traditional printer. I hope the printers see value in that.”

Finishers and binders also are investing in services that may not make sense for printers to invest in, further increasing their sets of specialized skills and knowledge. “The binderies and finishers probably are a little more tuned into the technology of the finishing world than the printer is,” said Greenwald. “They’re probably more aware of equipment in terms of digital control or little things that are after-market add-ons that they can put on their equipment because it makes sense from the finishing standpoint. Maybe it doesn’t make sense for the printer to have some of those add-on items.” Such situations can prove mutually beneficial, giving finishers a competitive edge while also serving as an additional resource for printers.

For Greenwald, adding services is critical for binders and finishers looking to remain relevant in the marketplace. “You’ve got to keep adding services,” he said. “Little things can be a big thing to a finisher. What are those little things? Is it UV coating? Is it specializing larger or smaller sheets? Maybe you have the ability as a finisher to fold extra-thick cover paper. Maybe the printer doesn’t have a plow folder and you do, so there you go. You have an opportunity to help the printer out.”

As Worden noted, another avenue for binders and finishers is through partnerships with printers. While this can be difficult to put in place, it is not impossible and certainly worth pursuing in the right circumstances. “We have some strategic alliances, if you will, with certain customers that make for a good fit when we do get those opportunities to provide turnkey solutions,” Worden explained. Because printing most often is more expensive than binding, when those printers have customers with products that need to be printed and bound, it makes sense for the printer to send those projects on to Universal for finishing, saving the printer time and expense.

Like Greenwald, Worden also advises that offering specialized service and knowledge is, and will continue to be, a crucial tool for finishers and binders moving forward. “Trade finishing evolved because it made more sense for printers to invest their assets in what they did best. I think, to a degree, there’s still a lot of that on both sides,” Worden stated. “Why not use someone like myself, where this is all we do and we’re really good at it, and we can offer spot-on technical advice and be in partner with them?”

For Universal, this is especially important when it comes to the prevalence of digital printing. “We’ve got a large geographic footprint,” said Worden. “I’ve got customers in a broad part of the country. You won’t have that for digital. That will have to be kept close. Of course, that presents its own challenge. We’re still entrenched in serving offset printers, but we do serve digital printers.”

While digital printing certainly has changed the way many in the industry operate and brought its own strengths and challenges as a result, Universal’s commitment to offset printers is one thing that has not changed for the finishing company. According to Worden, “Offset always will have a place because of the economies of scale.” This is good news for finishers and binders like Universal. In fact, “We did a job recently during the slow time that was a very nice run of 55,000,” said Worden. “You can’t do that on digital. You just can’t.”

Economy of scale isn’t the only advantage that offset continues to hold over digital. “The other thing you run into is that digital doesn’t register very well sheet-to-sheet,” he noted. “When you start taking digitally printed sheets and run them through a folding machine, critical crossover jumps don’t line up like they do with offset. Designers may start figuring out how to design around that, but for now it just doesn’t reproduce very well digitally. Plus, you’ve still got the issue that, when you look at a digital sheet from an angle, you see the sheen of the toner on top of it. I just find that to be very unappealing compared to a nicely done offset job.”

Thus, while some tried and true processes likely always will have their place, there is no doubt that as things continue to change and shift, finishers and binders will have to shift as well. “You have to look at where the population is going and what the trends are,” said Greenwald. Naturally, not all of those trends are good. For instance, “One of the bad trends we have noticed is a lot of stitching work seems to be going away,” he said. “You have to look at why that is. Why are these traditional finishing services falling away?”  Of course, it is not enough to look inside the industry for answers to these questions, as Greenwald noted. Instead, finishers will need to, “look completely outside of the print industry – outside of everything we do to see why.”

With some traditional finishing services falling away, it becomes even more imperative for finishers to prove their value – namely by being much better at what they do than the standard printer. “Printers may have an in-house bindery,” said Greenwald, “but if they’re good printers with their customers interests at heart, we hope they would know when they’re in over their head. At that point, you would hope they would call their favorite finisher, their favorite binder, and say ‘I’ve got this project, let’s get it done.’ They can do that with confidence, and everyone wins.”

Like Greenwald, Worden also feels that finishers will have to pay close attention to future developments taking hold in the industry. “As the runs are getting shorter, do we lean more toward digital finishing equipment? We’re already seeing more digital equipment with softbound lines, and I think we’re going to start seeing more of the digital finishing equipment for hardbound as well,” he said. “Those of us in the binding and finishing world, we’re just going to have to go where the trends are.”

“It’s a brave new world for finishers,” said Greenwald. “What do we as an industry do? We’ve got to be really good at what we do. We have to accept that certain things are going to change. We have to be nimble; we have to be quick and we have to be willing to jump over the candlestick when someone needs us to.”