Software

Get the Most Out of Chargeable Extras

July 13, 2014

by Mark Porter, Dienamic MIS Software Inc.

When was the last time you produced a job without any changes? Are you capturing the revenues for these legitimate extra charges, or are they falling through the cracks? If you’re not gaining more revenue, then you should at least be avoiding costs. If a job is changed during production and you did not collect the extra revenue for the change, then you probably incurred more cost.

Finishers/binderies provide quotes for customers and customers submit orders. The normal process is to ensure that the job submitted and the quote provided are similar enough that you can approve the production of the job. Once that approval has been given, any customer-driven changes to the order should be chargeable. How do you track these changes and bill your customer so that they feel compelled to pay? And, more importantly, allow yourself to collect the charges without damaging your relationship with that customer?

You must follow a procedure to record all changes to jobs, chargeable and non-chargeable, to ensure that nothing falls between the cracks and is forgotten. But just recording changes will not allow you to collect your legitimate extra charges. The changes must be documented as to date, time, employee and reason the changes were made to provide the maximum support for your claims.

Documentation is not enough. The changes must be communicated to the customer at the time they are requested. The changes must be recorded as having been submited in writing to the customer, warned that they were chargeable and that a price was quoted.

When the job is completed a full listing of all changes should be supplied to your employee in charge of invoicing. They can then decide which charges should be accepted, changed or deleted. The invoicing decisions are determined and the invoice is submitted to your customer. If the customer questions these extra charges you can support your claims by providing the customer with the who, what, where, why and costs details.

Hopefully your customer will start to provide you with better information when the jobs are first submitted. Either way, your company is in a better position because you are either collecting legitimate extra charges or avoiding the additional costs of providing those changes without charging for them.

Mark Porter is the president of Dienamic MIS Software, Inc. 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.

Job Costing: Know Your Costs, Know Your Profits

August 21, 2010

by: Mark Porter, Diemanic MIS

There is a simple equation in business that must be followed:

PROFIT = SALES – COSTS

If a business doesn’t know its costs, then how can it know its profits? In good economic times, companies must know their costs to maximize profitability. In tough economic times, they must know their costs to survive.

These days, understanding true costs is more important than ever. As competitors constantly lower prices to keep work in their plant, they put downward pressure on your prices. It can be difficult to know when to say, “No” and walk away from a job.

The simple truth is that if a business is not using job costing to determine the true costs for each job, then it will never know when a job doesn’t make sense from a cost standpoint. This affects overall profit. If the profit made from each of last year’s jobs was graphed, we would likely see a graph similar to the one below. Because the true costs of each job were not understood, the business simply took each job that was won. As a result, these jobs fall above and below the profitability line.

If the costs had been understood at the time of estimating the jobs, the orders that had no chance of being produced profitably could have been walked away from and more of the jobs would have fallen above the profit line. Job costing can help identify the type of work that can be done profitably, so the sales and production efforts can be focused on that type of work.

Job costing needs to encompass three areas:
1. Calculating the true costs.
2. Applying costs to the estimating process.
3. Monitoring and analyzing the costs on a continuous basis.

Calculating the True Costs

Costs associated with any job-oriented manufacturing business, of which the binding and finishing industries are members, require the monitoring of direct labor, direct materials, and the application of overhead costs (both factory and administrative). The direct labor and material are easy to calculate, but the overheads must be applied based on accounting principles associated with the direct labor hours or Activity Based Costing. Without accurate hourly rates that ensure all overhead costs have been encompassed, then job costing will be useless. Hourly rates can be calculated using either budgeted hourly rate software or an accountant. These hourly rates are not static. Adding or deleting a piece of equipment, adding a new shift, or changing the employee benefit package all can require a recalculation of hourly rates.

The job costing system also needs accurate production standards. Information such as run speeds and makeready times must reflect the times required to perform specific tasks. Most operators of bindery and finishing companies have a good handle on this information. With accurate cost rates for machines and speeds and times for processes, the costing system is ready for use (see Table 1).

Applying Costs to the Estimating Process

Estimating and selling are two different processes. This is probably the most misunderstood concept in the binding and finishing industries. Most companies use “sell” rates to produce estimates, rather than using costs and then marking up the estimate to reflect selling conditions. The advantage of using true costs in an estimate is that the business knows at the estimate stage if the job will make or lose money.

If the estimate states that it will cost $100 to produce this job, but also wants a 20 percent markup, the sell price is $120. This puts a business in a position to make a more educated selling decision if the customer says another company will do the job for $95. The business does not have to walk away from the job, but at least it knows it is paying $5 for the privilege of doing the work and that there’s no profit on the horizon (see Table 2).

Monitoring and Analyzing Costs on a Continuous Basis

Cost and production standards must be monitored and analyzed on a continuous basis. It is vital that businesses ensure that standards used for estimating accurately reflect the standards being achieved on the shop floor. It is of no value to estimate a machine as producing 5,000 pieces per hour if it is actually only achieving 4,000/hr – that loses money before the job comes through the door. Conversely, if a business is estimating at 4,000/hr and actually obtaining 5,000/hr on the shop floor, jobs are being lost that could be produced profitably.

To continually monitor costs, staff must record the time and materials used in the production of each job. This has several advantages. At the end of each job, an actual v. estimate comparison can be run that will show any differences in cost or production between the way the job was estimated and the way it actually ran. Any variances should be investigated and analyzed to determine if it is a change that needs to be accounted for or a one-time occurrence.

Time can be collected via time sheets or shop floor data collection devices. The shop floor data collection devices have many benefits over the time sheets, but either method will work. Businesses must track every minute of each employee’s day – both chargeable and non- chargeable time.

There are many other benefits of collecting data for job costing, especially in the current economic conditions. Monitoring the time and material usage of all employees brings an increased level of accountability to the shop floor. Accountability leads to increased profitability and decreased waste. If a business has $2 million dollars in labor and material being processed in its plant each year, even a cost reduction of 5 percent can result in $100,000 savings.

The information collected can be used in other formats as well. Productivity can be analyzed to determine average speeds and makereadies. Average speeds being obtained by individual employees can be tracked, as can chargeable and non-chargeable times. If an employee has only 60 percent chargeable time, his role may need to be evaluated. A solid job costing system is critical in good times and essential in tough economic times.

Mark Porter is president of Dienamic MIS Software, Inc. Dienamic offers a wide variety of software products and services designed specifically for trade binderies and print finishers. Dienamic can offer full systems, including estimating/management information/e- commerce and individual software tools such as delivery management, die management, foil management, and budgeted hourly rates. For more information, call (800) 461-8114 or visit www.dienamicmis.com.

Delivery Management: Increase Productivity, Customer Service, and Profitability

November 21, 2009

by Mark Porter, Dienamic MIS Software, Inc.

The past year has proven two things to those of us in binding and print finishing. One, we must be more productive. Our existing staff must be more efficient and perform more tasks with fewer resources. Two, we must provide extraordinary service, especially to our good customers. It is generally accepted that 80 percent of revenue comes from 20 percent of our customers, so we need to lock those customers in to ensure it takes a bigger price difference or bigger mistake for them to take their business elsewhere.

Productivity and service are objectives that can be achieved in many ways, but one way is through delivery management. The binding and finishing companies – the post press industry by definition – cannot begin a job until goods are received from the printer. The efficient management of these goods, combined with the timely receipt of goods from suppliers, can greatly contribute to the profitability of a job.

Nobody has to tell you how competitive it is in the marketplace. Printers are continually being pushed toward smaller production runs, lower prices, and quicker turnarounds. Binders and finishers, as the last step in the production process, bear the brunt of this pressure. Even if the end customer provides an allowance for extra time in the production schedule, in all probability it will be sucked out by the design, prepress, and printing processes long before the job gets to the post press stage.

It is a constant challenge for binders and finishers to meet the production needs of their printing customers profitably. But there are procedures, policies, and tools that can be implemented to help manage jobs and increase customer loyalty.

Controlling the Flow of Jobs into Post Press

By managing the delivery of both printing from customers and purchases from suppliers, you can maximize the time available to produce jobs, thereby limiting the risk of incurring overtime costs, disrupting other jobs, or missing deadlines.

The key to this problem, like many problems, is communication. Knowing what you are expecting, when you have received it, or when it is late can greatly increase your ability to manage jobs. These jobs are then produced on time and more efficiently for your customers and more profitably for your business.

Communication starts with knowing what job is coming in and when to expect it. Too often jobs just appear in the shipping/receiving area, causing production disruptions. Not controlling the receipt of jobs exposes your company to customer claims that goods were received earlier than they actually were, forcing interruptions in the production schedule. Sometimes your customer honestly believes that the job arrived early in the morning – he doesn’t realize his driver diverted his route. Providing a notification of received goods not only can provide your company with the evidence it needs to support the actual delivery, but also can provide the customer with information to manage his delivery resources.

Maximizing Production Time

Giving customers the ability to pre-book jobs and/or shipments via a computerized goods management system provides your business with notice of what jobs are coming in and allows you to plan for their arrival. Offering incentives, such as providing first priority status, supplying notification to the printer when goods are received, or advising the customer when his goods are not received by the required time are all motivation for the printer to pre-book his jobs.

Once the jobs are received in-house, it is critical that not a minute of valuable production time is lost. As soon as goods are received, people both within your organization and at the printer should be notified of receipt. The quantity and the condition of the goods can be verified against the information entered by the printer. If the counts are short or the material was damaged in transit, these issues can be dealt with immediately. Placement of the goods within your plant can be documented and a skid tag can be generated and attached to the skids or containers for easy identification.

Often, jobs are not just waiting for printed matter from your customer but also spine material, dies, or other items from suppliers. A quick look-up of all receipts for that specific job will quickly provide the information required to coordinate production.

Building Customer Loyalty

The additional benefit of a delivery management process is that customer loyalty is built through the addition of convenience and value to the printer. The ability to enter print job information 24/7 provides a printer with unparalleled access to your services. If it is 8 p.m. and a printer needs a job done tomorrow, is he going to enter it into your system – thereby gaining a priority place in your workflow – or wait until the morning to start calling binders/finishers?

Back in the ’80s, just as the printing industry was getting into desktop publishing, files were being generated on disks and couriered to printers. One of my clients had invested in providing his best customers with modems. These customers then had the choice of generating disks, filling out courier slips, experience delays in delivery of the disks and – if there were mistakes in the file – repeating the procedure – or they could simply click a button and electronically send the file to our printing client. It was an easy choice and I am sure this customer service won jobs for his company. Automatic electronic notification when shipments are received or are late provides peace of mind and eliminates the time required for the printer’s staff to follow up with you. This provides the printer’s staff with more time to do their jobs.

Automatic electronic notification of short counts and damaged goods provides the printer maximum time to correct these issues and ensures the printer can meet the customer’s deadline. Obviously, the use of a manual delivery management system makes this process very time-consuming and difficult to maintain, but the Internet provides the perfect communication system for the receiving process. Through your website, customers can have the ability to enter data, such as sheets to be delivered. An automated delivery management system can email the customer and your internal staff automatically when events happen, such as shipments received, short counts, damaged goods, or late shipments. This ensures that everyone involved is provided the maximum time to produce the order or correct the situation.

A solid management process for receiving goods will increase customer loyalty, save time on both your end and the customer’s, and improve your chances of producing jobs profitably.

Mark Porter is the president of Dienamic MIS Software, Inc. Dienamic offers a wide variety of software products and services designed specifically for trade binderies and print finishers. Dienamic can offer full systems, including estimating/management information/e commerce, and individual software tools such as delivery management, die management, foil management, and budgeted hourly rates. Contact Mark Porter at (800) 461-8114 or visit www.dienamicmis.com.

Estimating and Selling Are Two Different Functions

November 21, 2007

by Mark Porter, Dienamic MIS

There are many reasons to automate the estimating function within your bindery.

Faster, more consistent estimates.
Re-quotes are much faster.
Allows you to spend more time planning the job then crunching numbers.
Letter of Confirmation faxed or e-mailed provides a more professional image.
Estimate history allows you to find and analyze estimates quickly.
Single entry of data eliminates mistakes because estimate is automatically converted to a Ticket.
Ability to download common or simple estimates to a junior estimator.

…and there are many more reasons, but one of the biggest reasons is the fact that estimating and selling are two different functions.

Estimating vs. Selling: Not Every Job Equals Profit

We have installed our software in 70-80 post press companies and have talked to many more binderies and print finishers over the years and very few, if any, operate their business using this concept. Most binderies estimate by calculating numbers and adding them up. They then present this price to the customer. There is no addition of markup at the bottom of the estimate. This signifies that these binderies do not practice the concepts of cost accounting that are vital to any job-oriented manufacturing industry.

When I bring up the concept that estimating and selling are two different functions, most binderies respond by saying that the market dictates the selling price. This is 100 percent true, but the market does not dictate your costs to produce the job. It certainly doesn’t stop you from evaluating if this job, at the market price, covers your costs and provides the desired return.

A good estimating system should use the production standards that you have determined 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 machine on a hourly basis. These rates are called Budgeted Hourly Rates (BHR) and they encompass financing charges, labor costs, benefits, miscellaneous materials, and overhead. Information as to the number of shifts and levels of productivity are entered and the software can determine accurate hourly rates for each piece of equipment.

When these hourly rates are applied to the production standards that you determined, you will have an accurate representation of how much the proposed job will cost to produce. You can now evaluate the risk, the desired return and the markup of the quote to determine the selling price.

If the market will not bear your desired price, you now have all of the data required to evaluate at what price you are unable or unwilling to bid on the job. There may be times you will bid on work below your cost – BUT YOU WILL KNOW THAT YOU ARE BELOW COST.

Once time standards and BHRs are established, it is vital that you constantly monitor your production processes to ensure they are consistent with the standards used when estimating. For example, if we have our estimating system calculating the speed of the binder at 5,000 per hour and we are only obtaining 4,000 out on the shop floor, it means we are losing money on the job as soon as we win it. Conversely, if we are estimating at 4,000 per hour and actually obtaining 5,000 per hour out in production, it means we are losing jobs that we could be producing profitably. This monitoring can be done through software that measures productivity and compares estimate vs. actual values for every estimate.

These concepts of cost accounting and management information systems are vital to any job-oriented manufacturing businesses (such as binderies) no matter how big or small. The results will provide more data, allowing you to manage your business in a more profitable manner.

Budgeted Hourly Rates (BHRs)

BHRs are determined by simply identifying all of the costs for each cost center in your plant. The purpose is to recover all costs incurred in the production, sales, and administration of your bindery products. You 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 your hourly rate to adversely affect your profitability.

The process of determining BHRs begins with identifying the processes you perform in your plant. You must then determine and collect the related data. Just because ABC Bindery and DEF Bindery have the same folder does not mean they will have the same hourly rate. ABC Bindery may have paid cash for its folder, its facility rent may be less expensive, and it hires less skilled employees. This will all lead to a lesser cost per hour for ABC Bindery.

A sample BHR sheet for a folder is included to demonstrate the type of information that is required for the BHR calculation.

The Manufacturing Cost per Chargeable Hour is not the Budgeted Hourly Rate. It is useful if you must charge back house errors to the company.

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 percent 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 your 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 the output that you achieve on a certain machine under a certain set of circumstances.

A bindery company can determine its production standards in six ways.

Data collection
Intuition
Published results
Competition
Manufacturer
Time and motion studies

Methods 2-5 use outside information that does not reflect your actual conditions and therefore is of very little benefit. Method 6 is accurate but very expensive and is not on-going. Method 1 represents the best method, as it uses your own historical data and is gathered in a continuous process that constantly reflects changes in your output. Shop floor data collection devices are used to constantly send data to 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 must be constantly 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, can constantly change. Equipment gets old, new employees with less skill start working, and other factors change the production we achieve. BHRs change with rent increase, purchasing new equipment, and adding shifts.

A good system will allow you to monitor both components of the estimating system with an Actual vs. Estimate report for each job. This report will allow you to see at a glance how you estimated the job compared to how it actually was produced. Any variations should be examined. Weekly and monthly production analysis reports both of processes and employees will allow you to spot changes in production standards. This will ensure that your estimating system is always using the most accurate data and allow you to obtain the type of work that can be produced most profitably.

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 you with a good return? In slow times, it is vital that you know your exact profit position when customers demand price cuts.

Again, software is available to help you easily perform all these functions, leaving more time to manage your bindery business in a way that is both well-informed and profitable.

Mark Porter is the president of Dienamic MIS Software. Dienamic develops and markets software solutions specifically for the post press industries of trade binderies and print finishers. Dienamic offers estimating software, management information systems (order entry, shipping, data collection, scheduling, etc.), and e-commerce software designed to meet the specific needs of binders and finishers. Dienamic offers stand-alone modules for BHRs, die management, and receiving goods as well. For more information, call (800) 461-8114 or e-mail mark@dienamicmis.com.

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