PrintSpeak survival guide: Cost rate reviewing

nil recessus carborundorum

success story...

cost rate reviewing

This week's strange-but-true success story is about a print company that was very nearly brought to its knees by winning a large three-year contract for a retail chain - because the contract was based on inaccurate and out-of-date costings

The printer had been bought five months previously as a modestly-profitable going concern. The new MD, by his own admission, knew nothing about print, although having been a sales director for a retail manufacturer he knew how to sell.

His strategy was to bring in a handful of big contracts to be the backbone of the company's turnover. So when the company signed the contract with the retail chain, he saw it as the first rung on his ladder.

But just three months into the new contract, it became clear that, in the words of the MD, "the job was an expensive one - it seemed to be costing us as much to produce it as we were getting paid for it."

The contract was worth about 2% profit for 20% of our total capacity. It was like realising you're standing on the edge of a cliff and if you take another step you're going to fall off

He had satisfied himself that the company's MIS was working properly, that his estimators knew their jobs, and that the job wasn't taking any longer to produce than had been forecast. So he was baffled by the lack of profit that the job appeared to be turning.

Like a lightbulb going on

Leafing through his inherited filing cabinet, by accident the MD came across a consultant's brochure for 'profitability services'. In his own words, "it was like a lightbulb going on. I realised immediately that it had to be down to our cost rates." He hired the consultant to do a week's work examining the company's costs and producing a more accurate set of figures.

"The last thing he did was to run a comparison on the retail contract," said the MD. The results left his jaw hanging. "We'd priced the whole thing so it brought in just over 2% profit. And it was taking up about 20% of our total capacity. It was like realising you're standing on the edge of a cliff and if you take another step you're going to fall off."

Stuck with contract

Stuck with the three-year contract, the MD had no choice but to run with it. However, armed with his new figures he began to look at reducing the cost-inefficiency of his bindery. He encouraged two staff to take early retirement and used the wage savings to invest in a new wide-format printer, adding another service that was accurately costed; this helped to offset the low profits of the retail contract.

"We look forward to the day when this contract ends," he said. "Which is not a good position to be in. We'll survive, but by the skin of our teeth. I feel as if I've hobbled the company, and it will take us a long time to recover."

what is...

cost rate reviewing?

Accurate cost rates are the foundation on which profitability is built, says David Butler, the BPIF's cost rate review consultant

Costs comprise everything in your business that costs money to employ, own, run or maintain. This includes staff, machinery, premises, bank charges, depreciation, energy costs, vehicle costs - everything from the roof to the teabags...

Once the costs are determined, these are set against 'cost centres' - the individual processes/machinery that go into producing a job. The cost rate per hour is then calculated

When a quote request comes in, it's broken down into cost centres and times - 20 minutes to make plates, three hours on the saddle-stitcher, etc - and the cost rates are used to accurately calculate the exact cost of producing the job and set a realistic profit margin

A cost rate review process - such as that offered by the BPIF - involves a print industry expert visiting your factory to calculate cost centres and rates. The expert then constructs a spreadsheet model for cost rates that can be fed into an MIS, and which can be easily updated

The time taken for a typical cost rate review is between four and six days depending on the size of the printer. The BPIF also offers periodic reviews

Cost rate reviewing is an ongoing process. To keep rates accurate, it's necessary to review them on at least a three-monthly basis, or whenever a major business change occurs, such as a move of premises or a loss of staff

who can benefit from...

cost rate reviewing?

Every printer can benefit from a rigorous, frequently-updated process of cost rate reviewing

Any new start-up or any printer under new management will particularly benefit from a cost rate review - as our success story shows, you can inherit a can of worms

Any printer wanting to price low as a loss-leader to gain a new relationship - if you know where your costs are, you can make canny judgements about just how low you can go

Any printer with a recent or upcoming significant business change - such as the adding of a new service or a move of premises. Such events can change overall profitability dramatically

Any printer with an MIS - the old principle of 'rubbish in, rubbish out' means that inaccurate cost rates won't let you get the full benefit of your MIS investment

Any printer wanting to performance-manage their business - accurate cost rates are an excellent basis for setting key performance indicators, such as chargeable hours, machine utilisation, cost centre rates, etc

Welcome to the PrintSpeak Printers' Survival Guide - helping you to ride out the recession

The pages of the printing trade press have recently read like a Domesday roll-call of print's great and formerly glorious. Who could have predicted the failure of Borcombe SP, Kelvin Print Group, Quebecor, Capital, Printhaus, Butler and Tanner, Celloglas and more? With margins on print lower than they've ever been, the current global economic crisis is magnifying the cracks in every print business model.

But for every bad news story, there are plenty of success stories. Here at PrintSpeak, we decided to pull together a weekly newsletter looking at printers who recently hit a sticky patch - and what pulled them through. We hope it will provide our readers with food for thought. A struggling business is not necessarily a failing one - and knowing who to call is half the battle. In the coming weeks we'll be looking at subjects including factoring, debt collection, credit management, VIAMBOs, cost rate reviewing, credit insurance, financial restructuring and more - building a library of business know-how and giving you the contacts and knowledge to ride out the recession.

Karen Charlesworth
Publisher, PrintSpeak
karen@printspeak.co.uk