Gorelick's Management

I'm often asked, “What’s the first thing you would do if you owned a graphic arts company or could change the industry?” I offer a two-part answer:

1. Understand customers on both the aggregate and the account-specific level. There are broad trends, such as the commoditization of print, the need to define a company’s competitive differentiation and customers’ needs to differentiate themselves in their respective industries. This, in turn, suggests that an ongoing investment in information gathering is at least as important, though much more modest, than an investment in equipment and technology.
2. Understand your costs, but not in a manner suggested by some industry trade association. Run, don’t walk, from studies that refer to “average” and “ratios.” In an industry that is huge in terms of the number of business units and that is characterized by fragmentation and segmentation, adherence to average in analyzing and using industry averages usually results in overcharging for the most desirable work and undercharging undesirable work. (An example: if one were to put one’s feet in the freezer and his head in the microwave oven, it could be argued that this individual is statistically comfortable.)

I am disappointed and frustrated by the overwhelming number of print companies that pay scant attention to the daily operations of the initial portion of the workflow cycle, the logic of estimating and pricing.

Too late for tweaking
Estimating and pricing are distinctly different concepts. Combining them, in my opinion, ranks among most common reasons for financial failure of graphic arts companies. My frustration is that some print companies even acknowledge the validity of this argument but refuse to change their practices. Some trade associations continue to publish, and base consulting activities on, the notion of all-inclusive costs.

Sorry to use strong language, but I suggest that traditional industry estimating and pricing practices often go beyond questionable and border on the intellectually corrupt. It’s too late for tweaking—the financial viability of many graphic arts companies is at stake. It’s time to be honest, even if some organizations and print companies’ suppliers may not reap an immediate financial benefit from doing so.

The act of calculating a job estimate, based on (accurate, complete and unambiguous) job specifications should have the following objectives:

• A job-specific budget based on accurate, updated, realistic production standards and budgeted hourly rates. There should be no tinkering with the number. The estimated job cost is immutable.
• An estimator’s layout, showing gripper, trim and other details to allow a third party, usually a customer service representative, to understand the job plan on which the estimated costs are based. A computer program’s layout is not always accurate or understandable. An estimator’s explanation that “the specifications always change anyway” is not an excuse.

In my experience, the opportunity costs of all-inclusive costs, allowing the estimate (or quotation) to be printed through a computer program, are amazing. I believe that the use of this common industry practice results in the sacrifice of at least two percent of net profit on the current level of sales.

The price isn’t right
Once management knows the costs involved in manufacturing a job, pricing should be customer-specific, not job-specific. This column does not condemn estimators—they’re doing the best they can. Some companies haven’t adjusted standards in five years or more. Pricing is the critical issue. One price doesn’t fit all customers. Some florists price like many printers—a dozen roses on August l5th would be priced the same as a dozen roses on February l4th.

The ugly fact is that few graphic arts companies understand their non-manufacturing costs on a customer-specific basis. This leads to the best customers subsidizing the least profitable customers. Averaging in the estimating process is a major source of profit leakage in the industry.

Companies are focused on reducing spoilage and product defects when they should also be focused on customer defections, an issue that can be addressed more successfully once the source of profits and profit leakage can be identified.

Activity-based costing can’t occur overnight. Most print companies, however, would do well to treat estimating and pricing as separate activities, involve ownership and senior management in pricing, and become more active in questioning the operations and logic of the estimating process.

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Dick Gorelick is president of Gorelick & Associates and the Graphic Arts Sales Foundation. He can be reached at info@gorelickandassociates.com.

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