As promised in the previous blog, today we take an in depth look at Total Factory Cost of Product. In this entry we use two example printers, a profit leader and an average printer with $1.7 million in annual sales.  In future entries we will cover mid-sized and larger printers. How much does it cost an average printer and a profit leading printer with $1.7 million in sales to produce their finished product? Total Factory Cost of Product is 8.28% less for the profit leading printer than the average printer, resulting in $140,760 in savings for our $1.7 million printer. Gross profits for the average $1.7 million printer were 19.85% compared to 28.13% for the profit leader. This significant savings provides the profit leaders with additional funds to cover SG&A, interest expenses, and other expenses and achieve a profit before income taxes of 5.93% compared to a loss of 4.23% for the average $1.7 million printer. Profit leaders with sales less than $3 million averaged profits of $87,779 while the average printer had a loss of $79,778. The significant efficiencies that the profit leaders achieved in producing their product added to their bottom line and helped them remain profitable in 2009 despite the recession and declining sales. How much more efficiently does the profit leader work, and where are most of the efficiencies realized? As mentioned above the example profit-leading printer’s Total Factory Cost of Product is 8.28% or $140,760 less than the average printer of similar size. The next question is how they achieve these efficiencies. In the first line item, “Paper,” profit leaders on average spend 1.87% or $31,790 less. Some reasons for this variance include the average printers: Purchasing polices need adjustment. Improper control of waste and spoilage. Proper handling of paper is extremely important in all phases of production—shipment, storage, pressroom, bindery, etc. The type and quality of paper required by the jobs that this group of average printers produces could have an adverse effect on paper costs, as could product mix. Selling price could be too low. The effective manager will investigate these areas to find out where the problem or problems are occurring. If the manager can take corrective action, the amount of money being spent on paper will decrease. If the problem is beyond his control and cannot be corrected, he will at least understand the reasons for this high paper cost. Under “Total Other Chargeable Materials,” the profit leader printer spends $13,000 less on outside printing and $10,000 less on outside binding, which reduced their total factory cost of product by 1.37%. This may be because they have more in-house capabilities or are getting better rates from outside providers. About 30%...

In 2010 industry sales rebounded from the lows of 2009, increasing by 2.79% to $144.6 billion. 2009 was the first time in the 89 years that Printing Industriesof America has been tracking industry profitability via the Ratios Survey that we calculated industry losses. Losses as a percent of sales averaged 1.4% for all printers in 2009 and profit leaders (the top 25% of respondents) profit as a percentage of sales declined from 9.4% in 2008 to 7.0% in 2009. Despite the Great Recession profit leaders still earned a significant profit before taxes. How did profit leaders earn a profit in 2009 despite declining sales and the weak economy? Taking a look at the results from the 2010-2011 Ratios Survey (fiscal year 2009 results) the most impressive difference is the total Factory Cost of Product. As a percent of sales the average printer dedicated 80% of their sales on Total Factory Cost of Product expenses, which include Factory Payroll and Factory Expenses, while profit leaders only spent 73.8%. This more efficient use of both labor and capital explains 75% of the divide in profitability between the leaders and the industry average. According to our quarterly survey of printers both sales and profitability improved in 2010. On average printers sales increased by 5% and earned a reported profit on sales of 4.1%*. Total industry sales increased by 2.79% after adjusting for those firms that closed their doors in 2010. The graph below is a diffusion index of industry sales and profits for 2010. It is calculated by taking the percent of printers reporting increasing sales/profits subtracted by those reporting declining sales/profits.   We are in the process of collecting data for the 2011 Ratios Survey. If you are interested in discovering how you are performing compared to industry profit leaders and learning where your company needs to focus its efforts to increase productivity and profitability go to www.printing.org/ratios to participate.  Next time we’ll take an in depth look at the difference between the industry average and profit leaders Total Factory Cost of Product for a $3 million, $10 million and $18 million printer. *Quarterly profit as a percent of sales collected in the Quarterly Print Market Survey tends to be higher than what is collected in the Ratios Survey. This is most likely the result of the QMS figure being based on between 200 to 300 responses and the Ratios figure having a significantly larger sample size of between 400 to 500 printers. The QMS figure is a good directional indicator but in terms of magnitude tends to be...