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.

  1. 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.

  1. 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:

  1. Purchasing polices need adjustment.
  2. Improper control of waste and spoilage. Proper handling of paper is extremely important in all phases of production—shipment, storage, pressroom, bindery, etc.
  3. 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.
  4. 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% of profit leaders’ efficiencies in driving down costs comes from the above mentioned material costs. Next we take a look at Factory Payroll and Factory Expenses. Labor costs are always a large percentage of graphic arts sales. Because labor is so costly, management has to watch it closely and control costs tightly. Total Factory Payroll as a percent of sales is 2.40% or $40,800 less for the profit leader in this example. To lower total factory payroll, as a percent of sales, review the following checklist to identify possible causes for increased costs.

  1. Is there a good, working system in place for gathering job costs so that job pricing is realistic?
  2. Is there too much overtime? Does management know at what point overtime is, or is not, profitable?
  3. Are vacations scheduled for slack periods?
  4. Does management try to avoid idle time? Do employees wait around because of poor instruction, no material, no power, or no repairman?
  5. Is production delayed while management makes decisions?
  6. Even worse, is one job taken off the press to get a “rush” job through, thus creating extra non-chargeable time?
  7. Do the sales and manufacturing deparments work together to decide which jobs have economic priority?

The profit leader in this example spends $56,400 or 3.32% less on Factory Expenses compared to the average printer. More than 50% of this variance is due to higher depreciation expenses, mostly on equipment, for the average printer. As long as the investments in machinery and equipment are earning enough to cover the cost of capital and are being depreciated based on their useful lives, then there is not much management can do to manage this expense. The areas of most concern or where management can influence change are utilities, factory supplies and expense, and packaging, shipping, and delivery. If your printer is similar to the average printer when it comes to the percent of sales spent on utilities you may want to address the following questions.

  1. When was the last time we conducted an energy saving review?
  2. Are machines shut down when not in use?
  3. Are the heating and air condition systems efficient?

We have now reached the Gross Profit line for our example printers. So far we have discussed where significant variances appear and possible areas of improvement. The most controllable costs frequently appear above the Gross Profit line. Our example profit leader’s gross profit is $478,270 and our average printer’s is $337,450. Gross Profit has to be high enough to cover Administrative and Selling Expenses, pay for Interest Expense, and provide for a profit. In this example, the average printer gross profit is not high enough to cover all costs, while the profit leader’s is able to cover all costs and provide for a profit of 5.93%. In our next entry we will look at SG&A and interest expense ratios for a profit leader and average performing printer with $1.7 million in sales and perform the same Total Factory Cost of Product Analysis for a larger printer.

Review the table below for a detailed look at the factors that contribute to Factory Cost of Product. To participate in the 2011 Ratios and receive the results free go to www.printing.org/ratios.  To purchase a copy of last year’s study go to: www.printing.org/ratios10-11.