The Third Wave: An Iron Tale about the Business of Print, Vol. 6
- Published: June 01, 2002, By Susan Kelly, Raine Consulting
This column is the sixth in a yearlong series of columns about the challenges facing the converting industry. Through our 2002 series of web articles, Raine provides critical insights, specific industry examples, and thought-provoking ideas about how technology is impacting converters today.
Finding Profit Somersaults in Your Business
One simple way to gauge how change is impacting your business is to try and spot "profit somersaults." These swings in profitability are symptoms of a bigger problem. These days you easily can find profit somersaults in the converting industry -- everywhere you turn.
What Is a Profit Somersault?
A profit somersault is when a business metric or a financial ratio has flipped over to the opposite side of traditional thinking or a standard "rule of thumb." An example of a profit somersault is when the most profitable activity in a converting shop or manufacturing facility flips from the converting equipment or a press (for instance, the longest depreciating assets) to the front or back-end activities (quickest depreciating assets). Examples can be found easily when you examine the changes in your business mix, or when you see order quantities start to trade places with selling prices.
Examples Everywhere
One converter told us it was awarded an order for 5,000 POP displays for $11,000. A year later, the quantity increased to 8,000 units but the price dropped to $9,500 for the same work. So for 3,000 more units, the price dropped $1,500 -- almost a 50% drop in "price per M." But what’s scarier is three suppliers bidding on the work showed a variance of less than 5% between the highest and lowest bid. We also have witnessed incidents when non-traditional competitors, such as web or sheetfed printers, start to bid on converting work and cut prices by 30%.
Profit somersaults are evident when customers start to value services more than manufactured products. For example, one company shared with us how it increased its profitability by promoting such services as "smart packaging." The manufacturer used some of the latest research in moisture controllers, oxygen scavenging, and antimicrobial additives to ensure customers [it employs] the latest security techniques and to reduce inventory costs. Another example is how a converter promoted its ink-jet coding systems, which integrated with its customers information systems, subsequently changing the overall fulfillment process dramatically.
The Bottom Line
The examples may sound obvious, and we hear about them everyday; however, we need to take a deeper look at what is changing the migration of profitability in converting businesses today. When it is no longer the exception and is now the new rule of thumb, than you know these profit somersaults are leading indicators that: profit has moved to somewhere else in the business; the business model has shifted, or a value erosion is taking place.
The converting and manufacturing equipment, affectionately called the "heavy iron," now is the tail and not the dog. Converting must "flip on its head" and "get outside of itself" in order to grow and be profitable. In other words, a converter’s technology infrastructure, its new service offerings, and its end-to-end workflows have become the "dog." Those that come to grips with what his or her business is today, and more importantly, where profitability really is generated (inside and outside the converting business) will make the reinforcing choices and, ultimately, will become the leaders of tomorrow.
This article is excerpted from the Raine whitepaper The Third Wave: An Iron Tale about the Business of Print, downloadable free of charge from RaineConsulting.com.
