Published Articles

Learn What Detroit’s Learned: Outsourcing Works Better

A typical graphic arts job touches all these bases: design, photography, copy, layout, plates, press, bindery and mail.  A leading industry association has long been advising printing companies to diversify into as many of these areas as possible so that the “value-added” percentage of their business increases.  If this outdated business model sounds familiar, it is.  Value-added concepts have been rammed down our throats for decades.

Let’s look at an unrelated industry: Automobiles.  During the 1960s and 1970s Detroit embraced a vertical integration strategy and outsourced little.  In a world of unlimited energy and assets, this approach is fine, but when strapped by limited resources, it isn’t.  When the Big-Three car manufacturing companies’ collective attention was distracted by the production of lights, seats, gaskets and other non-core products, what happened?  Engineering took a back seat and dismal results followed.  Early in the last quarter of the twentieth century, America started producing look-alike cars that sputtered well before the warranty period was over.

Had there been no alternatives, U.S. consumers would have been forced to put up with these lousy, expensive products.  Better-managed foreign companies smelled opportunity and invaded the U.S. market.  In two short decades, Japan went from a wannabe to a world-class quality leader, in part due to outsourcing.  Oddly, this may have been the best thing to happen to the US, because Detroit woke up.

What should the core competencies of a car company be – design, engineering, marketing and distribution?  You bet.  How about lighting, fabric and fluid containing systems?  No way.  Tires are one example of Detroit getting it right.  To the best of my knowledge there has never been a Ford- or Chrysler-branded tire.  The bindery business is as different from printing as the tire business is from making cars.  Good bindery performance is necessary for printers to thrive, but requires sufficiently different skills and should be excluded from a printer’s vertical integration efforts.  (Vertical integration is the creation of complete products within one economic unit from beginning to end.)

General Motors is still reeling from its misguided vertical integrated strategy – and still outsources only 45% of its vehicles today.  By comparison, Ford is at 60% and Chrysler, 65%.  Sound good?  I’m not so sure.  Some Japanese companies outsource up to 90% of their vehicles.  The last time I checked, the Honda Accord was the best selling car in America.  The more a car company outsources, the more resources are left over for its core competency areas – design, engineering and distribution.  Think of Chrysler’s current marketing slogan: Engineered to be great cars.  Maybe they’re onto something.

In Asia, OEMs have fine-tuned the manufacturing process to the point that they can manufacture parts and assemble cars from different companies on the same production line on the same day.  This doesn’t sound too different from trade binderies, does it?  More printers are recognizing that binderies have different core competencies than they do, and are turning toward the outside professional bindery for expertise and state-of-the-art equipment.

Let’s look at a hypothetical example.  If a printing company doesn’t know that a 100,000-piece job can be produced automatically, and bids it as handwork, what are the company’s chances of winning it?  In a competitive situation: not good.  If the handwork portion of the job costs $100 per thousand pieces, the total handwork costs would be $10,000.  If another printer knows where to get the job automatically produced for $20/M, their bindery cost will be $8,000 less.  Who do you think will get the job?  Industry consultant Dick Gorelick was right when he said, “The definition of knowledge has changed.  Knowledge used to mean knowing how do something.  Now it means knowing where to go to get something done.”

The graphic arts industry has been an outsourcing laggard.  The rest of the manufacturing world is ahead of us partially because some of our industry experts have mistakenly clung to the department store, under-one-roof, value-added model of doing business.  Meanwhile, the rest of the world and industry has gone in exactly the opposite direction.

Limited human energy is another good reason to let go of value-added selling.  The physicists are right: For every action, there’s an equal reaction.  If someone is at the upper limits of their endurance, new business activities will distract and replace old ones.  If time-pressured printing managers devote themselves to non-core activities like bindery, they will have less time available to manage their core business – printing.  The people who think they can do it all are usually wrong.  Most people with 60-hour workweeks aren’t able to sustain jumps to 80-hours.

Outsourcing Effects on Profit and Working Capital
A lot of the markup on outsourced services drops straight to the bottom line.  For example, consider a $100,000 miniature folding job that is 10% printing and 90% bindery.  If your printing company doesn’t offer miniature folding services, and is hung up on value-added percentages, this project is clearly unattractive.  On the other hand, if viewed from an outsourcing standpoint, it’s ideal.

The amount of company energy expended to profit on internal value-added activities is far greater than when you combine printing with outsourcing.  In this case, $10,000 of printing at a margin of 10% will generate $1,000 of net profit.  For the outsourced portion of the job, a conservative markup of 10% will generate $9,000 of incremental income, of which we can assume 50% will be used to manage and administer the outsourced operations.  This leaves a $4,500 profit, which is significantly greater than the $1,000 generated from internal operations – and your company still has a lot of capacity to produce core business.

Post press cash flow issues in the bindery are very different from those in printing.  Printing tends to be very capital intensive while finishing is very labor intensive.  For example, a $1,000,000 printing press may require the same labor cost per manufacturing hour as a $200,000 piece of post press equipment.  In general, I have found my company needs 75 cents of additional working capital for each dollar of equipment cost to cover direct labor expenses and normal collection of receivables.  So, based on the above example, we need a total of $350,000 of available cash to successfully purchase a $200,000 machine.  This ratio is different than what printers face when buying printing presses.

When companies bring capabilities in-house, they essentially change their payable terms from net-30 days to net-5.  This is because labor must be paid once a week, which averages net-5 days.  If you have extra cash, this may not be a problem, but if you don’t, your future flexibility, responsiveness and ability to satisfy customer needs will be choked by a cash shortage.  Financial analysts know that the number one reason why companies go broke is a weak cash position.  Outsourcing is a proven method of minimizing working capital requirements.

*       *       *

On a personal note, it’s been a pleasure writing this column for the past year.  Rickard Bindery was founded in 1900, and in preparation for our centennial year, I need focus on my company.  Many thanks go to Henry Mortimer, one of the finest editors around.  In this last column, I wanted to comment on a big-issue topic.  From the many choices available to me, outsourcing is by far the most important.  If stodgy Detroit can save itself by outsourcing, so can we.

Kevin Rickard is Vice President of Operations for Rickard Bindery and an Officer of the Binding Industries of America.  Rickard Bindery specializes in creating solutions for challenging bindery jobs. Kevin can be reached at (800) 747-1389.