Published Articles

Size Non-Core Operations For Maximum Payback and Minimum Hassle

Does your company need to raise its top and bottom lines?  Since you farm out post-press work, have you considered bringing some of it in-house?  Should you start a bindery?  Or, if you already have one, should you add more equipment?  Answering these common questions is vital to a printer’s future success.  Adhering to a few simple principles and answering some key questions will help you decide if vertical integration is appropriate for your needs. (Vertical integration is adding capabilities that occur before or after a company’s core services.)

In our competitive printing marketplace, printers’ temptation to add ancillary bindery services is common.  The lure of perceived scheduling control, value added manufacturing and increased profits cause some managers to consider vertical integration.  There are situations when buying machinery outside of a company’s core competency area is the right decision.  Conversely, there are others that on the surface appear to be sure bets, but in actuality will negatively drain cash and managerial resources for years.

If you’ve made the decision to offer an in-house post press capability, properly size your operation for maximum payback and minimum hassle.  Since bindery operations will never be your core business, making it the right size operation will ensure profits and minimize future headaches.

How Big Should Your Bindery Investment Be?
Determine your slowest period of the year and size the bindery to convert 80% of your expected volume at this low point.  This will help you five ways.

  1. It will be a hedge against overly optimistic sales forecasts.
  2. Your equipment will be run at or near a 100% utilization rate.
  3. You will be able to farm-out work that doesn’t fit you well and retain the most desirable jobs.
  4. Valuable manufacturing floor space won’t be wasted by very specialized equipment with long periods of idle time.
  5. You will keep your trade relationships strong.

Your sales reps probably tell you about all the jobs that they would be getting if they had certain pieces of finishing equipment.  You’ve probably asked them if they are willing to commit to keeping new machinery consistently busy.  As you certainly know, their most common answer is “no,” and herein lies the impasse.

More Issues To Consider
Risk.  How much risk are you willing to accept to keep more work in-house?  A major difference between printing and finishing is that most of a product’s final value is already in the product when it arrives at the bindery.  If a job goes sour on press, paper is wasted, but if a bindery job is ruined, the repercussions are much greater.  On a typical printing job, perhaps 30% of a job’s value is at risk on press.  However, for a typical binding job, 90% or more of a job’s value is at risk.  If your goal is to make a 10% return on bindery operations, and you’re handling a job worth ten times your bindery conversion revenue, for every $100 of risk exposure, you have a potential profit of $1.  In short, the risk/return ratio in bindery is fundamentally different, and much lower than what you’re used to in printing.

Management Attention.  Will ancillary services significantly divert your attention and resources from your core capabilities?  If you think of putting ink on paper as primarily being chemistry, pre-press as being bits and bytes, and bindery as being mechanical, how far should you stray from your core business into a new mechanical world?  Cutting-edge printers with core competencies in the latest pre-press and pressroom technologies may have employees already spread too thinly.  Can they absorb another significantly different operation?  Will you be able to devote the proper amount of managerial attention?

Working Capital.  Post press cash flow issues 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 our 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.

Also, 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 is on average net-5 days.  If you have extra cash, this may not be a problem, but if you don’t, you will be limiting your future flexibility, your responsiveness in your core business, and your ability to satisfy your customers’ needs.

Profit.  What types of profits are you hoping to generate?  Some companies view in-house bindery services as loss leaders.  While this strategy sometimes works in the consumer products industry, it rarely does in our relationship-oriented graphic arts business.  If a company won’t make money on equipment operations, it shouldn’t buy the equipment.  In our job shop environment, it just isn’t worth it.

Choosing Equipment.  Printing equipment tends to be versatile.  If you purchase a press to handle a certain type of work, and that work disappears, you likely will be able to use it for a variety of other jobs.  However, if you buy a saddle stitching machine and your big stitching job changes to perfect binding, how do you fill up your stitcher?  Bindery equipment by its very nature is specialized and may not offer the flexibility you require.  Are you certain that your demand for stitching will outlive your clients’ current needs?  Or, is die-cutting a better long term bet, even though today it appears to be stitching? Unless you have exceptionally deep pockets, you will need to prioritize.  Also, will your new post press equipment operators have enough work to keep them busy in the long run?  If you’re not sure, will you feel pressure to integrate these new employees into existing operations for which they are not well suited?

*     *     *

When analyzing bindery investment options, reduce your future stress and do your homework.  In summary, please keep three words in mind: 1) Customer.  Always keep the best interest of your customer in mind.  2) Risk.  Maintain an appropriate risk level for your situation.  3) Profit.  Make a profit within a reasonable time frame.  If you adhere to these principles you will make the right choice, help your bottom line and thrive in today’s tricky business environment.

Jack Rickard is the President of Rickard Bindery, and the former President of the Printing Industries of Illinois and Indiana, Binding Industries of America, and Graphic Finishing Industries of Illinois.  Rickard Bindery is a company specializing in discovering solutions to challenging bindery jobs.  He can be reached at (800) 747-1389.