In my humble estimation

January 1, 2007

Johnson’s World by Steve Johnson

Are you staying awake nights wondering whether you should continue to use budgeted hourly rates (BHR) as the basis for your estimating standards or switch to activity-based costing (ABC)?

I didn’t think so. Unfortunately, those who most need this month’s message left “Johnson’s World” after the first sentence. To illustrate my point, I’ve prepared some questions for our audience.

Are your competitors idiots?

Are they idiots who can’t possibly understand their costs, so they are damaging the entire print market in your area by undercutting your prices? If you talk to other printers (and I do, by the thousands) you’ll find that only two companies really have a handle on costs: yours and mine. Everyone else is an idiot, sure to go out of business any day—but until they do, boy, they sure are messing up things for the rest of us.

Yes, the above paragraph drips with sarcasm. Everyone in this business can’t be stupid, (gulp) can they?

I’ve had plenty of stupid competitors. Many are gone. They really didn’t understand pricing and costing, so when the capital ran out, they disappeared. But not all of them. Some competitors do understand. They might be lower in price because they know exactly what their overhead is and have worked to drive it down so low that they can justify charging less, while still making as much profit as the rest of us (or more). Who are we calling idiots?

Have any idea what your costs are?

When was the last time you assessed your own costs? Assessed the basis for your costing? Analyzed the application of your cost basis to your estimating standards? Am I losing you? If so, you’ve answered my question.

May I provide an example? Last summer, fuel prices soared. Whether you are gassing up your own trucks or buying outside freight, you paid a lot more to deliver your finished product in 2006 than you ever did before. Did you capture that cost?

If you charge for delivery, did you pass along higher fuel prices? Did you ignore them completely? Or did you bravely raise delivery charges, but waive the increases for your one big customer who accounts for 75 percent of your shipping costs?

If you don’t charge for delivery, and many printers don’t, how did you capture this extra cost? If freight charges are included in your overhead, the only way to capture the fuel cost increase is to raise prices across the board. Did you? I’ll bet not.

You say you know your costs? When was the last time your firm brought in an outside cost accountant to validate the assumptions that are the basis of your costing system? This would be someone professionally trained to verify that one plus one really equals two&8212;preferably, someone from outside our industry who doesn’t hold beliefs like, “You can’t expect to make money in prepress.”

We all laugh at the old commercial printing joke: “We sell at a loss but make it up in volume.” An outside auditor won’t find that line—or your costing system—amusing.

How about digital?

Have you revamped your estimating procedures since you added that shiny new digital press? Or have you just tried to shoehorn it into your conventional pricing? Perhaps you found that these presses won’t fit into your current system, no matter how hard you try. Have you “borrowed” costing numbers from the vendor who sold you the press?

Here’s another example from real life. Many sheetfed shops discover that their spiffy “digital presses” (built on mainframes originally designed as office copiers) won’t run in the pressroom, what with spray powder, solvents and grime in the air. A separate digital pressroom is then created in a part of the facility that is actually office space.

If you are using budgeted hourly rates, you’ve allocated plant square footage to “direct overhead” and office footage to “indirect overhead.” By locating the digital printing cost center in an office area, you’ve just changed your footage totals. Did you adjust for this?

How about material handling? If the digital pressroom is off the beaten path, it takes longer to move paper to and from the digital area. Most shops include such logistics in “indirect factory overhead.” If so, you’ll have to raise all prices slightly to account for this additional cost, meaning that the rest of the plant is now subsidizing the digital operation. Or, did you factor this into your digital pricing? I’ll bet your digital press vendor never mentioned (or even thought of) this wrinkle.

I smile when the merits of BHR vs. ABC are debated. As long as SWAG (strategic wildbutt guess) remains the industry standard, the debate will continue to fall on deaf ears.