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Printing Industy Blog

The High Cost of Preventable Errors

By David Dodd
Published: May 3, 2010

It's no secret that the past several years have been difficult for many printing companies.  The big problems - declining print sales and persistent low profit margins - have been discussed in a variety of venues.  The recent recession has exacerbated the difficulties, but the underlying cause has been a fundamental shift in the ways we communicate.  Therefore, we cannot depend on a general economic recovery to significantly improve printing company performance.

It's important to remember that, in this kind of environment, every aspect of business becomes more important.  Rapid growth and high margins can hide many sins, but slow growth and low profits reduce the margin for error and magnify the importance of performing almost every business activity as close to perfection as possible.

So, this post is about rework.  Or, more specifically, about eliminating the errors that create the need for rework.  Just how important is this issue?  The impact of rework on profits will vary from company to company, but it's fairly easy to illustrate the importance.

Suppose, for example, that a company has a pre-tax profit margin of 5 percent, which means that the average profit margin on jobs is also 5 percent.  The average job size in this company is $3,000, and the cost structure of the company is typical for a printing company.  Column A in the following illustration shows the job profitability of the average job.  The selling price is $3,000, and the profit on the job is $150 (5% of the selling price).

Now suppose that just prior to shipment, an error is discovered that requires this job to be completely redone.  Column B in the above illustration shows the financial impact of this rework.  The selling price is still $3,000, but now the cost of materials and outside services has doubled.  Notice that the internal conversion costs in Column A and Column B are the same.  To make my point in this example conservatively, I'm assuming that all conversion costs are fixed and that the company has sufficient unused capacity to redo the job without adding costs such as overtime work, etc.

Because of the rework, the job "profitability" becomes a loss of $900.  Therefore, the total negative impact of the rework on profitability is $1,050 - the $150 the company should have earned plus the $900 loss the company actually sustained.  That's bad enough, but here's the real significance.  With a 5 percent net profit margin, the company will need to sell $21,000 of new business just to make up for the negative profit impact cased by the rework ($1,050 / 0.05).

Rework can be a huge profit drain in a printing company - a profit drain that most companies can ill-afford when replacement profits are hard to come by.  Yet, despite its importance, many managers don't pay enough attention to rework or to the errors that create it.

Over the  years, I've reviewed dozens of printing company financial statements, and I've rarely seen rework costs reported on the income statement.  Rework costs are sometimes tracked in a job costing system, but the issue here is one of timeliness.  By the time job cost reports are analyzed, several days or weeks may have elapsed since the error occurred that caused the rework.  The people involved may have forgotten what happened and why.

The real tragedy here is that most of the errors that create the need for rework are preventable.  To prevent these errors, a company needs three things:


  • A system of quality processes and tools that are designed to prevent errors from occurring (or detect them as soon as possible)

  • Employees that consistently follow the quality processes and use the quality tools

  • When an error does occur, the company must have a process that identifies the root cause of the error and determines whether the error was caused by a flaw in a quality process or tool or a failure to use the process or tool in the right way


Most rework can be prevented.  Given the impact that rework can have on profits, managers should take a close look at this important issue.  In a slow-growth, low-margin business, even small improvements can significantly boost profits.

G. David Dodd is available for speaking engagements and consulting projects. To get more information contact us here.

G. David Dodd is a principal of Point Balance, LLC ( www.pointbalance.com ), an executive education and management consulting firm. Point Balance provides cutting-edge management education programs designed for printing and publishing executives. The firm also provides management consulting services involving business strategy development, strategic marketing, cost management (including activity-based costing), business process management, and balanced scorecard performance management systems. Dodd is a co-author of Activity-Based Costing for Printers: An Implementation Guide, the authoritative resource relating to the use of activity-based costing by printing and publishing firms. Dodd also co-authored Making Value Added Services Work, a comprehensive reference tool for printing company managers who are just beginning to consider diversification or who have already added new services and are not receiving the benefits they expected.

David Dodd can be reached at ddodd@pointbalance.com,931-707-5105.

 

Discussion

By Erik Nikkanen on May 03, 2010

David, excellent post. It really highlights the core issue facing the manufacturing economics of printing.

This subject is one that I have been working on for over 25 years. For some reason, I have found that the industry does not want to address the fundamental causes of problems that lead to the rework you discuss in your post.

The industry is hostile to any idea that they are doing things incorrectly and always put up arguments to prevent the corrective actions required.

Even WTT, in a short sighted action, has prohibited me from discussing a particular concept on this blog or on the Printplanet forum, that addresses THE critical process problem in Offset. This also means that the other related and important issues will not be discussed by me.

Your post clearly shows that the affect of faults dramatically affects profitability. I can see that printers will agree with your views but then it comes to the problem of what to do about it.

There are some Lean tools that I know you are very familiar with, which can help but printers will always be plagued by the fundamental problems in the process. Since the industry will not accept that these fundamental problems even exist, the chances of them accepting potential solutions is low.

It is so frustrating for me over many years to see all the waste of money, resources and time experienced in the printing manufacturing process and the aggravation printers have with a process that is inconsistent and not predictable and at the same time to have to fight to address these fundamental process issues in the industry that does not really want to hear about it.

I hope your post helps get printers and others to see that faults in the manufacturing stages directly affects their bottom line. Good post.

 

By Henry Kafeman on May 04, 2010

A good post spelling out the potential consequences of not paying attention to quality processes and tools. I know from my experience that Printing Plants do not make best use of the Software, Systems and Industrial Automation that they have in place. For instance by ensuring that settings/configurations are optimised periodically. Consequently they are wasting time and money on every Make Ready/Startup. That will obviously effect the costs associated with every Job and hence the profitabilty! So there are other sets of High Cost "Preventable Errors" not just those associated with rework (which is perhaps the most visible to those running a Company).

 

By Susan Beyer on May 06, 2010

Loved your blog, David! It's what my husband Philip Beyer has been talking about for years and then wrote about in his book System Busters: How to Stop Them in Your Business, after totally systemizing his printing company over 10 years. What you say really can be done! It's amazing how important your information is, but how few look into it seriously for their businesses. The hair-pulling is everywhere, as owners wonder how to put sustainable order into their operations. The answer is closer than they think! Thanks for offering such great suggestions in that regard. Hope you'll check out my husband's website at System100.com. I think you'll agree, this might be a solution to all that hair-pulling!

 

By Dick Rossman on May 07, 2010

David, an excellent message, and your conclusions and recommendations are exactly correct.

Most printers don't measure their performance in any way, not tracking errors and waste such as bad plates, improper proofs, excessive makereadies,etc., and why they are bad, improper, or excessive, let alone keeping track of their rework and analyzing it with a Quality Committee on a regular basis. In fact, the notion of a Quality Committee is usually a foreign one.

When someone like myself suggests that perhaps their procedures and processes could be improved, company owners get defensive and refuse to consider that there may be room for improvement in their operations. This leads to all the results that you've described, and more.

 

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