PrintingNews.com

We have all felt the impact of the economic downturn and seen how this recession is negatively affecting all aspects of the print industry. More than ever, we need to pay close attention to several important metrics if we are to survive these tumultuous times. Benchmarking studies like the Printing Industries of America’s Ratio Study can help identify not only where we are as an industry, but also help troubleshoot potential profit wasters in individual companies.

Value Added

We recommend using the Value Added (VA) as the basis for computing your metrics. VA is calculated as follows:
Value Added (VA) = Sales less Materials and Outside Services

VA is thus what remains from your sales to cover all remaining overhead expenses (including payroll) and still achieve a profit.
Payroll

As shown in the following example, payroll accounts for well over 50 percent of the Value Added (VA) cost for both profit leaders and the industry as a whole:

As you can see, once you add together the labor percentage and the expected profits, only 32 to 37 percent of the remaining costs are left. Many of these costs are considered fixed costs, like depreciation and rent, and cannot be controlled easily because they are the result of prior decisions. Given this significant impact, your greatest opportunity for controlling costs most likely rests with payroll.

Direct Labor vs. Support Labor

Another important ratio involving payroll is the relationship between direct labor (employees that charge their time to jobs) and support payroll. Support payroll represents everyone who does not charge time to jobs, (supervisors, customer service reps, sales, estimators, planners, administrative personnel, etc.). When we extrapolated data from the Printing Industries of America Ratio Study, all firms calculated out to have $1.10 of support payroll for $1.00 of direct labor, or a ratio of 1.1 : 1.0. This is the ‘norm’ most printing companies should aspire to achieve.

Granted, this ratio may be more difficult for printers to attain in these tumultuous days of terminations, reduced work weeks, salary reductions, etc. It is still a valid and important practice to determine this ratio for your company as a benchmark of where you are and where you can improve. And should you find your ratio falls well off the mark—1.2 : 1.0, for instance—it may be time to review just how many administrative people you need, or whether your estimators can do ‘double duty’ as planners.

Productivity

Profit also needs to be reviewed in light of current utilization (production) rate. As you can see, the goal here is to be at a metric of 75 to 80 percent (minimal range).