Planning for capacity starts with CSR

What is Corporate and Social Responsibility (CSR)?

The Government: “… sees CSR as the business contribution to our sustainable development goals. Essentially it is about how business takes account of its economic, social and environmental impacts in the way it operates – maximising the benefits and minimising the downsides. It is essentially about companies moving beyond a base of legal compliance to integrating socially responsible behaviour into their core values, in recognition of the sound business benefits in doing so.”

In other words, CSR describes the principle that companies can and should make a positive contribution to the environment, the community and their stakeholders (those who are affected by their business operation).

It is the practice of managing the social, environmental and economic impacts of the company, being responsive to stakeholders, and behaving according to a set of adopted ethics and values that are not codified in law. In reality, the term can refer to a wide range of actions that companies may take, from donating to charity to reducing carbon emissions to protecting the human rights of individuals working in the supply chain.

Should print buyers cover their buying habits within their CSR framework?

Yes. If a large corporation makes the claim that it is running its business with a raft of ethics designed to promote corporate and social responsibility, it should incorporate its buying protocols into this framework. There are ways that buyers of print can buy from their suppliers in a more ethical and sustainable way. It requires a reduction in their supplier base and a new methodology for procurement.

Capacity planning – a practical solution.

Let’s take an average printing company with a target sales of a million pounds:

• Sales £ 1,000,000
  Paper / ink / plates £ 270,000
  Outwork purchases £ 120,000
  Manufacturing costs & wages £ 310,000
  Total cost of manufacturing (COM) £ 700,000
  Gross profit (GP) £ 300,000 (30%)

The GP shown of £300k is the result of subtracting the so-called ‘above the line’ manufacturing costs from the target sales of £1 million. Out of this, the company is required to fund their other business costs such as administration salaries, depreciation, rent, rates, and so on. If their admin costs exceed £300,000, they will lose money. If they are less than £300,000 they will make a profit.

30%, then, is their break-even GP. A sustainable GP would be more than this – perhaps 35% - which provides for a profit for the company. Conversely, if no GP is added to a job, then it is said to be at ‘cost of manufacturing’. In this case, the job will cover the manufacturing costs alone and make zero contribution to the recovery of admin costs. This is neither desirable or sustainable – yet is sadly commonplace in today’s cut-throat printing market.

What happens when sales fill capacity?

Let’s imagine our company doubles its sales. For simplicity, we will assume the manufacturing costs also double. Here is how a revised budget would look:

• Sales £ 2,000,000
  Paper / ink / plates £ 540,000
  Outwork purchases £ 240,000
  Manufacturing costs & wages £ 620,000
  Total cost of manufacturing (COM) £ 1,400,000
  Gross profit (GP) £ 600,000 (30%)

The GP shown of £600k is now double the previously calculated £300k. However, it is unlikely that the printing company’s admin costs will have doubled along with its sales. In fact, they might very well stay the same, or increase by, say, 25% – up to £400k. Either way, there is now an opportunity to reduce selling prices and this is how most printers have tackled the problem of rock-bottom pricing in the market – by increasing their manufacturing output and sales targets. This, in turn, has created the huge over-capacity in the industry. The problem has become, quite simply, lack of work.

However, if a company could be guaranteed a certain volume of work and a sustainable GP, how might it effect their budget – and their business?

Guaranteed sales and a sustainable GP.

If a printing company could be guaranteed an increase in sales volume and a sustainable GP of say, 22%, here is how their budget might look:

• Target sales £ 1,800,000
  Paper / ink / plates £ 540,000
  Outwork purchases £ 240,000
  Manufacturing costs & wages £ 620,000
  Total cost of manufacturing (COM) £ 1,400,000
  Gross profit (GP) £ 400,000 (22%)

The sales of £1.8 million represent, in real terms, a 10% reduction in selling prices. The manufacturing costs are double, and the GP has risen to £400k, however, it has actually dropped in percentage terms to 22%. This proves, in principle, that if a printing company could be guaranteed an extra volume of work taking them closer to their capacity, they could now manufacture to a lower percentage GP.

This would manifest itself as lower selling prices to customers and would create a sustainable working environment. This concept might provide the perfect solution for print buyers wishing to carry on paying lower prices, but who want to buy more ethically and transparently from their key suppliers, in a way that helps to sustain them – and not send them out of business.

How are the spare capacity and sustainable GP components calculated?

An assessment of a printing company’s equipment, shift working patterns, measured efficiency, staffing levels and present sales volumes by a suitably qualified independent, would allow for the calculation, in principle, of a company’s spare manufacturing capacity. Haybrooke Associates are qualified to offer this service to you and your customers.

Reworking your company’s budget by factoring in an increase in manufacturing output driven by new sales volumes (a ‘capacity plan’) would reveal the sustainable GP. This GP could then become the pricing point for all work undertaken for your contracted clients, serving as the bedrock of a transparent agreement, in return for a minimum contract period of one, two or three years.

You would offer an assurance to your customers and would comply with a monthly audit to ensure that the agreed GP was being applied fairly and consistently to all contract work.

Sustainable capacity planning (SCP):

1. Printing company is assessed to determine spare capacity.
2. Printing company's customers agree to place fixed volume(s) of work at agreed contract prices based upon agreed GP
3. Printing company accepts contracted volumes of work at a fixed GP from its customers.
4. Printing company is audited monthly to check for compliance.
5. Entire contract is transparent to printers customers.