Where is Your Money Going

Certain things are not going to change about printing. Printers will always be laying ink down on a substrate. The speeds at which printers perform this operation will change. The equipment will change. Even the inks will change in terms of what characteristics they possess. And, of course, what will never change is that package printers must purchase these consumables from their suppliers continuously, unless they start making their own substrates and inks.

Managing consumables, as well as other major capital expenditures, requires a sound purchasing strategy based on several factors, including strategic sourcing, internal rationalization, and understanding the marketplace.

Strategic sourcing

Philip Carter, D.B.A., a professor in Arizona State University's Supply Chain Management Department, provides a definition of the strategic sourcing process. "It starts with what you need, what do you need to support the plant, and then it's a question of saying is this the right thing," he says. After a printer answers the preceding questions, the internal work begins. "Then you start looking at possible suppliers. You might look very wide if you're a big company or look locally." Printers might consider who they purchased from in the past, the ones with which they may have the most negotiating power. "Then you have to decide how to approach them," Carter continues. "Is it going to be putting out a request for quotes, looking at bids? Are you going to sit down and negotiate with two or three companies? Do you need to try to expand the value proposition in some other way—getting more services, getting better service, and so on?"

Purchasers then move to the contract phase and buy against the contract. "If the contract says I'm going to buy these parts from this supplier at this price, then somebody's got to release orders to that supplier in a timely way," says Carter. "Make sure when you get the order that the bills get paid, the pricing is according to what you negotiated, that you're meeting your requirements, and that the suppliers meet their requirements according to the contract."

The real work begins

The preceding involves printers determining what they need, when they need it, and who they are getting it from.

Much of the preceding involves knowing the marketplace, which includes knowing what suppliers are out there, how many there are, and which one has the balance of power. Knowing if there is a lot of unused capacity or if it is a tight market will help printers figure out what kind of prices they'll get. "Most printers are not huge compared to a lot of their suppliers," claims Carter. "So what they need to do is really have a keen eye on some of these markets to see what happens." For example, if a printer is buying paper, it is not going to push around the big paper manufacturers. "So they need to understand what the supply and demand situation is," Carter says. "If the market is soft, they need to understand that and know that there is an opportunity for them to get some concessions in the negotiating process."

Carter states that depending on the state of the marketplace there could be opportunities for spot buys, but then there are inventory implications. "It's not just good buying," says Carter. "It's [knowing] the implications of these decisions also."

Mistakes can be made

As the economy recovers, it's important not to make certain mistakes. One, according to Carter, is passing along price increases from your supplier to your customer. For example, a supplier says its costs have gone up 10 percent, so it passes that cost onto you by raising your cost 10 percent, and you pass that to your customer. But it doesn't have to be that way. "If the price of pulp goes up," says Carter, "it doesn't mean the cost of paper has to go up by 10 percent."

"When the markets start to turn up, that's a very common strategy for all companies to try to pass through more in terms of price increases than their actual costs went up. You really have to understand as best you can what [the suppliers'] cost structure looks like and how much a cost increase should really impact their pricing."

Using the pulp example, Carter suggests printers should do their best not to let a paper supplier pass that 10 percent increase on pulp right through to the final product, because there are costs that did not go up that are factored into that new price on paper. "Printers try to do the same thing," he says. "If their paper costs go up 10 percent, they'll try to quote their prices up 10 percent, whereas their labor cost didn't go up 10 percent, their capital costs didn't go up 10 percent, and their transportation costs didn't go up 10 percent."

Where is your money going?

Carter advises package printers to know where their money ends up. He states that most of the money printers bring in goes back out in terms of something that must be bought to keep the business going. The next biggest chunk, he claims, is probably labor cost. "But for many companies, for every dollar they bring in, they may spend 40, 50, 60, or 70 cents of that dollar...it goes right to the bottom line if you save a penny in purchasing."

To do so, he says, it's important to have someone in charge of purchasing that understands and has an interest in it, and who understands where the opportunities lie. "Have a purchasing strategy staffed with people who have some concept of the vision of how it can contribute to the company's success, other than just processing purchase orders," he asserts. pP