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THE HIGH COST OF PREVENTABLE ERRORS

It’s no secret that the past several years have been extremely difficult for many printing companies.  The big problems – declining print sales and persistent low profit margins – have been widely discussed in a variety of venues.  The recent recession and the anemic recovery have exacerbated the problems, but the underlying cause has been a fundamental shift in the ways we communicate.  So, these problems are long term and structural, not short term and cyclical. 

In this environment, every aspect of business becomes more important.  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 article is about rework.  More specifically, it’s about eliminating the errors that cause rework.  How important is this issue?  The impact of rework on profits will vary from company to company, but it’s easy to illustrate the importance.

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

The Impact of Rework on Profit

 

                                                   Column A       Column B
                                               Before Rework   After Rework

 

Selling Price                                     $3000            $3000

Materials & Outside Services              $1050            $2100

Value Added                                    $1950            $  900

Internal Conversion Costs                 $1800            $1800

Job Profitability                                 $ 150           ($  900)

Now suppose that an error requires the job to be completely redone.  Column B 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 conversation costs in Column A and Column B are the same. To make my point in this example, conservatively, I've assumed 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 pretty bad, but here’s the real significance.  With a 5% net profit margin, the company will need to sell $21,000 of new business just to make up for the negative profit impact caused 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 cause it. 

The real tragedy is that most of the errors that cause 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
• A process that identifies the root cause of each error that occurs, and determines whether the error was caused by a flaw in a quality process or tool or by a failure to use the process or tool in the right way

The vast majority of 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 reductions in rework can significantly boost profits. 

[G. David Dodd is a business and marketing strategist and B2B marketing content developer.  He has worked with small and mid-sized B2B companies – primarily printing and publishing companies – for over twenty years.  You can read more of David’s thoughts on B2B marketing and sales at the B2B Marketing Directions blog] 

THE TEN CANNOTS

As a business owner for nearly thirty years, I have come to see how the state of our nation—the political landscape, a virtual battlefield for conservative and liberal thinking—has had a profound influence on the success or failure of American businesses.

 

Most of my energy over those years has been concentrated on the business of business—how it works, how to make it work better, and how to help others sustain the highest standards of quality, efficiency and productivity in their own businesses. My research has been fascinating, to say the least!

 

Recently, I became aware of a man named William J. H. Boetcker, an influential leader and public speaker in America during the early to mid-20^th Century.  His words, I believe, ring even truer today than they might have during his lifetime.  Born in 1873 in Hamburg, Germany and raised in Erie, Pennsylvania, Boetcker was an outspoken proponent of free-market enterprise and entrepreneurship.  He is best remembered for his authorship of a pamphlet he published in 1916, titled The Ten Cannots.    

 

Given the current state of our nation—our over-taxed and increasingly floundering businesses, and the rise in unemployment—it seems important to me that we revisit Boetcker’s “Ten Cannots” in order to determine America’s collective temperature. Will your company survive today’s economic pressures, or will it become a statistical fatality, as many others have now.

President Ronald Reagan is one of many who have quoted Boetcker over the years, hoping to inspire a return to reason and order for our nation and its business and financial structure—and our ability to prosper as a free people.  I suggest that these same “Cannots” also hold great wisdom for today’s businesses that find it harder and harder to afford to stay afloat, hire those who will work, and maintain order on a daily basis.

So, for those of you who are determined to find solutions to your business problems, and for those of you who can understand the correlation between the state of our nation and its current policies—and the direct impact they have on your business—I also submit to you The Ten Cannots, for your consideration:

• You cannot bring about prosperity by discouraging thrift.
• You cannot strengthen the weak by weakening the strong.
• You cannot help little men by tearing down bigger men.
• You cannot lift the wage earner by pulling down the wage payer.
• You cannot help the poor by destroying the rich.
• You cannot establish sound security on borrowed money.
• You cannot further the brotherhood of man by inciting class hatred.
• You cannot keep out of trouble by spending more than you earn.
• You cannot build character and courage by destroying men's initiative and independence.
• You cannot help men permanently by doing for them what they can and should do for themselves.

William Boetcker died in 1962, after also warning America about what he called "The Seven National Crimes"…

• I don’t think.
• I don’t know.
• I don’t care.
• I am too busy.
• I leave well enough alone.
• I have no time to read and find out.
• I am not interested.

It’s up to you and me, those of us who own or manage businesses in these challenging times, to make every effort to educate ourselves and others about our nation’s leadership; and to stand strong for our free-enterprise system, and the freedoms our country was built on. 

 

Right-thinking leadership understands the imperative of businesses to thrive in America, and is wise to give business owners every encouragement and incentive to risk and to prosper; to be able to afford to hire good workers, and retool as needed, and to meet the demands of ever-changing technologies. 

 

You may be thinking, “Philip, what does this have to do with SYSTEMS?”

 

If our businesses are not running lean by systemized management—and remain in a state of chaos that keeps us “too busy” or “too tired” to get involved in local and national issues that have a direct effect on our business—it’s likely our freedoms and the worth of our hard work will continue to decline.

 

We must implement leaner, more sustainable practices—systems that will allow us time to get involved, educate ourselves in government practices and support elected leaders who will stand with us and for us.  

 

As go our businesses, so goes our nation!

 

It’s up to you and me.