23. Profitability

23.

Profitability

Many of our decisions are driven by how profitable things are. This is balanced with the amount of investment needed. We can look at this in a few different ways. One is the classic ROI – return on investment. Profit versus investment, 5%, 10%, or more, etc. It’s the first question and normal reaction from any Chief Financial Officer (CFO). We’ll try to convince the CFO, and the facts are sometimes also needed for the bank agreement backing up the investment. Another way to look at profitability is per job, not per meter or sheet. Then, it’s the value that an order will give you as a producer, your customer, and the real user – the consumer. A good thing about the packaging market is the possibility of measuring every step in the process. Value can also be about cost savings and/or equal cost but with an increased value per job, instead of meter or sheet.

We see examples from the label and commercial market, printers that have fully transformed to digital. They soon find out that even when only 15–20% of the volume is digital, it can represent more than 50% of their profit. With more than 30% in digital volume, the digital profit can be as much as 70% of the company’s total profit. Do you think any CFO ever in the graphic market has seen such good return on investment for a long time? No, probably never. But there are some steps that you need to take before reaching this result. The first step is normally offloading the short/midsize runs (and the ones with many SKUs) from your conventional analog presses. Adding digital to your portfolio is like adding a whole “smorgasbord” of new possibilities. But having done this, here is what can happen if you play it wrong – and I’ll take this story from a

few real cases. So, after the addition of digital, they soon get the full attention from a lot of customers. Digital alone has made them more interesting on the market. More jobs come in, still the same existing type of normal jobs, which is good and ok. Then all of the focus turns to filling the old presses, the space made by digital when offloading all of the short runs, and business starts to grow. But it’s with an increase of analog volume and still with a slim profit. There are no new volumes coming in on the digital side, and the whole cost-customer is unbalanced. The total cost has increased, and they still work with the same slim margins. They had all the right intensions in the beginning but lost sight of the horizon. They left the mental journey and went back to the old model, well known and comfortable, doing business as they have done in the past, selling a product based on the old cost model instead of value. The problem is that they now sit with a double cost but only one technology that produces (the other one producing maybe 10% of a shift), jobs that have freed 50% of the time in the old press that now can be filled-up with more long runs. Without a balance in the production, you’ll sit with the same slim margin and a too high cost. You have no added value coming in and only work with optimizing an old kind of volumes. It’s like the old saying about “peeing in your pants”; warm and nice in the beginning but very soon cold and ugly. Yes, of course, it’s nice at first to get all the attention from the customers and getting jobs because you attract them. But that is still the old kind of low value jobs, no new high value jobs. Why? Because the customer doesn’t even know that these new digital jobs exist and could add great value for them as well. It’s in this phase that the question pops up: What came first – the technology or the demand? I use this question in many of my seminars together with Visutech Digital Academy. I show the iPhone as an example and most people in the audience answer that technology came first. This is one of Steve Jobs’ bestknown statements and the right answer is the opposite: The demand came first, but you just didn’t know about it. Often people don’t know what they want until you show it to them. When you at first get all the attention from the customer, start working on how you can lead the way and be the best partner possible. Develop your relationship together and work close with one another. Not only doing what you have done before, long and short jobs etc. Don’t focus on digital or analog. Instead focus on understanding the need of your customer, expand your offer using your large number of new high value tools. How can you help your customer to grow and you with them? Hopefully that will be a profitable journey that you’ll embark on together.

This procedure needs more understanding and more cooperation with every customer and we have agreed that it’s the right way going forward. Developing the relations with your existing customer is the right thing to do. Sure, you won’t have twice as many clients in the future. But you will have a great power and ability to be twice as big within your existing customer base. Develop each customer with the possibilities from your new “toolbox”. The value of your services will then go up and your profit will grow as you scale. How your sales team works with the customer is crucial and so is the tight cooperation with the project leader, a person who must see all the new possibilities for each customer and create new solutions. The production manager has one priority in every step of the transformation: filling all the buckets equally 1, 2, 3, or 4 shifts! If the production manager instead of seeing the possibilities starts thinking too much about the run length and hard breakeven point per job, he or she will lose focus pondering if this shall go analog or digital and is doomed. The fixed costs are the biggest ones. The machine operator plus other fixed costs per shift stays for around 50% of the total running cost. If you only fill half a shift, it will instead increase to 75% of the cost per job. And don’t forget the number of jobs going through digital compared to analogue; it’s a factor 10 to 1, or 100 to 1, maybe 1,000 to 1 with e-business. Digital gives you the power to increase your profit with really small volumes compared to analog. With the new business plan (more on that later in the book), we view and estimate the cost from the digital and now count the cost per time instead of per job, which also includes longer conventional runs.

When you give the CFO or the bank the facts of how the Return on Investment (ROI) will look like, there are a few cornerstones you can build your argument on. If the digital packaging investment in hardware and software can cost EUR 25,000 per month for a narrow web, to around twice for wide web or sheet fed B2 solution per month, savings come through less staffing with digital and will be at least 30% per volume EUR in turnover. Over 5 years, based on one shift, both analog and digital, real cases today from label and commercials (those already transformed) show, if based on an investment around EUR 25,000 per month (EUR 1,000,000 investment), that the ROI can be as high as 25% = EUR 75,000 per year on the bottom line. You shall see that as a hint, not a guarantee. With our own “Smartplan”, a calculator that will support you with your own personalized ROI, you’ll get a calculated plan just for you.