Efficiency: the new way to profit


By John Roche, Haybrooke CEO

EfficiencyProfit

How does becoming more efficient improve the profitability of a printing company?

Before we try and answer this question, the notion of ‘efficiency’ must first be understood in a context that is relevant to its greater application.

A typical dictionary definition of efficiency will include: well organised,competent and resourceful. It will also say that to be efficient is to be:economical, cost-effective and environmentally aware. No less important is the type of efficiency that is: effective, useful and helpful. So what is it?

If we say that a printing machine is ‘operating efficiently’ then what do we mean?

Are we saying that the machine minders are well organised, competent and resourceful? Perhaps we are saying that the machine is performing economically, cost-effectively and in an environmentally friendly manner? Or are we saying that the machine is operationally effective (working), that it is a really useful machine and that it is somehow helping its owners business?

Maybe the easiest way to frame the term ‘efficiency’ for a printing company is to first formularise it.

Imagine that the input to a system is represented by value ‘I’ and the output by value ‘O’. If the input to the system is equal to the output then the system is said to be in balance (or ‘breaking even’ in commercial terms). Using a basic efficiency model, this could be expressed by the formula:

{I = O}  or,

{O – I = 0} (output minus input = zero)

So, the basic measure of efficiency it seems is ‘output minus input’. What happens to the formula if the efficiency of the model is increased in terms of output?

The answer is:

{O = I + 1} or,

{O – I = 1} (output minus input = one)

What happens to the formula if the efficiency of the model is increased in terms ofinput?

The answer is:

{I = O – 1} or,

{O – I = 1} (output minus input = one)

You will notice that whether it is the input or the output that is made more efficient in the above two scenarios, the improvement in performance – and therefore profit – is equal to ‘1’, as shown in the second variant of the expression.

Simply stated, this means that the same increase in efficiency can be achieved by either:

  • Maximising the value of input (costs), or
  • Maximising the value of output (sales)

So where does this simple logic fit into a printing company?

Well, a printer has an enormous amount of costs relating to the function of its operation. These operational costs are represented by ‘I’ in the efficiency formula and the sales income by ‘O’. If sales income exceeds costs, then a printing company is technically enjoying some level of efficiency. This is not to say that it cannot improve its efficiency – for it can – simply by widening the gap between I and O.

It turns out, then, that ‘efficiency’ does not simply improve profit – it IS profit.

An efficient printer is a profitable printer. Or, put another way, a profitable printer by definition is an efficient printer. Every efficiency drive ever undertaken in any printing company anywhere in the world always has but one of two very clear objectives: to reduce input costs (maximised against production output); or increase sales values. Or, both!

How can this simple efficiency formula: {O – I = 1} help a printer to overcome its own basic inefficiencies?

The truth is, the formula is not helpful when subtle changes are made to a business cost model that result in small increases or decreases in efficiency. It canbe helpful, however, when determining if the output of the business it relevant to the input resources. In other words, could a printer be generating greater outputwith the same level of equipment? Or, alternatively, generating the same level of output with less equipment?

Example

For ease of understanding, imagine a printing company with three printing machines. Each of the machines operates for two working shifts per day. In our formula we’ll call the cost of running each machine ‘I’ and state the number of shifts in brackets alongside it. Sales are shown as the value ‘O’. All other considerations apart, here’s how the efficiency formula would look:

I(2) + I(2) + I(2) = O

Or,        I(2) x 3 = O

Or,        I(3) x 2 = O

The formula correctly infers on the second variant line that three machines running two shifts each ‘I(2)’ produces the sales output ‘O’. The slightly revised formula on the third line, however, suggests an underlying simplicity that the company has possibly overlooked. Namely, that two machines running three shifts ‘I(3)’ is just as efficient.

The fact is: if the company reengineers its shift patterns, it can be just as productive with two machines as it is with three.

The same applies with the performance of the machine. Let’s introduce the running speed of the machine into a new equation. Rather than place the number of shifts in brackets alongside, we’ll put the running speed here instead:

I(10,000) + I(10,000) + I(10,000) = O

Or,        I(10,000) x 3 = O

Or,        I(15,000) x 2 = O

As before, the formula suggests on the second variant line that three machines running at 10,000 impressions per hour ‘I(10,000)’ produces the sales output ‘O’. The slightly revised formula on the third variant line, however, shows that two machines running at 15,000 impressions per hour are just as efficient.

Efficiency on show

Efficiency comes in two flavours: ‘observational’ efficiency and ‘underlying’ efficiency. Observational efficiency is that which is observed. For instance, a person seen carrying a box across a factory floor. Underlying efficiency is the measure of how cost-effective the observed efficiency really is. Stand and watch the person carrying the box and they may be meandering aimlessly back and forth across the factory floor.

Observational efficiency, then, can sometimes be a misleading measure of cost-effectiveness. ‘The machine is running all the time’ is no indication that the machine is actually operating efficiently. To ascertain this, the underlying efficiency has to be measured (underlying efficiency here meaning what function the machine is actually performing when it is observed to be doing ‘something’).

This is interesting. It means that observational efficiency is mostly represented by ‘O’ in the efficiency equation {I = O}; and underlying efficiency mostly represented by ‘I’.

Let’s rephrase this. Underlying efficiency can be improved by managing input (costs). Observational efficiency can be improved by managing output (sales). If both are improved simultaneously the net benefit to the printer is enhanced even further.

Specifics

How can a printer improve the efficiency of its presses, guillotines, folders, stitchers and perfect binders?

The only way to practically guarantee 100% input efficiency is to outsourceeverything. This way, the outwork supplier shoulders all the costs that are usually absorbed into a printers cost structure. However, this underlying efficiency can by adversely offset by a reduction in observational workflow efficiency. The supplier might not complete the job in time, for instance, or they might inadvertently spoil it.

Printers therefore perceive that the advantages that come about from observational efficiency – being in direct control of the work – outweigh the difficulties of being in charge the underlying efficiency issues (spiralling costs, spoilage, waste disposal and control, machine maintenance, insurances, environmental issues, staff recruitment, training, support, discipline, motivation; and so on).

Ultimately, though, manufacturing is called manufacturing for a reason – it is men and women working for a living. The first real step to improving efficiency, then, is to look to the workforce. Motivate them and reward them in a way that keeps their contribution levels high – and get rid of time-wasters quickly.

How to set about improving efficiency in a practical way

Look at all of your input costs and production workflow variables and streamline them. In plain English, this may mean cutting costs and investing, where necessary, in new equipment. This doesn’t necessarily mean taking out overheads by ‘hacking and sacking’. Time is money, as they say, so the less time it takes to do something the less it costs.  In practice, then, the focus is to improve the practical efficiency of your production workflow – i.e. the time it actually takes to do stuff. Put this together with a review of real costs and the underlying efficiency should start to improve.

Next, take a long, hard look at your manufacturing processes and apply a bit of basic business sense to see if you are missing a trick. If you have a bank of three machines and are running them on double-days, throw out one of them and run three shifts on the remaining two – for the same volume of output. Or, keep the ‘spare’ machine and sell off work cheaply to print managers to keep it busy – provided always that the main breadwinners are printing to capacity first.

Or, replace two old B2 presses with a new, hi-speed B1 machine and run it 24×7. Not only will you increase capacity due to gains in running speed productive output, but you will double the volume of work that can be printed for the same cost in hours.

What’s the bottom line?

Efficiency can come in many guises, but the bottom line is, you either maximise your input (costs); or, maximise your output (sales). Or both. That’s efficiency.

Printers: Now work out your manufacturing cost rates to help you in your efficiency drive by downloading our free software here.