Run-of-the-mill screen prints have been classified as printing commodities for many years. It seems that nothing is likely to elevate or resurrect their position on the totem of profitability. But let’s look at the three ways to improve profitability: raise the selling price, cut the costs or some combination of both. When dealing with “commodities” there is no chance of raising the price—there are too many alternatives and there is way too much competition, so the only solution is to cut costs.
The first question in this line of thought usually plays with the idea of how to get core material suppliers to cut their selling price. Some savvy entrepreneurs may take it a step further and think in terms of discounts, net day’s sales, consignment, loyalty and alternative sources of supply. After all, the simplest thing to do would be to get someone else to solve the problem, right? So to help initiate a stochastic approach (the term literally means “to take accurate aim”), let’s take a look at a simple example detailing activity-based cost accounting for a hypothetical corporation, The Corrigan Company.
There are a myriad of activities in Corrigan’s T-shirt business and therefore, an equal number of associated costs. Luckily there is a specific way to account for each of these costs. In the activity-based model used to analyze this “typical shop” with one shift, open five days a week and operating one automatic press, we can define the following costs:
Direct labor—one to four persons working on the press line
G&A (general and administrative) costs—executive and managerial salaries, employee wages, etc.
Fixed costs—rent or mortgage, capital equipment payments, automobiles, etc.
Consumables (garments)—the difference in net profits of a garment, licensing, pre-print, custom or contract printing of garments
Core RMCs (raw materials costs)—frame, mesh, stencil, film, ink and blade
The core raw materials for the Corrigan Company are:
Frames at $75 each (last two years)
Mesh at $10/yd (average of 10,000 impressions)
Stencil at $90/gallon
Films at $1.50/square foot
Blades $50 each (last six months)
Other factors for The Corrigan Company that are reflected in Figure 1 are:
G&A runs 20 percent of revenue while fixed costs run 7 percent: they are seeking a 45 percent margin
Set up averages six minutes per color; goods are printed at 40-dozen per hour
A 500-piece order for a three-color job requires four direct laborers averaging $20/hour
The garment costs $2.46; is sold for $4.46
Open five days with single shifts, averaging 70 percent annual plant capacity
Over the decades, the Corrigans’ business has seen some evolution. Currently, it is dabbling in special-effects printing. The reasoning is simple—much of the business has been commoditized, printing simple coatings on a shirt, run lengths are generally down and international and virtual competition is honing in on their business. Under the circumstances, The Corrigan Company’s prime directive must be self-perpetuation… and this means the mission must be to make a profit.
Special-effects printing is one way to inflate profit per shirt since it adds value. But when the image and decoration is a simple one- or a few-color print, there is little opportunity to raise the price. Here, cutting manufacturing costs looks like a solution in order to make sufficient profits. At no time is it more critical to reduce manufacturing costs than in the case of producing simple prints. And, it becomes crucial to examine which costs should be on the chopping block. But the typical costs companies sacrifice to solve this problem are not necessarily the keys to profitability.
In the business of printing apparel, anything that slows down the press is bad and anything that makes it run faster and maintains or improves quality is good. It is a simple axiom but one which is most often neglected. The reason is simple: It’s a lot easier to find RMCs by simply looking at an invoice from a supplier. But it takes a bit of work to evaluate the cost of conversion (for more on evaluating the cost of conversion, turn to page 68, this issue).
Figure 1 shows that the cost of direct labor is relatively high. While reevaluating your staff and contemplating layoffs is a solution, a business would be better served by reducing the direct labor as a percentage by putting more “stuff through the chute.” Reduce set up times, increase cycle rates and reduce interruptions by purchasing quality raw materials that make the cycle flow better. Hence, consider the value of the labor-to-revenue ratio. It’s not about the cost of direct labor, but about distributing the real costs (shirt, G&A, fixed costs and direct labor) to the revenue stream which they intend to help create.
The direct labor-to-revenue ratio is the best single gauge of status or progress in a manufacturing operation. Efficiency can be measured by taking the cost of direct labor and positioning it against the amount of revenue generated in the same timeframe. For example, The Corrigan Company spent about $125 on direct labor for the press run and invoiced about $1,780 in the same time (the blank T-shirt has been deducted), so they ran a labor-to-revenue ratio of 14.4 to 1.0. If they continue to “get better at it” the ratio will be higher.
Improve Labor-to-Revenue Ratio
The author suggests these few cursory tips to help improve labor-to-revenue ratio:
• Never under-staff the press line
• Cross-train loaders and other employees
• Rotate the press crew to maintain focus and comfort while maximizing productivity
• Reverse the fold-bar to increase the ink well
• Shorten the stroke length and use the minimum length blade
• Use raw materials that increase the speed of the press
• Use mesh that lasts longer, is balanced warp/weft and treated to hold stencils
• Use quality stencils that withstand water-based inks without breakdown
• Invest in plastisol that won’t build up and water-based that won’t dry in
• Use blades that print softer and smoother and run at top speed