Good Time for Commercial Print Sourcing
Spend Matters welcomes a guest post from Jim Pfeiffer, a Senior Director with Alvarez & Marsal Business Consulting.
Commercial print can be a complex category to manage but the rise in digital media has been accompanied by a reduction in commercial print demand. For consumers of commercial print, this represents an opportunity to drive cost reductions.
The revolution in digital communications has taken a toll on commercial print demand. The advent of tablet computing promises to accelerate the reduction of certain kinds of printing – why buy a book or magazine when you can the same experience instantaneously on your iPad? This technological shift has created an excellent environment to drive savings through sourcing initiatives.
Demand reduction has created a fiercely competitive environment for printers. In some cases, this becomes a life or death struggle for volume, which results in weaker competitors dropping below minimum operating thresholds. While the situation is dire for some marginal printers, it is still a very fragmented marketplace. There are estimated to be more than 30,000 suppliers for print services in North America despite the substantial consolidation in recent years.
As a result of the decline in demand and consolidation of supply, the general market dynamic is a "bumpy plateau," where volume declines are offset by periodic supply reductions as printers take capacity offline. By some estimates, the industry capacity is only 70% utilized and the economy in 2012 has done little to improve capacity utilization.
Because printing is a capital-intensive business, there is a strong incentive for printers to aggressively pursue volume as every dollar of contribution helps keep printers afloat. This is particularly true for some suppliers who have recently proven willing to accept low margin print jobs in order to maintain throughput and cover fixed costs.
This translates into a classic "buyers market." Aggressive sourcing organizations can take advantage of this environment to achieve dramatic cost reductions. Of course, this knife cuts both ways. If/when capacity utilization returns to historical levels, pricing can be expected to increase.
Cost Reduction Levers
For sourcing professionals, commercial print sourcing requires more than "3 bids and cloud of dust." To drive the greatest savings, you should instead adopt a total cost of ownership mindset and think broadly about the category. Commercial print entails more than just the printing – it also includes the paper itself, transportation, pre-press services, binding, photography, envelopes, content management, and lettershop services, among others. A number of cost reduction levers follow.
First and foremost, leverage competition. We find that many companies get too comfortable with their incumbents and don't use competition effectively. Ironically, others have the opposite problem – they put every individual print job out for bid and don't get the benefit of contract rates for larger, predictable volumes.
For example, we recently helped a client source envelopes for a direct mail operation. While they purchased about 50 different envelope SKUs with many more print variants, they had substantial spend (greater than 80%) in standard #9 and #10 envelopes. Instead of buying these envelopes at one time and taking advantage of their leverage, they purchased envelopes as part of each lettershop job. Because they do literally hundreds of lettershop jobs each year, they found themselves getting bids for standard envelopes hundreds of times.
Of course, the ultimate in competition is to use a "should cost" approach to enable buyers to negotiate from a position of strength (and to allow their companies to create contracts despite ever-changing specifications). Should-cost sourcing requires in-depth knowledge that allows the buying organization to suggest what best-in-class pricing should be. This expertise is often provided by 3rd-party subject matter experts. (This skill set is relatively rare and, as such, is beyond the capabilities of most traditional consultancies.)
Another lever to consider is to break up print jobs across multiple, smaller shops to take advantage of spare capacity while also reducing transportation cost. This is especially useful for broadly distributed items.
For certain very large buyers, we have also found that it might be advantageous to decouple the paper from the print. While many printers claim to pass through the cost of the paper, we have found that some printers still embed a margin in the paper. Despite claims of pass-through pricing, a margin on the underlying paper can be derived from a larger rebate agreement between the printer and their paper mills. This can cause the buyer to pay more for paper than they would otherwise if they were to purchase their paper either direct from mills or through brokers. All that said, buying paper directly requires a level of expertise that many organizations simply do not posses and they would probably be better off leaving paper buying in the hands of their printer(s).
A variety of technology exists to support different portions of the sourcing and print management processes. Some of the technology is printer-provided while other platforms are supplier-agnostic. Some organizations may even go so far as to outsource print management entirely.
Finally, there is still an open question regarding how the service reductions proposed by the US Postal Service will impact print demand going forward. This certainly could cause some organizations to think twice about direct mail campaigns which may put further downward pressure on demand.
While it's a fast-changing environment, the path is clear for procurement professionals: there is no time like the present to source commercial print.
Jim Pfeiffer, a Senior Director with Alvarez & Marsal Business Consulting, specializes in operational performance improvement and supply chain management. He can be reached at firstname.lastname@example.org.