WHAT MAMA DIDNT TELL YOU ABOUT BHRS JOE POLANCO, NEW DIRECTION - PowerPoint PPT Presentation

WHAT MAMA DIDN’T TELL YOU ABOUT BHR’S JOE POLANCO, NEW DIRECTION PARTNERS

WHO ARE THESE GUYS? • JOE POLANCO • BEGAN CAREER IN CUSTOMER SERVICE AND ESTIMATING • GENERAL MANAGER POSITIONS WITH COMMERCIAL OPERATIONS • 30 YEARS WITH PRINTING INDUSTRIES OF AMERICA’S TEXAS AFFILIATE • NEW DIRECTION PARTNERS • PREMIER MERGER/ACQUISITION CONSULTANTS IN PRINT & PACKAGING INDUSTRY • OVER 300 M&A DEALS • 9 PARTNERS WITH AN AVERAGE OF 20+ YEARS OF INDUSTRY EXPERIENCE

TRADITIONAL PRICING MODEL • BUILT ON BHR’S - INDUSTRY’S DEFACTO PRICING/COSTING TOOL • ALL INDUSTRY PRICING SOFTWARE USE BHR’S • MOST EFFECTIVE WAY TO ALLOCATE OPERATIONAL COSTS IN A CUSTOM MANUFACTURING INDUSTRY • WEAKNESS • DO THEY REALLY MEASURE COSTS?

BUDGETED HOURLY RATES • DIRECT COSTS (VARIABLE – EXCLUDING MATERIAL COSTS) • LABOR, TAXES, BENEFITS • MACHINE COSTS (SEMI-VARIABLE/FIXED) • CAPITAL COSTS, MAINTENANCE, UTILITIES, SUPPLIES, SOFTWARE, ETC. • OVERHEAD COSTS (FIXED/SEMI-VARIABLE) • GENERAL, ADMINISTRATIVE, SELLING • THREE TYPES OF RATES – • DIRECT • MACHINE (DIRECT COSTS + MACHINE COSTS) • FULL ABSORPTION (ALL INCLUSIVE)

CHALLENGES • BHR ALLOCATION • INDIRECT COSTS (OVERHEAD) ALLOCATED BY VARIOUS FORMULAS • SQ. FOOTAGE; ACTIVITY; INVESTMENT • COSTS ARE ADJUSTED BY “CHARGEABLE” HOURS • 1,944 HOURS = 100% • 1,555 HOURS = 80% • 1,360 HOURS = 70% [MOST FIRMS BASE COSTS ON 70%; 85% IS CONSIDERED LIMIT]

6/C PRESS 40” PRESS {1-SHIFT} • DIRECT COSTS (VARIABLE – EXCLUDING MATERIAL COSTS) • $74,000 • MACHINE COSTS (SEMI-VARIABLE/FIXED) • $433,000 • OVERHEAD COSTS (FIXED/SEMI-VARIABLE) • $295,000 • TOTAL COSTS – $802,000 • 70% = $589 PER HOUR ($802,000/1,360)

BUDGET VS. REALITY April May June July August $589.00 $589.00 $589.00 $589.00 $589.00 Budgeted Hourly Rate Budgeted Hours (70%) 113.4 113.4 113.4 113.4 113.4

BUDGET VS. REALITY April May June July August $589.00 $589.00 $589.00 $589.00 $589.00 Budgeted Hourly Rate Budgeted Hours (70%) 113.4 113.4 113.4 113.4 113.4 ACTUAL Utilization Rate 80% 70% 68% 60% 50% Actual Hours 129.6 113.4 110.16 97.2 81

BUDGET VS. REALITY • OVER/UNDER ABSORPTION April May June July August $589.00 $589.00 $589.00 $589.00 $589.00 Budgeted Hourly Rate Budgeted Hours (70%) 113.4 113.4 113.4 113.4 113.4 ACTUAL Utilization Rate 80% 70% 68% 60% 50% Actual Hours 129.6 113.4 110.16 97.2 81 $9,541.80 $0.00 ($1,908.36) ($9,541.80) ($19,083.60) Over (Under) Absorption $515.69 $589.36 $606.69 $687.59 $825.10 ACTUAL HOURLY RATE (COST)

BUDGET VS. REALITY • PRICING CONSTRAINTS BHR Target Utilization (70%) $589.00 Pricing Rate $260.00 Overhead Underabsorption $447,440

REALITY • “EXISTING” MODEL DOES NOT MEASURE COSTS • MIS/ESTIMATING SYSTEMS DEVELOP PRICES • MANAGEMENT MAKES DECISIONS ON JOB “COSTS” • IGNORES IMPACT OF MATERIALS/OUTSIDE PURCHASES (40% OF SALES) ON PROFITABILITY • DOES NOT ACCOMMODATE THE REALITY OF MARKET PRICING (COMPETITION & VALUE TO CUSTOMER)

WHAT’S THE FIX? • ACTIVITY BASED PRICING (CONTRIBUTION/VALUE ADDED) • ACCOUNTS FOR ALL DIRECT COSTS • CONTRIBUTION TO OVERHEAD IS KEY METRIC • NEED TO MOVE AWAY FROM JOB COSTING MINDSET • PRINTERS DO NOT CREATE HOMOGENOUS PRODUCTS • LABOR • MATERIAL • CAPITAL RESOURCES

WHAT’S THE FIX? • VALUE ADDED • SALES LESS: PAPER CHARGEABLE MATERIALS (INK, DIRECT SUPPLIES, “CLICK” COSTS) OUTSIDE PURCHASES

WHAT’S THE FIX? • CONTRIBUTION • SALES LESS --- • PAPER • CHARGEABLE MATERIALS (INK, DIRECT SUPPLIES, “CLICK” COSTS) • OUTSIDE PURCHASES • DIRECT LABOR COSTS

STD Costing JOB A JOB B Materials Paper $425 $750 Chargeable Materials $85 $85 Outside Purchases $370 Hours BHR Prepress 2.5 $90.00 $225 $225 Pressroom 4 $230.00 $920 $920 Bindery/Finishing 2.5 $45.00 $113 $113 Total Costs $1,768 $2,463 M.U. $177 $246 Selling Price $1,944 $2,709

STD Costing JOB A JOB B Materials Paper $425 $750 Chargeable Materials $85 $85 Outside Purchases $370 Hours BHR Prepress 2.5 $90.00 $225 $225 Pressroom 4 $230.00 $920 $920 Bindery/Finishing 2.5 $45.00 $113 $113 Total Costs $1,768 $2,463 M.U. $177 $246 Selling Price $1,944 $2,709 Value Added $1,434 $1,504 V.A. Margin 0.74 0.56

JOB A JOB B Materials STD DIRECT STD DIRECT Paper $425 $425 $750 $750 Chargeable Materials $85 $85 $85 $85 Outside Purchases $370 $370 Hours BHR Prepress 2.5 $90.00 $225 $75 $225 $75 Pressroom 4 $230.00 $920 $288 $920 $288 Bindery/Finishing 2.5 $45.00 $113 $45 $113 $45 Total Costs $1,768 $918 $2,463 $1,613 M.U. $177 $246 Selling Price $1,944 $2,709

JOB A JOB B Materials STD DIRECT STD DIRECT Paper $425 $425 $750 $750 Chargeable Materials $85 $85 $85 $85 Outside Purchases $370 $370 Hours BHR Prepress 2.5 $90.00 $225 $75 $225 $75 Pressroom 4 $230.00 $920 $288 $920 $288 Bindery/Finishing 2.5 $45.00 $113 $45 $113 $45 Total Costs $1,768 $918 $2,463 $1,613 M.U. $177 $246 Selling Price $1,944 $2,709 Contribution $1,026 $1,096 Sales Commission $156 $217 NET CONTRIBUTION $871 $880 P.V. 0.45 0.32

General Commercial Sales $3,840,000 Material Costs Paper $806,400 Ink/Supplies $202,450 Outside Purchases $218,158 Total Material Costs $1,227,008 Direct Labor Costs $921,600 Direct Selling Expense $215,040 Contribution $1,476,352 P.V. 0.38 Direct Factory Costs $226,560 Gross Pofits $1,249,792 GP Margin 0.33

Commercial Direct Mail Purchase Magazines Services Services Total Sales $3,840,000 $1,440,000 $1,152,000 $1,920,000 $768,000 $480,000 $9,600,000 100% Material Costs Paper $806,400 $244,800 $322,560 $422,400 $1,796,160 18.7% Ink/Supplies $202,450 $76,050 $66,206 $110,346 $24,948 $480,000 5.0% Outside Purchases $218,158 $53,684 $150,947 $236,579 $60,632 $720,000 7.5% Total Material Costs $1,227,008 $374,534 $539,713 $769,325 $85,580 $0 $2,996,160 31.2% Direct Labor Costs $921,600 $345,600 $195,840 $460,800 $161,280 $88,800 $2,173,920 22.6% Direct Selling Expense $215,040 $92,160 $82,944 $92,160 $43,008 $26,880 $552,192 5.8% Contribution $1,476,352 $627,706 $333,503 $597,715 $478,132 $364,320 $3,877,728 40.4% P.V. 0.38 0.44 0.29 0.31 0.62 0.76 0.40 Direct Factory Costs $226,560 $69,120 $46,080 $113,280 $19,200 $12,000 $486,240 5.1% Gross Pofits $1,249,792 $558,586 $287,423 $484,435 $458,932 $352,320 $3,391,488 35.3% GP Margin 0.33 0.39 0.25 0.25 0.60 0.73 0.35 General/Administrative $2,208,000 23.0% Selling Expense $595,200 6.2% Earnings Before $588,288 6.1% Interest/Taxes

TAKE AWAYS • CONTINUE TO USE YOUR EXISTING BHRS • UNDERSTAND THEY DO NOT REPRESENT COSTS! • DEVELOP DIRECT COST BHR’S • DEPARTMENT COSTS WITH ACCURATE UTILIZATION (6 MONTH ROLL) • CREATE THE TOOLS TO MEASURE VARIABLE COSTS BY JOB/PRODUCT/CUSTOMER • VALUE ADDED • CONTRIBUTION

Joe Polanco New Direction Partners jpolanco@newdirectionpartners.com (214) 336-8586