Profitability and the label converter

Label industry growth, globalization and new technology solutions seem to have done little to improve label industry profitability. Mike Fairley, global label industry expert, analyzes some of the global financial trends and the steps that can be taken to improve converter margins.

One of the biggest challenges facing label converters today is the steady and ongoing erosion of an adequate margin and return on investment, with converters globally highlighting rising costs and downward pressures on prices as key barriers to their future growth and profitability.

In for example, around 32 percent of label converters surveyed last year indicated that their percentage operating profit on sales was below zero. A further 36 percent said that their profit level was between 0 percent and 5 percent. In , 17 percent of label converters reported profit on sales of less than 5 percent; while 46 percent had a profitability of between 5 percent and 10 percent. This is a much lower level of profit on sales than in the 1980s or early 1990s.

While the emerging markets of Latin America, or generally report somewhat better profitability than the developed markets, around 45 percent of them in these regional surveys carried out by the Labelexpo Global Series in the past two years still state that their operating profit on sales is below 10 percent.

Yet the key aim of any label converting business should be to make an adequate return on investment and to be profitable, otherwise why be in business at all? Indeed, between 5 percent and 10 percent of converters in almost all markets actually did achieve a profitability of over 20 percent. So why have so many others found it so difficult to achieve an adequate return in recent years?

Firstly, there are ever changing internal and external cost pressures. Competition from other converters, the challenges of finding new business, rising investment costs, higher raw materials prices, wage increases, packaging and waste recycling requirements, ISO and quality pressures and the development of new management information systems. The end result is an ever increasing squeeze on margins.

Secondly, many converters are concerned about the downward pressure on prices exerted by the large brand owner and retail groups. These groups constantly strive to drive down prices in the whole converter supplier chain: materials, repro, house colors, stock holding, shipping and payment terms. Most converters can in turn exert little pressure, if any, on their own suppliers. Consequently they get squeezed in the middle.

A further key point that is perhaps found too often in label converters is insufficient attention to financial control and financial planning. Do hourly production and overhead rates fully reflect all the costs involved? Are items such as machine and equipment depreciation accurately costed in? What about loan or other interest payable? Or the full cost of leased assets? How long does it take to collect money in after invoicing and is this longer than the time by which you have to pay suppliers? If it is, there are likely to be cash flow issues.

So what do label converters need to do to increase their profitability and margins? Add value? Reduce costs? Improve financial management? And whose responsibility should it be? In practice, there are three key areas of a converter’s business in which margins and profitability should be reviewed and improved:

• Enhancing productivity and reducing wastage (Production department)
• More effective sales and marketing (Sales and marketing department)
• Improved financial and accounts performance and control (Finance department)

Ideally, the head of each of these departments or areas of business – in turn reporting back to the president, owner or managing director - should implement a plan to improve margins and profitability in their own business activity which takes into account factors such as the following:

Production department

In looking at enhancing productivity and efficiency, reducing production costs and minimizing materials wastage, the production team needs to analyze the levels of substrate and ink wastage and look to reduce these by around 5-10 percent in a three month period. Similarly, pre-production times, press downtime and press run-time should be carefully analyzed to determine savings or improvements that will contribute to profitability. And how can workflow and work handling best be optimized?

Other areas for the production team to review and improve where feasible are the levels of stock and work in progress. Can stockholding be rationalized? Are just-in-time or ‘pitstop’ methods of production being implemented? Could more jobs be produced on a ‘complete and ship’ basis?

The amount of productive time per day can frequently be improved through enhanced production scheduling and improved press/time management. Also does holding stock for customers provide an adequate recompense in terms of job pricing? And all of this is on top of striving to become a ‘world class’ label producer.

Put together, a properly implemented plan to better manage revenue and expenditure and grow the business should be able to provide significant enhancements in the main measures of performance in most label production departments. This can be seen in table below.

Sales and marketing department

In terms of sales and marketing, how many label converter sales’ departments fully analyze their existing accounts and know their profitability by market sector, by customer or by type of label? Do they put in place an action plan to obtain more of the more profitable types of work, or even to move away from their least profitable activities, customers and markets?

How many sales and marketing teams set themselves the challenge of improving quality and service to existing customers?  Do they have a plan to take existing successful (profitable) products into new markets, or plan to develop and take new products into their existing markets?

An important point to remember is that ‘when label buyers deal with order takers at the label converter level the business will tend to become a commodity supplier competing on price’. So what are the key performance measures that a sales and marketing department should look to achieve in a set period of time (three months to six months) so as to improve margins and profitability? A summary table is shown below.

Finance department

Frequently the finance departments in a label converting plant can have the most influence on improving margins and profitability, particularly with better management of debtor and creditor days, and looking to achieve a better return on investments.

Financial issues to be examined or re-examined en route to improving profitably include ensuring that hourly rates accurately reflect all costs. The same applies to overheads. Is depreciation of capital equipment factored in correctly? The finance department should also be providing regular analysis and feedback on production costs, sales performance, cash flow, loan and lease payments to all department heads and the board of directors.

The financial director needs to be advising sales and production heads on what type of work or customers are most profitable, or reporting back on why some jobs end up making a loss or an inadequate return. Those departments should then determine the reasons behind the loss and in turn reporting back on what steps will be taken to eliminate such issues in the future. Measurements of performance for the finance department should include:

Those label converters that have a regular system of measuring, analyzing – and then improving – performance will have a tool that will enable them to execute and control a strategy for better managing revenue and expenditure and consequently will improve margins and profitability.

Fortunately, there is an increasing range of technology and software aids that can help the converter in measuring performance. The latest developments in Management Information Systems (MIS), accounting packages, press add-ons, productivity tools and waste management solutions can certainly have an important influence on company profitability.

One of the best opportunities to assess what is available to converters for measuring and controlling performance and improving profitability, will be the forthcoming Labelexpo Europe show in . This unique global show has more exhibitors than ever before, more software packages, new technology and waste management solutions and extensive new products on display.