Facing Today’s Manufacturing Woes

(By Alex Brown of Publishing Executive)

Publishers are being buffeted by cost increases on all fronts, and while there are no magic wands to wave, we can gather round to share our sorrows and consider a few basic cost-control tactics.

The latest blow is a 10-percent to 12-percent increase in ink prices announced by ink suppliers. Printers will differ in their implementation of this, but if yours is delivering bad news in the form of higher prices, you can accept it as a true reflection of the market. The costs of raw materials and freight have indeed affected the selling price of ink.

Your printer may spare you this increase, or you may hear of another publisher that has gone unscathed. There are good reasons for printers to differ in applying ink escalations.

First, some printers have an ownership interest in an ink supplier. They can let overall business strategy rule their decision on a price hike, and they can do it customer by customer.

Second, printers that are not tangentially in the ink business vary in the markup they initially impose on the ink they sell to you. Once again, a critical customer relationship may be important enough for a printer to absorb some or all of the escalation blow, particularly if he has a comfortable markup to cushion it.

Third, printers sometimes delay imposing an escalation. Your vendor may not be sending out the bad news quite yet, but it doesn’t mean you’re off scot-free.

Finally, ink costs generally represent 5 percent to 8 percent of a manufacturing invoice, not including paper. With today’s tight margins, that’s a significant amount, but printers may still have some negotiating room.

With all this in mind, the smart print buyer will look at a change in ink prices as an opportunity for negotiation. But tread carefully: The printer’s costs really are going up. What you’re negotiating is how much it will affect you. Keep your guns in their holsters and start out with sympathy for the printer’s situation. Then look for a fair way to absorb the rising price together.

The greater the printer’s ink markup, the more leeway it has for giving the publisher a break. You can look for a compromise on a lower percentage increase or a delay in its effective date.

The Bigger Problem: Paper
The ink increase, however it finally hits you, is small potatoes compared to the rise in paper prices. Mills are generally announcing a $50/ton increase for the third quarter, but with demand so weak, there’s reason to hope this will work its way down to the $30/ton zone.

The overall message, however, is clear: The mills want to keep hiking prices to compensate for the increases in their own costs, and they are not letting low demand dictate price policy. What they don’t get in July, they may well try for in October.

The wise paper buyer needs to understand that the mills are driven by two loud voices in their ears. First, the rising costs of energy and transportation are affecting mills, and price increases are necessary just to tread water. Second, strict profit goals are in place at all mills today, with the sternest tests at those held by private equity investors. The days of waiting out a market downturn or sharing a customer’s burden are over. If you can’t make money selling paper today, you shut down the mill and take your capital elsewhere. The lost jobs and lost customers don’t have a place in the equation.

The classic cost-control move when paper prices go up is to downgrade specifications. Cutting basis weight, trim size or paper grade are still useful moves, but not every square on the chess board is open.

Mills have gotten pesky about making basis weights they consider less profitable, and the spectrum of paper types is shrinking as mills consolidate. The nastiest news is the closure of Katahdin Paper’s supercalendared (SC) machine, announced for July. The loss of 180,000 annual tons of SC will mean that buyers trying to downgrade from grade 5 won’t find SCA easily. In turn, SCA shoppers may have to upgrade, making the price increase that much more likely to stick.

Meanwhile, our favorite price safety valve—importing paper—doesn’t work anymore. Mill consolidations have put a distinctly global face on the paper market, so there’s no more exploiting small pockets of unbalanced supply and demand. Globalization levels such anomalies. The weak dollar undercuts our buying power, so we can’t pit imports against domestics. And even if we could, shipping costs would gobble up all the savings.

The rising cost of fuel sits at the center of all the price increases swirling around us. You see it in fuel surcharges for overnight mail, the petroleum components in ink, postal increases, and freight allocations for paper shipments. And it’s buried only a little deeper in the power used to make paper and run presses. In short, the cost of a barrel of oil ripples through every manufacturing move we make.

Because this is affecting all publishers, all printers and all consumers, a price increase is easy to justify. But it’s going to be hard to collect. The hard-pressed consumer will resist, and publishers tremble at giving readers any reason to say no to a subscription renewal or a newsstand purchase. And raising ad rates can be equally perilous.

Printers in a Bind
There’s another constituency with nearly the same problem. Printers are hit directly with increases in operating costs, but customer demand is flat or falling, making it tough to impose increases that could drive demand still lower.

The prevailing price for printing is riding on some very gusty winds. Pushing it down is low demand that forces printers to compete hard for every job that can keep the presses turning. Pushing it up is the reduction in competition from a shrinking pool of vendors. With their own costs rising and profit pressures mounting, printers are twitching their escalation trigger fingers. If ever there was a textbook time when print prices should rise, this is it.

Or is it? A healthy publisher can absorb an increase in print prices, but a weakened one will switch to digital delivery. If there’s a large economic message here, it’s that making and moving printed pages is inefficient compared to putting images on screens—so much so that the current wave of increases in every manufacturing cost center should be enough to drive a lot of printing demand away.

Printers can scale down their capacity to compensate, but it’s not going to be an orderly march that publishers and catalogers lead. For now, printers must try to retain customers who can flee not just to another printer, but to another medium. Setting print prices has never been harder. Should prices be high enough to let printers evolve into artisans serving a micro-market? Low enough to prevent the market from shrinking that small? Or some spot in the middle that might, at least, prolong current conditions?

The tough lesson is that doing nothing won’t allow things to stay the same. Oil prices aren’t going to return to 20th-century levels, so this cost gauntlet we’re running through right now is not a drill. New energy sources will rewrite our economic equations, but all the variables in the formula will change, too. Printers will have to evolve even more than publishers.

For now, however, your printer will try to pass along the increases he’s experienced through your contract’s escalation provision. You can respond by negotiating an advance renewal that could lead to a price reduction or, if you’re at the end of the contract term, soliciting competitive bids. There’s no guarantee you’ll find the types of bargains we’ve seen for so many years, but it’s crucial to try. Opportunities still exist in a market with excess capacity, but they don’t drop into your lap.

Today, there’s nothing a publisher purchases that isn’t affected by energy costs. But the still larger wave running through the economy is the uncertainty about what major energy and environmental changes will mean to buying decisions. It’s impossible to forecast trends too vast to detect, but we know they’re at work, and we’ll slowly shift with them. It may be small comfort, but every business and every consumer is similarly affected. We’re all in this together.