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Management Counts

Management Counts

By Ray Chambers

About Ray

Ray Chambers, CGCM, MBA, has invested over 30 years managing and directing printing plants, copy centers, mail centers and award-winning document management facilities in higher education and government.

Most recently, Chambers served as vice president and chief information officer at Juniata College. Chambers is currently a doctoral candidate studying Higher Education Administration at the Pennsylvania State University (PSU). His research interests include outsourcing in higher education and its impact on support services in higher education and managing support services. He also consults (Chambers Management Group) with leaders in both the public and private sectors to help them understand and improve in-plant printing and document services operations.
 

Economics 101: The Law of Supply and Demand

By Ray Chambers | Posted on February 28, 2011
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Will outsourcing the Washington State Department of Printing really reduce printing costs? Really?

Let’s think back to entry-level economic theory—Economics 101. Remember the Law of Supply and Demand? It’s a straightforward concept. According to the Web site Investopedia:

“Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy.” Demand refers to how much (quantity) of a product or service buyers want/need. Supply represents how much the market can offer. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.

In practice it’s really pretty simple. Let’s say that yesterday you could buy widgets for some price, but last night a good size chunk of widget-producing machines broke down and there are fewer widgets available today (supply drops). If consumers still need the same number of widgets, what happens? The folks that need widgets start offering more for the widgets that are available, and the price of widgets goes up.

Or, if the number of widgets that can be produced stays the same, but suddenly more people want more widgets, the same thing happens. The price goes up.

Think OPEC. What happens when OPEC cuts back on oil production but the demand for oil stays the same or grows? The price of oil goes up. Right?

Whether it means to or not, if Senate Bill 5523 (the bill seeking to close the Washington State Department of Printing) passes, the Legislature in the state of Washington will be in a position similar to that of OPEC. The bill will close the Department of Printing, a major component in the overall supply of printing in that market. If the Department closes, what happens to supply? It goes down. Supply will decrease by the amount of work printed at the Department of Printing, currently estimated at about $20 million per year.

Demand, however, is not likely to change. People still need printed stuff to do their jobs, and that includes employees of Washington agencies. And what happens when demand stays flat and supply decreases? If the Law of Supply has anything to say about it, prices for printing will go up.

They’ll go up for state agencies. They’ll go up for churches and charitable organizations. They’ll go up for colleges and universities that buy printing now. They’ll go up for schools. And they’ll go up for firms that depend on printed material do conduct business. The law of supply and demand cannot be selectively enforced. Everyone takes a hit.

One could argue that closing one or two commercial printers in the area would not have a big impact on supply. But the Department of Printing is not a “typical” commercial printer. The Department of Printing has about $30 million in annual sales, $20 million of which is produced internally. According to local news sources (which obtained their data from IPG), the Department of Printing is the third largest government printing plant in the country, trailing only the U.S. Government Printing Office and the California Office of State Printing. If we compare its size to commercial printers, it ranks in the top 200 or so commercial printers in the United States. Said differently, the Department of Printing is larger than about 30,000 commercial printers. Closing a plant of this size will cause a major reduction in print supply.

The department purchases about one-third of its annual sales from commercial vendors. That means that the remaining 66 percent, or about $20 million per year, would no longer be produced internally. It would have to be purchased.

The U.S. Department of Labor estimates that most (80 percent) of commercial printing firms have sales of $2 million or less and employ 15 or fewer employees. The Department of Printing produces about $20 million annually internally, and it employs approximately 100 people.

If the Department of Printing were to be closed, the impact would be comparable to closing 10 average-sized commercial printers. Print customers, including state employees, would be forced to compete on the open market for available supply. And what does ECON 101 tell us? When demand is flat and supply goes down, prices go up. It’s the OPEC model. Cha Ching!

The commercial printers in the area must be positively euphoric about this.

Closing a self-supporting in-plant print shop doesn’t make the demand for printing in the organization go away. People will still need pieces of paper to do their jobs, and in the absence of a central print facility, one focused on the mission and goals of the parent organization, print costs for the entire community will go up.

Why don’t our decision makers think of this stuff?

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Most Recent Comments:
Ray Chambers - Posted on March 01, 2011
P.S. I checked the Printing Impressions top 400 printing companies 2010 list. Only two printers from the State of Washington are included.

One in Seattle reported total sales of $12.6 million and has 65 employees. Sales per employee is about $190,000.

The other, in Tacoma, had total sales of $9.6 million and 64 employees, for a SPE of $150,000.

Both are top performers by PIA standards, but neither have an advantage over the Dept of Printing.

Of course, these are self reported, and your top performers may have decided not to participate.
http://www.piworld.com/article/printing-impressions-ranking-leading-printing-companies-2009/1
Bruno - Posted on February 28, 2011
First off, your bias is obvious towards the in-plant, which in the non-government world is fine, as the department is accountable for costs and ROI. In the government sector I have found that in-plants tend to be over staffed, as stated above the Washington Dept. of Printing does about $20 million in work with 100 employees, I know of at least 5 printers in Washington who do the between $18 and $25 million in printing annually and they have on average about 45 to 55 employee's. Just that alone shows how much waste there is. Also, one of the things you do not point out is that the total printing done at the WA Dept. of Printing is not just for state operations, they solicit business from municipalities, counties and other states, so that they can justify their existence. As far as supply and demand goes, your theory is more suited to an industry where there is growth, the reality is traditional printing is shrinking and the state would be well served to get competitive bids for many of the jobs they do in house as there are plenty of tax paying business that would like to continue to support the state budget by paying B&O taxes on their work. Imagine the amount of revenue the state could generate by contracting that work out to the general economy, if again your numbers are correct and the average print shop is $2 million dollars and employees 15 people or less then if half the work went to local Washington printers then that would be like having 5 new $2 million gross dollar business' adding, for the sake of argument at least 40+ new tax paying jobs to the state economy. While I do not wish for people to lose their jobs, it seems to me the state would be better off to put those dollars to use with Washington small businesses that would produce tax revenue, in turn that 20 million, which is going to get spent anyway, could be viewed more as away to improve the local economy instead of as a money pit.
One more point, what many people do not know, is that the state does send plenty of work out to the private sector already, many departments do not use the State Dept. of Printing, either due to the fact that they can not do the work in a timely fashion, do not have the correct equipment for the job, or their quality/service is not good enough for the work that is being done. With that said, the state Dept. of Printing has a staff of people that solicits work, which in reals terms means the dreaded "overhead" which in the private sector has to be justified, but in government work is just added to the cost, so I am not sure how much savings their actually is.
Ray Chambers - Posted on March 01, 2011
Gee. . . where to start. I freely admit my bias toward in-plants. I've worked in them for 30 years and have listened to the distortions and misinformation spread by the commercial print sector for most of that time. I described all of that in my first blog. You have me at a disadvantage - I know nothing about you or your background, although you seem biased toward commercial printing. Nothing wrong with that. But "Money Pit?" Come on. A couple of points:
1 - The Dept of Printing sales per employee ratio is about $200,000. Actually it's closer to $225,000, but I rounded off. The PIA average of profit leaders is in the $140,000 to $150,000 range, which is considerably less than that. PIA says sales-per-employee is a legitimate measure of efficiency.
2 - The printers you cite are outperforming IPA profit leaders by about 300%. That's admirable, but there may be a lot of reasons, many of which have nothing to do with efficiency. We know that the Dept of Printing is required to stay below Franklin pricing, but commercial shops charge what they can get away with. Profit does not equate to efficiency - it just means you can charge more than it costs you to operate. Even NAPL says that commercial printers can't compete on price.
3 - Printing, as you may know, is cyclical in nature. Most print users have slow periods and periods of peak demand. In-plants that are allowed to fill slack times by marketing to outside agencies — state and local government units for example — are not "justifying their existence"; they are optimizing the use of their equipment by filling slack time with outside work and passing savings on to other public organizations. As a taxpayer, you should appreciate that.
4 - I agree that competitive print buying can reduce the overall cost of printing. That's why the department buys $10 million per year.
5 - Supply and Demand is not my theory. It's basic economics.
6 - I don't understand your point "Imagine the amount of revenue the state could generate by contracting that work out to the general economy." I fail to see how contracting work will "generate revenue." The state will spend about the same amount for printing because those costs are budgeted in individual agency budgets. What the state will do is get less for the amount spent.
7 - My point is that you won't have 5 new Washington printers, at least not right away. Start up takes time. So while those businesses are starting up, the cost of printing will go up because, as I said, buyers will be forced to compete for available capacity. And the startup costs have to be absorbed by the market, so the new equilibrium point will likely be higher than the current point.
8 - Yep. Customer service is part of overhead, And the Department of Printing still outperforms the majority of commercial printers based on PIA published sales per employee ratios. Actually, customer service reps (overhead) in in-plants actually help keep costs down because they are charged with finding the most efficient path to get the job done.
9 - Moving print expenditure to small local businesses is a legitimate policy objective, but let's not hide it behind an argument that commercial printers will be more efficient, because there is no evidence of that. Study after study (and I'm talking peer reviewed academic research, not special interest group "reports") point to the failure of outsourcing as a cost reducing strategy in state and local government. So if your argument is that it is better public policy to close the Dept. of Printing and buy printing to reduce the size of government, fine. But that's a policy decision based on your perceptions of the role of government, not an economic decision based on value of internal vs. external production.
10 - Finally, I am not arguing that all in-plants are good, and I would be the first to agree that some suffer from poor management. I am arguing that generalizing that all in-plants are bad because a few may have had problems is wrongheaded. We need to evaluate the performance of an in-plant based on achieving clearly stated, meaningful, and measurable goals, and if performance isn't met, deal with it. As a rule, if an organization lacks the skill to operate an internal service, probably lacks the skill to buy it.
Thanks for sharing your thoughts.
Click here to view archived comments...
Archived Comments:
Ray Chambers - Posted on March 01, 2011
P.S. I checked the Printing Impressions top 400 printing companies 2010 list. Only two printers from the State of Washington are included.

One in Seattle reported total sales of $12.6 million and has 65 employees. Sales per employee is about $190,000.

The other, in Tacoma, had total sales of $9.6 million and 64 employees, for a SPE of $150,000.

Both are top performers by PIA standards, but neither have an advantage over the Dept of Printing.

Of course, these are self reported, and your top performers may have decided not to participate.
http://www.piworld.com/article/printing-impressions-ranking-leading-printing-companies-2009/1
Bruno - Posted on February 28, 2011
First off, your bias is obvious towards the in-plant, which in the non-government world is fine, as the department is accountable for costs and ROI. In the government sector I have found that in-plants tend to be over staffed, as stated above the Washington Dept. of Printing does about $20 million in work with 100 employees, I know of at least 5 printers in Washington who do the between $18 and $25 million in printing annually and they have on average about 45 to 55 employee's. Just that alone shows how much waste there is. Also, one of the things you do not point out is that the total printing done at the WA Dept. of Printing is not just for state operations, they solicit business from municipalities, counties and other states, so that they can justify their existence. As far as supply and demand goes, your theory is more suited to an industry where there is growth, the reality is traditional printing is shrinking and the state would be well served to get competitive bids for many of the jobs they do in house as there are plenty of tax paying business that would like to continue to support the state budget by paying B&O taxes on their work. Imagine the amount of revenue the state could generate by contracting that work out to the general economy, if again your numbers are correct and the average print shop is $2 million dollars and employees 15 people or less then if half the work went to local Washington printers then that would be like having 5 new $2 million gross dollar business' adding, for the sake of argument at least 40+ new tax paying jobs to the state economy. While I do not wish for people to lose their jobs, it seems to me the state would be better off to put those dollars to use with Washington small businesses that would produce tax revenue, in turn that 20 million, which is going to get spent anyway, could be viewed more as away to improve the local economy instead of as a money pit.
One more point, what many people do not know, is that the state does send plenty of work out to the private sector already, many departments do not use the State Dept. of Printing, either due to the fact that they can not do the work in a timely fashion, do not have the correct equipment for the job, or their quality/service is not good enough for the work that is being done. With that said, the state Dept. of Printing has a staff of people that solicits work, which in reals terms means the dreaded "overhead" which in the private sector has to be justified, but in government work is just added to the cost, so I am not sure how much savings their actually is.
Ray Chambers - Posted on March 01, 2011
Gee. . . where to start. I freely admit my bias toward in-plants. I've worked in them for 30 years and have listened to the distortions and misinformation spread by the commercial print sector for most of that time. I described all of that in my first blog. You have me at a disadvantage - I know nothing about you or your background, although you seem biased toward commercial printing. Nothing wrong with that. But "Money Pit?" Come on. A couple of points:
1 - The Dept of Printing sales per employee ratio is about $200,000. Actually it's closer to $225,000, but I rounded off. The PIA average of profit leaders is in the $140,000 to $150,000 range, which is considerably less than that. PIA says sales-per-employee is a legitimate measure of efficiency.
2 - The printers you cite are outperforming IPA profit leaders by about 300%. That's admirable, but there may be a lot of reasons, many of which have nothing to do with efficiency. We know that the Dept of Printing is required to stay below Franklin pricing, but commercial shops charge what they can get away with. Profit does not equate to efficiency - it just means you can charge more than it costs you to operate. Even NAPL says that commercial printers can't compete on price.
3 - Printing, as you may know, is cyclical in nature. Most print users have slow periods and periods of peak demand. In-plants that are allowed to fill slack times by marketing to outside agencies — state and local government units for example — are not "justifying their existence"; they are optimizing the use of their equipment by filling slack time with outside work and passing savings on to other public organizations. As a taxpayer, you should appreciate that.
4 - I agree that competitive print buying can reduce the overall cost of printing. That's why the department buys $10 million per year.
5 - Supply and Demand is not my theory. It's basic economics.
6 - I don't understand your point "Imagine the amount of revenue the state could generate by contracting that work out to the general economy." I fail to see how contracting work will "generate revenue." The state will spend about the same amount for printing because those costs are budgeted in individual agency budgets. What the state will do is get less for the amount spent.
7 - My point is that you won't have 5 new Washington printers, at least not right away. Start up takes time. So while those businesses are starting up, the cost of printing will go up because, as I said, buyers will be forced to compete for available capacity. And the startup costs have to be absorbed by the market, so the new equilibrium point will likely be higher than the current point.
8 - Yep. Customer service is part of overhead, And the Department of Printing still outperforms the majority of commercial printers based on PIA published sales per employee ratios. Actually, customer service reps (overhead) in in-plants actually help keep costs down because they are charged with finding the most efficient path to get the job done.
9 - Moving print expenditure to small local businesses is a legitimate policy objective, but let's not hide it behind an argument that commercial printers will be more efficient, because there is no evidence of that. Study after study (and I'm talking peer reviewed academic research, not special interest group "reports") point to the failure of outsourcing as a cost reducing strategy in state and local government. So if your argument is that it is better public policy to close the Dept. of Printing and buy printing to reduce the size of government, fine. But that's a policy decision based on your perceptions of the role of government, not an economic decision based on value of internal vs. external production.
10 - Finally, I am not arguing that all in-plants are good, and I would be the first to agree that some suffer from poor management. I am arguing that generalizing that all in-plants are bad because a few may have had problems is wrongheaded. We need to evaluate the performance of an in-plant based on achieving clearly stated, meaningful, and measurable goals, and if performance isn't met, deal with it. As a rule, if an organization lacks the skill to operate an internal service, probably lacks the skill to buy it.
Thanks for sharing your thoughts.