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Jan 1, 2003 12:00 AM
Prior to buying a new sheetfed press, printers must ask themselves questions about what size press they need, its features and the supplier itself. Perhaps the most important questions that should be asked, however, have to do with whether the purchase makes business sense. We spoke to industry consultants, a financial advisor and sheetfed-press vendors on how printers can determine whether a new press is a smart buy and what they need to know before signing off on the equipment.
Printers can list a myriad of reasons for purchasing a new press — some make sound business sense; others do not.
C. Clint Bolte, principal of C. Clint Bolte and Associates (Chambersburg, PA), cites overutilization of current presses as the most compelling argument to add or replace a press. “When scheduling is in jeopardy because of excessive overtime, it's very clear that the marketplace is responding well to the work you're doing,” he observes.
The way some printers justify new-press purchases, according to Timothy Dalton, president of Dalton Print Consulting (Hewitt, NJ), is by the updated automation and technology that allow for faster makereadies and turnaround time, reduced waste, greater flexibility and a streamlined workflow. The consultant warns, however, that the decision to invest in new technology should be based on clients' needs, not in the spirit of keeping up with the Joneses: “Printers shouldn't buy a press as a prestige item — it should be something they really need.”
Robert Rath, senior vice president of Komori America Corp. (Rolling Meadows, IL), also believes that new-press technology is, rightfully, a strong motivation to buy. He notes, however, that printers need to be dedicated to the new technology. “In too many cases, printers invest in automation in their pressroom and then fail to take advantage of the efficiencies it can provide,” he says. “Management needs to institute procedures and practices to ensure benefits are realized.”
Used equipment may be the answer for printers that can't justify buying new presses. According to Bolte, there are three- and four-year-old presses for sale that are loaded with the same automation as brand-new models, but at a more affordable price point. (For more on used presses, see “Buying a used sheetfed press,” January 2002, p. 26.)
Bolte advises printers to be open to a discussion about used presses during negotiation because, if nothing else, it communicates to vendors that price is an important issue.
Price is a significant issue, of course, but it shouldn't be the only consideration. According to Jamie Wilson, press profitability analyst at MAN Roland (Westmont, IL), many new-press buyers don't do enough financial homework. “It becomes a price-based decision or an emotional decision, instead of making sure they've got the best business solution,” she says.
Printers that are considering a new press should conduct a comprehensive analysis of all aspects of their operation, not just the financial picture.
“You need to take a look at the equipment you already have in-house and consider how antiquated it is,” advises Michael Urquhart, senior vice president of sales for the graphic-arts financial division of People's Capital and Leasing Corp. (Waterbury, CT), an equipment financier. “Think about how the new press will improve makeready time and efficiencies, reduce overtime, boost material savings relative to quicker throughput and setup time, and lessen scrap. And, figure out how you can grow the company relative to new markets you could penetrate with the equipment.”
John Dowey, vice president of sheetfed product management, Heidelberg USA (Kennesaw, GA), says Heidelberg prefers to prove claims in its cost justification by demonstrating it to the potential buyer before he or she signs the purchase contract. “We can compare the production costs on their equipment vs. our new equipment, and then we back that up by demonstrating that the equipment we've proposed will actually perform to the specs we've put into our cost justification,” he explains.
Mitsubishi Lithographic Presses (MLP) (Lincolnshire, IL) helps customers forecast their needs by taking them through an analysis that examines their customer base and current product mix. According to Ray Mullen, vice president of sales and customer service at MLP, printers must have a clear understanding of what their production throughputs and cost centers are to accurately project the company's future needs.
“We ask them questions, such as ‘Do you want to maintain this customer and product mix?’ and ‘Is it a mix that you envision will continue to be viable, or how much will it change?’ Then we build as much reasonable flexibility into the equipment decision as possible,” Mullen says.
MAN Roland offers a computer-based press operating profitability (POP) analysis to help printers select the most economical press for their production requirements. The analysis, which is provided free of charge, is based on a study conducted by Bridge Strategy Group (Chicago), an independent market-research firm. Operating data were collected from studies released by press manufacturers and trade associations, on actual fullsize-press-performance information from 80 printers around the world. All systems represented in the study were six-color models, five years old or less. (MAN Roland recently donated the database to NAPL, Paramus, NJ, so that the data can be culled and maintained by an objective party.)
The POP analysis is customized by taking into account the type of work a facility does; printers can also factor in such variables as number of shifts, run length and job mix. “After we get all of a printer's information and data, we can show them the labor savings associated with makeready time and press speed, the reduction in consumable and waste cost, and how the press will pay for itself in a short amount of time,” says Wilson. Occasionally, analysis results indicate that the printer doesn't really need a new press.
The next step in the POP analysis is to compare MAN Roland's equipment to competitors' offerings, and sometimes the company advises printers to go with a different vendor's press. “It's not in our best interest to sell printers something if it doesn't make sense for them,” Wilson says.
All of the vendors interviewed for this article help potential buyers compare press options and analyze customer base/product mix, as well as ROI. The overall goal is to make the printer as comfortable as possible with the purchase.
When evaluating press options, printers should emphasize ROI. It's debatable, however, exactly how many printers actually perform a formal calculation when researching new equipment. Some buyers may despair of collecting all the necessary information, which can include the cost of capital, number of shifts, product type, margins by product line, usage of contribution margins, operational margins and pre-tax income. Buyers also should compare the new press to its replacement. Considerations include speed, changeover time, how long it takes to get up to color, power consumption, cost of consumables and press-manning requirements.
Rath at Komori notes that most small and midsize printers don't go through an ROI-type calculation, but rather base their investment decisions on cash flow, the impact it would have on their business, as well as a gut feeling that it's the right thing to do. “It's only when you get to the larger organizations that they'll determine what their ROI would be to justify the expenditure,” says the exec.
“Very few have calculated it,” concurs Bolte, who notes that for a press, ROI should be not be less than 25 percent, or from two to three years. Mullen at Mitsubishi agrees with this estimate, but notes that if a printer is able to eliminate two to three older pieces of equipment, eliminate a shift or reduce crewing, ROI can come as quickly as 18 months. If the equipment introduces a new process, the ROI is extended.
“So much depends upon how printers utilize their capacity and sell their services,” adds Dowey at Heidelberg. “It goes back to little efficiencies.” Dowey recounts having recently visited two printers; both had approximately the same sales volume, but one had more than half the employees of the other. “They do specialized work where the substrates are very expensive, so that kind of skews their financial results,” the exec concedes. “But they've concentrated on being very systematic and efficient so they can get more volume with less people. Any time you do this, the ROI on equipment becomes that much faster. Your fixed costs go down.”
Urquhart at People's Capital and Leasing Corp. suggests that printers analyze ROI projections with their in-house accountant or a CPA. NAPL's “Blue Book” is another resource for calculating ROI.
The Blue Book's hourly cost studies provide press and auxiliary-equipment prices, as well as specifications. Hourly cost rates are provided for one- to three-shift operations, three productivity levels and three types of working conditions. The new CS InterACT software version enables users to edit cost studies and tweak data to custom-fit their operation.
A recently updated 2002 edition for sheetfed presses contains data on 448 conventional sheetfed presses, from one to 12 units long. The program, available for Windows and Mac, costs $249 ($99 for NAPL members; for more information, visit napl.org).
NAPL is also working on integrating data from the Blue Book studies and user feedback into the equipment-justification module of its ProfitXL business-management software. Currently, users input data — including initial investment costs, cost of capital, average run quantity, running speed and makeready times — for their current press as well as those of up to two competing machines. This information can be collected from the press manufacturers and the Blue Books. In the next section, typical product-mix parameters are established for up to five jobs. The program then presents the input data in a summary.
“It helps determine what your capacity and potential sales would be, and it's focused on helping you decide which press to get,” notes Dean D'Ambrosi, CFO in NAPL's accounting and finance dept.
The results, D'Ambrosi notes, are completely user-dependent, as are the decisions based on this information. The actions taken are as well. “We have people who go through the model and determine that their existing machine is the best choice right now, but instead of running one shift, maybe they need to go to two shifts,” he explains. “It's going to give you some things to think about and models to run so you can look at different financial scenarios.” The exec says there is no set date for the new upgrade's release, although late next year is a possibility.
Training is crucial for the success of a press installation. Vendors typically offer a standard period of training, which can be reduced or extended depending on the printer's situation and negotiating skills.
According to Rath, training is important especially when installing automated equipment. He observes that, without it, operators “will naturally fall back into their old patterns of production, not fully taking advantage of the automated features.” The exec notes that Komori offers training onsite during the start-up phase of a press installation, as well as classes at its Rolling Meadows headquarters.
Mike Niesen, vice president of technical support at Heidelberg, notes that most buyers of large-format presses receive “pretraining”: They visit the manufacturer's showroom and have the opportunity to run the machine and get a feel for its configuration and size. Once the press is installed, Heidelberg provides complete training, which can run up to 15 days, depending on the size of the printer's operation.
In addition to training provided during installation, MAN Roland's Power Printers program offers customers a chance to expand their skills. Press operators participate in a five-day course at the company's Graphic/Training Center in Westmont that focuses on a different operational area each day. Printers also experiment with a six-color Roland 700 that is equipped with a coater and PECOM command and control system.
Eric Frank, vice president of marketing, notes that KBA (Williston, VT) offers training programs ranging from four to six weeks standard on new-press purchases. And Mullen says new owners of Mitsubishi machines receive a full week of training, free of charge, on how to operate the company's presses and maximize production. This is followed up with and reinforced by onsite training during installation.
“The confidence that the press crew brings in the initial startup has a lot to do with the press' come-up time,” Mullen explains. “They need to be excited about it and want to run it.”
As a guideline, consultant Bolte recommends that midsize buyers of new 40-inch sheetfed presses negotiate training for eight people, assuming their operation runs three shifts and two operators are required to run the press. This provides training not only for the press team in each shift, but also a pressroom supervisor and another employee who can cover for absent operators.
You've run the numbers, tested the presses and determined your training needs. Here are some other factors to consider before signing on the dotted line:
Most vendors offer a one-year parts and labor warranty, with the option to extend it. “[The warranty] addresses certain costs, and provides a clear statement of the manufacturer's confidence in equipment quality, which speaks to long-term reliability beyond the expiration of the warranty,” notes Mullen at Mitsubishi.
Niesen notes that very few customers opt to extend their warranties, mostly because of the cost and because some vendors, including Heidelberg, are often willing to stand behind their equipment beyond the warranty period. Of course, this isn't a pledge you'll likely get in writing, so it's important to not only clarify this point with the vendor but also ask its current customers about the extent of support they receive.
“We are seeing a trend where, instead of an extended warranty, companies are opting for remote diagnostics,” Niesen says. This service, supplied by the manufacturer, can help diagnose electrical and operational problems via a phone modem without requiring an onsite technician.
“I always recommend that the contract include the press inspection,” says Bolte. That inspection should include the satisfactory running of a test form as well as an ICC profile; many of the press vendors have a standing policy that such tests must be performed before the press is turned over for live production.
“We believe it's essential that a printer print test and compare the different manufacturers, and not only look at the bottom-line price of the equipment,” comments Dowey. “If you take a look at the pricing differentials in terms of their effect on the hourly rate of the equipment, a price difference of $50,000 or $100,000 on a $2 million or $3 million piece of equipment doesn't translate into much in terms of hourly rates. It's more about the net-net productivity of the equipment — how many sellable sheets end up in the bindery at the end of the day.”
Talking to printers that have installed the equipment you're evaluating and print-testing the press are also smart, if not crucial, steps to take. The vendors advise printers to work with standardized testing forms, such as GATF's sheetfed test form, which evaluates register, resolution, color control and reproduction, dot gain, trapping, slurring and doubling.
“Sometimes the standard forms don't address your particular needs, so don't be shy about having prepress or a designer do some custom work,” Frank adds. “And always run a few customer jobs on equipment you're considering.”
“A contract legally binds parties to certain actions and results. Legal counsel review is certainly a good idea, as this is usually a substantial commitment,” says Komori's Rath. He adds that usually only the largest printers will insist on negotiating contract terms and conditions, noting that the vendor's contracts have been fine-tuned over many years to serve the general printing market satisfactorily.
Ultimately, success in the press-buying process is about doing your homework. “See what makes sense, and it pays off,” says consultant Dalton. “People who do this make better decisions and get better results out of them.”
In an interview with industry news site printWriter.com, MAN Roland (Westmont, IL) CFO Eric Belcher called for an end to “creative financing” — specifically, extended delays on new-equipment payments. The exec noted that as presses are run, they depreciate in market value. If the debt load on a printer's balance sheet does not decline accordingly, the balance sheet is reversed, potentially jeopardizing the financial health of a company.
“Manufacturers who engage in such offers are doing a disservice to the entire graphic-arts industry, because the schemes add potentially unwarranted or artificial capacity to the marketplace,” Belcher warned. “That lowers print prices, which in turn reduces the value of printing to that of a commodity.”
Many industry pundits and other vendors concur with this philosophy. “It may be attractive to printers because they figure they can cut prices and gain customers,” observes John Dowey, vice president of sheetfed product management at Heidelberg USA, Inc. (Kennesaw, GA). “If you've built your business on artificially low prices because you didn't have payments, sooner or later you're going to have to raise those prices, and if that causes some of a printer's customers to reconsider suppliers, it could spell trouble since it most likely occurs at the same time the payments start to kick in.”
“Agreeing to payment structures that don't reduce principal balance quickly enough are probably the largest pitfall that printers can find themselves in,” agrees Ray Mullen, vice president of sales and customer service, Mitsubishi Lithographic Presses (Lincolnshire, IL). “When it's time to make a change in their equipment, printers end up with negative equity, which impacts the balance sheet at some time.”
Poses Kevin Lind, financial services director at KBA North America (Williston, VT), “Say your payments are $50,000 a month, and you're not making those payments for six months or a year. If you don't make a lot of money, put it aside and let it earn interest to take care of that balloon payment at the end when you want to trade, you're just robbing Peter to pay Paul.”
Are such financing deals ever advantageous? Robert Rath, senior vice president of financing at Komori America Corp. (Rolling Meadows, IL), notes that a short grace period before payment is helpful to some customers — it can provide time for a printer to focus on installation and training. Dowey adds that it does give the customer time to get the machine started up and people trained, as well as build new markets before payments start. The operative word, however, is “short” — the longer you delay payments, the more your machine has depreciated and the more interest has accrued. Consult with your financial advisor to determine if such a financing option is right for you, and how you can take advantage of it and still come out on top.
There are some major financing pitfalls printers should be aware of as they get close to inking a new-equipment deal. Michael Urquhart, senior vice president of sales for the graphic-arts financial division of People's Capital and Leasing Corp. (Waterbury, CT), works with sheetfed and web printers in securing financing for equipment purchases. He notes four main pitfalls, outside of “creative financing” deals, that printers need to be aware of.
“When you enter into a true operating lease, you relinquish some of the benefits of depreciation and building equity in your equipment, because you don't own it,” Urquhart says. The IRS provides for a 30 percent kicker of accelerated depreciation in the first year for new-equipment purchases — “a huge front-ed tax benefit when you take ownership,” notes Urquhart. Printers that choose to lease their equipment relinquish that tax benefit. Another drawback of a true operating lease: If you decide to accelerate a lease and trade that equipment in, or pay off the lease early, there are substantial penalties.
If a printer's credit rating isn't very high, lenders sometimes require another piece of collateral to secure the loan for the new equipment. This is a fairly common practice; however, “every borrower should go in with the goal of borrowing the money specifically against that asset,” Urquhart advises. “The underlying collateral supporting the loan should just be the equipment being financed.”
Some lenders require personal guarantees against loans. A personal guarantee is a pledge, by someone other than the named borrower, that he or she promises to pay any deficiencies on a specific loan. “Personal guarantees are appropriate in some situations based on the flow-through of income to the owner,” Urquhart says. “But there should be an exit strategy for personal guarantees based on payment performance over time.” For example, if you can establish that you've made your payments on time for two to three years, it should be possible to release the personal guarantee for the remaining life of the loan.
“With LIBOR (London Interbank Offered Rate) and prime rate of interest so low right now, it's not so risky to have some of your equipment on a variable-rate finance plan so you can take advantage of lower rates,” Urquhart says.