The Economic Impact of Digital Outsourcing
In the printing and packaging industry, it is almost impossible to take on 100% of customers’ print needs. As brand owners’ desires evolve and product lines expand, printers and converters are likely to run into certain situations where their equipment mix may not meet what the brand requires. Shorter run lengths, SKU proliferation, versioning, and other increasingly prevalent label and packaging trends have led to a need for more digitally produced packages, but for those that have not made the leap into the technology, outsourcing digital work could be their best option.
For others though, as the need for this type of work expands, investing in a digital solution to bring the appropriate jobs in house can be easily justified. But before making the move into digital, it is imperative that printers and converters understand the total cost of ownership, while implementing a business plan to ensure any new asset is operating at its full potential.
Paul Dombrowski, a print industry analyst specializing in return on investment (ROI) for digital presses, describes the starting point for evaluating the ROI for a digital press acquisition. First, he says to compare the running costs for the legacy flexo press to the running costs for the targeted digital presses, and to do this for all jobs being targeted for digital. This comparison of running costs, he says, yields key insights into the ROI including the quantification of the cost reduction opportunity and the volume of work that can be transferred.
“It’s best to examine the converter’s actual costs and job specifications,” Dombrowski says. “The investment represents real money and you may as well analyze real cost information and job data. Use the job data that [the printer] produced over a year. Scrutinize the samples. Match up what you’re producing to the digital press you’re targeting.”
Why is Outsourcing Occurring?
While the headlines and data points indicate a sharp increase in digital printing in the packaging industry in recent years, there are still those in the industry that have not brought digital on board. In these situations, outsourcing to a trade only operation is a logical choice, explains Patrick LaMourie, digital solutions manager for Domino, an inkjet press supplier for the label and corrugated industries.
He explains that trade only printers often have a wide variety of technologies on hand that can produce various types of work that come their way, which can lead to a successful symbiotic relationship. But for printers who may be on the hunt for their own digital asset, a consultative analysis of their current work and the work they hope to bring on board will help determine whether an investment or continued outsourcing makes sense.
“We’ll analyze specific work that [printers] have identified internally that they’re currently outsourcing or running flexo and is not a good fit for flexo because it has a lot of SKUs and a lot of color changes,” LaMourie says. “We’ll run that through our analysis tools and say if this is representative of X percent of your work, then it probably makes sense for you to look at our press. Or sometimes it doesn’t. Part of it is educational for the customer, but also for us because it helps us be more efficient in the sales process and everyone benefits from the exercise.”
While these trends that are driving digital’s growth are increasingly prevalent across the various packaging industry segments, certain applications have been slower to adopt digital technology. Flexible packaging for example, is in its early stages of digital adoption, but according to Brent Holloway, flexible packaging category manager for HP Indigo North America, converters in this segment are seeing more jobs come in that could be a good fit for digital.
He explains that there are some companies in this space that have developed a business model based entirely around digital production of flexible packaging, which can make for good outsourcing partners. However, as converters with conventional equipment are tasked with taking on more short-run work, versioning, and expanded product lines, bringing digital printing on board via equipment such as the HP Indigo 20000 becomes a viable option.
“Most of the business that runs on Indigo 20000s across the install base falls under the minimums that many conventional flexible packaging converters have established," Holloway says. "Jobs under that minimum are seen as a cost of doing business to keep the longer runs, rather than as value added work. As small and medium brands continue to take market share, and large brands try different strategies to better compete with them, run sizes will continue to trend down as will the lead times requested. Successful converters will leverage digital printing, whether internal or outsourced, to create value from these market dynamics."
In addition to flexible packaging, printers and converters in growing segments such as in-mold labels and heat transfer labels, are seeing a need for more digital production. As a result, Todd Blumsack, Xeikon’s director of sales for labels and packaging, says that these applications have led to growth opportunities for customers that have brought Xeikon equipment in, and are benefiting from outsourced work.
Blumsack explains that converters across in-mold and heat transfer labels, as well as flexible pouches, tend to be larger organizations with a robust arsenal of conventional equipment. In this scenario, mid-size and smaller converters that are able to move faster and handle shorter runs can take advantage of opportunities.
“With all the SKU proliferation and specialization of that market, those large players have the same issues that a lot of the market had years ago,” Blumsack says. “They don’t necessarily have a system set up to do short runs, whether it be the prepress work, the printing work, or even the job management of those short run scenarios.”
An Economic Endeavor
It has become common knowledge that digital printing shines the brightest when printers are faced with an influx of low-volume jobs that lead to an increase in changeovers. But understanding the economics behind digital printing’s efficiency in these challenging jobs and how it can impact a business is a key factor in the decision of whether to outsource or invest.
For example, Dombrowski explains that when printing on a legacy flexo press, the volume of work being produced should justify the amount of time it takes to changeover and makeready the press. And if the amount of downtime drastically outweighs the output, a digital solution could be the best way to go.
“The end goal is really pretty simple,” Dombrowski says. “Determine if the new press can produce the work being outsourced and generate more cash flow than its initial cash outlay — and do so within an acceptable time. It takes a bit of work to correlate job volume to the cost and performance elements of the press. A cautious, methodical analysis will show the financial impact of a new press. About timing: buy too soon and the press drains cash; buy too late and leave cash on the table.”
Brian Cleary, label segment category manager for HP Indigo, explains that run lengths are not the only factor to consider when diving into the economics of digital printing. Printers and converters are finding that their digital assets are capable of printing longer runs as the technology advances. He says that it’s important to factor in the entirety of the print production process, and gain an understanding of how much business is needed to ensure a return on investment.
“When you boil it down to a business decision, you have to understand what the risks are of outsourcing and then you have to weigh that against the cost of buying the equipment, getting the training, and everything else you need in order to do it yourself,” Cleary says. “It’s a different decision for everyone, but we certainly have the tools to educate [printers] on what a good digital business looks like, and how much business [they] would potentially need in order to cost justify a press, finishing, prepress, and everything else.”
When assessing the economics of outsourcing versus investing, Blumsack explains that Xeikon will collaborate with converters to calculate production costs for specific jobs on a conventional press and a digital press. He explains that by mapping out various jobs and scenarios, the cost calculators that Xeikon utilizes can map out a highly accurate picture of what a converter’s best economic option will be. However, he says that to be successful in this exercise, printers need to be honest and up front with their numbers.
“How much downtime do they have switching jobs? How much waste is there in their current environment? Can they take advantage of being able to load up a bunch of shorter jobs in the prepress department and just run them?” he says. “That’s how you get the advantage. You don’t buy a digital press and once a day run a short run job. That doesn’t make sense. They have to have enough volume to keep a digital asset occupied.”
LaMourie explains that the consultation between a converter and press supplier continues after the sale and install is complete. Through the Domino Solutions Program, he says that the company will support customers throughout the life of the press, and will work with them to continue to grow their business and maximize their return on investment.
“Especially with customers that are new to digital, we’ve got workshops around estimating and workflow and how [digital] is going to be different from what they've been doing,” he says.
One of the advantages of bringing a digital press on board, is that in addition to its ability to produce low-volume runs requiring multiple changeovers efficiently and economically, it can lower the barriers to entry into new packaging applications. But whether it is a label converter seeking a flexible packaging solution, or even a commercial printer seeking to use digital to enter the label market, acquiring the expertise to be competitive in this new space is just as important as having the right equipment.
Cleary explains that when entering a new market segment, printers may fall victim to thinking that their knowledge of printing garnered from their own core segment can be carried over to a new market. But, he says that beyond printing, companies need to understand new substrates, consumables, finishing processes, and more.
“Just because you’ve been selling labels that somebody else produced and you know some of the lingo that’s used around labels, doesn’t mean you have the experience to pick the right adhesive or the right facestock, or to decide on varnish or a laminate,” Cleary says. “Understanding the consequence of those decisions is super important.”
The combination of internal expertise and continued support from the supplier is what LaMourie says will result in a successful onboarding and continued use of digital. It is one thing to target initial jobs for a new digital asset, but to ensure long lasting success, it is important to keep a digital press filled with the right types of jobs.
“The differentiator really becomes if you have advanced training and if you have the consultative services,” he says. “That’s what is going to allow you to fill that machine and utilize that asset quickly and effectively.”
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