USP Case answers
United Screen Printers (USP) produces a wide range of decals for displaying promotional messages on fleet vehicles, including delivery vans, eighteen-wheelers, and aircraft. Its decals range from flat-color designs to full-color photographic reproductions.
Although it is one of the oldest forms of printing, screen printing is superior to most of the more modern approaches because it permits making heavier deposits of ink onto a surface, resulting in more vibrant and longer lasting finishes. Screen printing works by blocking out areas on a silk screen so that ink passes through only the unblocked areas to make an impression on the vinyl decal.
Many in the industry believe that the economics of fleet graphics makes them an extremely attractive form of advertising and should lead to their continued penetration of a largely untapped market. One industry source estimated that the cost of fleet graphics works out to be $2.84 per 1,000,000 visual impressions.
Given the highly cost effective nature of using fleet graphics as a form of advertising, it is speculated that organizations will increasingly exploit this form of advertising. In addition, as organizations become better aware of this advertising medium, it is likely they will want to change their message more frequently. According to managers as USP, this may be on the of the major factors that is apparently driving the competition to focus more on short lead-times and prices, and less on decal durability.
USP is about to begin its annual evaluation of proposed projects. Six projects have been proposed as described below. USP currently has annual sales of approximately $7 million. It typically allocated up to 10% of sales to these types of projects.
- Purchase new large press. There is currently a three-and-a-half to four-week backlog in the screen printing department. The result of this is that USPâ€™s total lead-time is 4 to 6 weeks in comparison to an industry average lead-time of 3.5 to 4 weeks. In a typical month, USP ships 13% of its orders early, 38% on time, and 49% late. It has been estimated that 75% of the backlog is waiting for press 6, the largest press in the shop. Furthermore, press 6 is in dire need of replacement parts but USP has been unable thus far to locate a source for these parts. Given the problem of finding replacement parts and the fact that the press is somewhat outdated, this proposal calls for purchasing a new large press for $160,000. Based on estimates that a new large press could process jobs 50-100% faster than press 6, it is calculated that the payback period for the new large press would be one year.
- Build new headquarters. USPâ€™s CEO fervently believes that the company needs to have a strong corporate identity. He therefore purchased land and had plans drawn up for the construction of a new corporate headquarters. Analysis of the new headquarters indicated that although it would improve operating efficiencies, the savings generated would not pay for the new building (estimated to cost $4 million). Many of the board members viewed the project as too risky since it would increase the companyâ€™s debt as a percent of capital from almost 0 to 50%.
- Pursue ISO 9000 certification. This proposal also comes from USPâ€™s CEO. ISO 9000 is a set of standards that provides customers with some assurance that a supplier follows accepted business practices. In some industries, obtaining ISO 9000 certification is essential, such as industries that export to Europe and the domestic automobile industry. It was less clear what competitive advantage pursuing ISO 9000 would provide USP at this time. On the other hand, the process along would help it document and perhaps improve its processes. The cost of this initiative was estimated to be $250,000-$300,000 and would take one year to complete.
- Develop formal procedure for mixing inks. This proposal comes from USPâ€™s plant manager. At present, mixing inks is a highly specialized skill that consumes 2-3 hours of the team leaderâ€™s time each day. This project would focus on developing ink formulas to make the task of mixing inks more routine, and less specialized and subjective. The team leader is paid $25,000 annually. The cost of pursing this project is estimated to be $10,000.
- Purchase and install equipment to produce four-color positives in-house. The lead-time to have positives made by an outside supplier is typically one week and costs $1,500-$6,000. According to this proposal, the cost of purchasing the equipment to produce four-color positives in-house would be approximately $150,000 plus $25,000 for installation and training. The variable costs of producing positives in-house are estimated to be $375 per job. If produced in-house, the lead-time for the four-color positives would be approximately an hour-and-a-half.
- Purchase inkjet printers. An alternative to purchasing a new screen printing press is to add capacity based on newer technology. Given the inkjetâ€™s production rate, 6 inkjet printers at a cost of $140,000 would be needed to provide the equivalent capacity of a new large screen printing press. The major disadvantage of the inkjet printers is that compared to the screen printing process, the outdoor durability is more limited. In general, inkjet printers are more economical for small orders, while screen printing presses are more economical for large orders.
What criteria would you recommend USP use in selecting its projects this year?
Based on your recommended criteria, what projects would you recommend USP fund this year? Are there any types of projects you would recommend USP pursue that were not proposed?
What, if any, additional information would you want in making your recommendations? How would you go about obtaining this information?