How to Evaluate  Distribution Savings

If you're in the midst of negotiating a printing contract, you've already noticed that printers increasingly distinguish themselves by their distribution offerings, not their printing technologies. Because most printing plants today have the ability to put ink on paper at a high level of quality, we tend to shrink manufacturing down to a price comparison. For the most part, distribution also is merely price, but you should consider a few service nuances. But first, let's look at costs. A co-mailing program is the centerpiece of what printers typically brag about when they say they can save you postal costs. Sometimes, just as important is the printer's drop-shipping approach. Here's how both fit in with the current postal price structure. In periodicals mail, there are three main cost structures—based on pounds, pieces and containers. Pounds: One Rate Fits AllThe pounds structure applies one rate to all editorial pounds, regardless of distance shipped, and a range of distance-based rates for the advertising pounds. (Ad pounds are calculated by multiplying the single-copy weight by the percentage of advertising; editorial pounds are the inverse.) The post office can't change rates more often than once a year and already has foresworn any changes for 2010. Because it moves mail, fuel cost has a huge impact on its operation, yet it cannot tack on surcharges as other carriers do. It has tuned its pricing to reflect at least some of the cost of hauling mail various distances, but it still confines these distance-based charges to the ad component. This is in tribute to a principle most publishers forget: Postal rates still are designed to stimulate the exchange of ideas and information, so edit pounds are transported below their true cost. Tiered ad-pound rates have several implications for publishers. First, the higher your ad percentage, the more vital it is to see if you can move your copies for rates lower than the USPS charges. Second, when fuel prices rise quickly, as they did last year, USPS rates can be lower than what you pay on the spot-freight market for certain mailings. Printers can haul your mail to its many postal destinations. The biggest savings come from bringing mail to the various sectional center facilities (SCFs) that serve each geographical segment of recipients. Short of that, you can try to reduce the copies in the distant delivery zones by what's often called zone-skipping, or plant-verified drop-shipping. The cost/benefit math is simple, yet subtle. Your printer should evaluate the drop-shipping program dynamically, reviewing each issue's mail file against the current freight cost. You might optimize costs with 100 destinations one month and 120 the next, all depending on that issue's ad pounds and subscriber file. The differences between printers are in the freight price they offer you and in their plant locations, which dictate the distances. The only service difference might be in the printer's willingness to conduct a dynamic calculation to optimize the drop-shipping program for each issue. When you see one printer using more entry points than another, what you actually are seeing is a lower freight cost justifying more destinations, not "better" optimization software. The next rate structure is based on piece costs, in which the post office charges by how coarsely or finely you package the mail. Co-mailing combines and sorts multiple publications at their entry point into the postal system, instead of downstream. The USPS acknowledges the benefit with discounts. Cost-cutting strategies must deal with the current rates, but the USPS presumably will make some major changes in cost structure as it rolls out more sites using the new Flats Sequencing System (FSS). The result of a $1.4 billion investment, the FSS automates the sorting of flats, or magazine-size pieces, based on barcodes. It doesn't take much to see the future: This equipment competes with co-mailing and refines the final sorting down to trays ready for carriers. Co-mailing discounts likely will survive, but the savings or destinations for which it's packaged will change. For now, co-mailing can save publishers on piece costs in almost any pool size, but it works best in pools of 2 million or more. That's enough to drive 85 percent to 93 percent of copies to the carrier-route level. Co-mailing also has an impact on the container section of costs, because your mail shares pallets in one mighty mailstream. Printers differ a great deal in their co-mail offerings, and it can take work to break them down to see the differences. In the end, co-mail programs compete with three elements: performance (the size of the pool itself, which affects carrier-route volume); freight prices charged to you (since all co-mail copies drop-ship to SCFs or other destinations); and the printer's charges to you for co-mailing. Evaluating Cost EstimatesPrinters often think their job is done when they produce a grand total on postal costs for you and then tell you how much you've saved by using their co-mail programs. But you need to go further to evaluate competing claims. 1. First, savings compared to what? Some printers use mail-origin entry as a baseline, ignoring the fact that you certainly would be drop-shipping if you weren't co-mailing. Because co-mailing inherently includes drop-shipping all those combined publications, the printer might feel justified taking credit, but don't be overly impressed with savings that count anything except the presorted component of your mail—that's all the co-mailing directly affects. 2. Next, you need to find out the source of the savings. Ask printers to produce a simulated 3541 form, showing the amount or percentage of mail at each presort level. Also, find out what the printer projects as the pool size in which your schedule will place your magazine. Be skeptical if printers vary a great deal in their presort-level estimates, or if their results seem out of scale to their pool sizes. All you can do is question the printer, but it's better to challenge an estimate now than to see a much higher postal bill later. 3. Freight costs can have a definitive effect on true co-mail savings. To build large pools, some printers truck magazines from printing plants to centralized co-mailing centers. You may be charged freight to and from the co-mail center, but the presort boost of a large pool can offset the inbound freight cost. Plainly, the hundred-weight price of freight itself is a key cost to analyze and, if possible, negotiate. Printers like to bury the cost by presenting a grand total for freight, but you need to know the pounds estimated in the shipment and the underlying freight rate. Fuel surcharges should be studied separately and made uniform, based on the Department of Energy's published price per gallon. Zero in on the hundred-weight rate itself, and see whether it contributes to an overall winning proposal or undermines the savings from the pool's performance. 4. The final element in co-mail pricing is the printer's "service charge." To encourage publishers to join the early pools, Quad/Graphics, which led co-mail technology usage, guaranteed publishers would save money by basing the co-mail fee on a commission. (The printer would keep some of the publishers' savings as a fee for running the co-mail line.) The money taken out of the post office's pockets was split either 50/50 or in some other ratio. This still is a popular cost structure, but two elements bear scrutiny. First, what is the baseline against which savings are calculated? (Arguably, it should be limited to the presort subcomponent of mailing costs.) Second, what savings percentage goes into the printer's pocket? Negotiating a better savings-share scheme can significantly improve the value of a printer's distribution program. Another approach is a fixed-savings guarantee; in effect, you pay a certain percentage less for postage, but the actual postal cost is still lower, with the printer keeping the difference. This means the printer wins by building larger and larger pools, or the printer loses if pool size drops. The publisher, meanwhile, is assured of savings commensurate with a particular pool size. Note that a printer might subsidize its co-mail pool to compete with other printers' by making a savings guarantee that exceeds the pool's natural performance. Printers also have priced the service at a per-piece rate, acknowledging that what the publisher actually is buying is use of the co-mail equipment. Of course, the publisher also is buying the printer's pool, since volume drives performance. Price structures that attract the greatest number of customers yield the highest savings, but publishers don't need any arm-twisting—they want to join the pool and are starting to look for pricing that capitalizes less on the money taken away from the USPS and more on the cost of running the equipment. Final Considerations5. When evaluating competing co-mail programs, look for the little, but persistent, extra charges. Administrative fees and high list-processing charges can peck away at your savings unless you negotiate. Don't begrudge the printer every charge, but do be on the lookout for buried fees. 6. A last point of negotiation pertains to qualifying for the pool. There are only so many stations on a co-mail line, and printers want to fill them with publications that drop a lot of copies. That means a minimum-count restriction on your editions, supplemental mailings or, for small-circulation titles, a closed door. Printers vary in their count thresholds, so this may be worth investigating if you want to be sure your supplemental or smaller editions are covered. Try negotiating to be sure your quantities are covered. There can be physical restrictions, too—not all printers have lines that handle polybag copies or tabloid trim sizes. After you've studied costs, look at schedule implications to be sure the savings justify the service. You may find that your printer-selection decision hinges as much on distribution as any other element. Alex Brown is a consultant to magazine publishers, specializing in manufacturing and magazine management. She founded her consulting company, Printmark, in 1984, and is a frequent speaker at industry events.

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How to Evaluate  Distribution Savings

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