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As appearing in The Seybold Report - April 06, 2006

Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.

MFSA-NAPL Fulfillment Conference 2006

Integrating Into Client's Overall Marketing Strategy

This second year of the joint conference venture by the Mailing and Fulfillment Service Association and the National Association for Printing Leadership enjoyed a little of its own March Madness with strong attendance - nearly 150 attendees and almost half those being first timers. Many of these fulfillment newcomers arrived early for a pre-conference full day workshop on How to Sell & Market Fulfillment Services conducted by MFSA's Director of Fulfillment and the total conference program organizer, Tom Quinn. The Conference was held in Dallas March 22-25.

Keynoter Andrew Paparozzi, NAPL Vice President & Chief Economist, delivered his third annual profile of the Fulfillment Industry based upon an extensive survey. This "2006 Survey of Fulfillment Practices" is the second involving both MFSA and NAPL members. The full report can be purchased from NAPL by late spring (napl.org). This survey followed a similar format to past surveys with the addition of queries on sales and marketing practices. This report shows the dynamic nature of the variety of fulfillment services as well as the interesting relative differences between the mailing and fulfillment specialists and general commercial printers. The following table highlights some of the marked differences between these two groups of firms. There were 52 respondents nearly equally divided between the two groups.

Table 1 2006 Fulfillment Survey Showing Statistical Differences between Mailing & Fulfillment Specialists and Printers
		M&F Firms	Printers
1.	Average total revenues (in MM)	$4.7	$20.3
	Range:
	<$10 million	95%
	$10MM-50MM		58%
2.	Revenue distribution (in $MM): Fulfillment:	1.3	1.1
	Mailing	2.9	1.5
	Printing	0.3	16.6
3.	Years offering fulfillment:	13.0	8.1
4.	Proportion offering these specific fulfillment services:
	Literature & Hand Assembly/Kitting:	96%	76%
	Premium, database management:	60%	<40%
	Variable data printing, contract packaging:	33%	10%
	Product fulfillment:	46%	13%
	Point of Purchase:	42%	46%
5.	Number of fulfillment clients:	19	21
	Range: less than 10 clients:	48%	56%
6.	Revenue from largest 5 clients:	76.5%	75%
7.	Proportion of SKUs printed in house:	7.5%	78.5%
8.	Revenue growth expectation:       '05 actual:	+8.5%	+13.9%
	Actual vs. expected:	-0.2%	+2.9%
	2006 forecast:	12.5%	14.4%
9.	Sales Organization Structure:
	Combination manager + sales person	61%	52%
	Sales person alone	17%	30%
	Manager/owner alone:	17%	0%
	Combination sales + fulfillment specialist:	4%	17%
10.	Fulfillment Sales Compensation System:
	Salary + Commission:	67%	13%
	Straight commission:	9.5%	52.2%
	Salary component:	76%	30%
	Straight salary:	9.5%	17%
	Draw + commission:	9.5%	17%
	Fulfillment commission rate average:	6.3%	7.9%
	Range:	2-10%	4-18%
	Proportion >7%:	50%	78%
11.	Other sales issues: new business from RFPs:	16%	21%
12.	Key time cycles (in months):
	(a) sales close	5.4	5.4
	(b) Product arrival from sales close:	3.5	3.0
	(c) Installation to satisfied client:	2.4	2.9
13.	How fulfillment marketed:
	Web site:	71%	44%
	Direct mail:	52%	39%
	Trade Show:	33%	17%
	Print advertising:	23.8%	21.7%
	E-mail:	23.8%	4.3%
14.	Fulfillment profitability relative to other divisions:
	Higher	33%	37.5%
	Lower	12.5%	33%
	About same:	29.2%	8.3%
	Not sure:	25%	20.9%
15.	How has Fulfillment profitability changed?
	Increased:	40.9%	43.5%
	Decreased:	0.0%	8.7%
	Holding steady:	59.1%	47.8%
16.	Fulfillment impact on printer's print volume:
	Increasing from fulfillment clients:		85.7%
	Not increasing from fulfillment clients:		14.3%
17.	Client turnover buying both print and fulfillment:		3.1%
18.	Client turnover buying only print:		15.4%

A few preliminary conclusions can be derived from these relative survey responses:

•  While total revenues would suggest that printers are over four times the size of the M&F Specialists (item 1), they actually have comparably sized fulfillment businesses (item 2: $1.3 versus $1.1 million).
•  Though both groups have about the same number of clients and revenue concentration among the largest clients (items 5 & 6), the M&F specialists offer a broader assortment of fulfillment services (item 4).
•   Printers are a little more optimistic about future growth, but clearly fulfillment is expected to continue to grow universally (item 8).
•  Sales organization and compensation are markedly different with M&A folks relying upon a higher salary component to total compensation (item 10). This might suggest that M&F firms grasp the longer term relationship being created with these clients and the less transaction driven nature of the business. Absolute numbers and ranges for sales compensation would be helpful and unfortunately are not available. Also the bonus or profit sharing component of compensation for the Fulfillment General Manager would be useful in future surveys.
•  It is also interesting to note that print salesmen are notorious for not being well equipped to sell fulfillment effectively, i.e., profitably, and yet 30% of printers rely upon the print salesman to sell the fulfillment service offering (item 9).
•  Item 13 shows that the M&F firms in toto utilize a broader spectrum of the marketing mix to promote and sell their fulfillment services.
•  Without knowing the absolute profitability (as a percent of revenues) of the fulfillment division of the two groups being compared, it is difficult to draw any meaningful conclusions from item 15. However, not to know profitability relative to other divisions would suggest an immature MIS capability, which could be disastrous! Both groups show at least a fifth of their firms without this vital data.
•  The favorable impact of increased overall revenues from fulfillment clients and markedly improved loyalty of these same clients is highlighted in items 16-18 as has been reconfirmed in every single NAPL survey!

As with most NAPL surveys conducted by Mr. Paparozzi and his professional staff, extensive phone conversations were held with the respondents to ascertain "the rest of the story." Some of the key values shared by the more successful practitioners regardless of which group they came from include;

•  "In terms of management and structure (1) hire the right person to run the division, (2) invest in a General Manager or COO type, i.e. don't expect your bindery manager to lead the team and (3) set up fulfillment as a division with its own profit and loss statement."
•  "Communicate the fulfillment vision to every company employee not just those in fulfillment."
•  "Don't compromise fulfillment to the print division." For example, clients want their fulfillment vendors to control and ultimately reduce their investment in inventories, which mean shorter print run lengths. This paradox opposes the Print Division.
•  Corporate IT commitment for professional staff and fully integrated fulfillment MIS resources are a strategic reality.
•  "Seasonality forces strong labor cost control and typically reliance upon a part time labor force." One firm reported developing a relationship with a church or cultural group for conscientious and reliable part timers in exchange for funding courses in English as a second language for the host organization.
•  "Develop strategic alliances and encourage peer firm visits." This may be strange to printers but is commonplace practice among most M&F Specialists.

Jack Alexander, President of Stark Brothers Fulfillment Services, gave a presentation on product fulfillment operational secrets. Though few printers may be interested in product fulfillment per se as it rarely drives print volume, the principles shared by Mr. Alexander were totally appropriate for literature fulfillment enterprises. Utilizing classic Industrial Engineering principles of measuring both absolute and relative processes, he suggested that 80% storage capacity utilization "is nearly full." This condition creates unnecessary and excess product movement.

To create more space he advised profiling the SKUs in terms of its order frequency. Slower movers, e.g., those out of season, should be moved to the back. Free up space by working with vendors to stage inventory, e.g., corrugated suppliers could provide JIT inventory when they know they are under a beneficial annual contract.

The SKU profile also includes a slot analysis report, which shows the number of stock turns in a week. When over "1", this is too frequent and that SKU should have a larger bin for less frequent replenishment. All SKUs should be sorted by frequency of orders from most to least. The top 50% cumulative orders or A items, often less than 20% of total SKUs, should have monthly cycle counts to assure inventory accuracy. The next 35% cumulative orders comprise the B items and should incur cycle counts quarterly. The last 15% or C items should be divided by 12 for cycle counting once a year during slow periods in each month.

Receiving procedures should have all literature items weight-sampled to check claimed count with a ±3-4% tolerance while premium items should be counted. Alexander offered a series of product fulfillment industry benchmarks. Many of these vary substantially from literature fulfillment benchmarks compiled by MFSA. Since good contracts include performance criteria, it is advised that MFSA's operations benchmark study (mfsanet.org) be kept handy to include in negotiations with a new client.

Variable data digital printing (VDP) is being increasingly adopted for literature fulfillment operations. Thomas Curtin, President of tca Creative Services, presented a variety of industry specific variable data digital print applications. For example, Huntington College in Huntington, Indiana, encourages its web site visitors to build-a-brochure containing pictures and information of the academic department and extra curricula activity of interest along with a DVD. Inquiries have been reported up by 28%.

Healthcare offers VDP opportunities such as customized brochures for doctors affiliated with a hospital to pre and post enrollment kits to provider directories for health insurance. Customized catalogs require fewer pages to be printed to be more appropriately targeted to the recipient even including a selected language. The retail industry needs loyalty program literature and targeted communications including statements and invoices. Quite often variable maps are linked to the recipient's zip code to indicate the closest store outlet. Casino marketing was detailed as one of the most mature and proven database marketing efforts.

John Rafner, founder and President of Nice Lines Direct Mail of Norristown, Pennsylvania and Vice Chairman of MFSA, presented a realistic perspective of having been in high end VDP for several years. He has two commercial designers on staff specifically skilled at designing for his NexPress. They have won a number of advertising design awards in and around the Philadelphia region for this expertise.

These digital print devices continue to be used 90% of the time for static printing, as opposed to variable, according to consultant and professor Frank Romano, because of the lack of corporate databases. Even gender sensitive software is dubious in preparing variable salutations when ethnic names are included. Data development is a top priority for many companies, but it simply does not exist for most firms today. Most web-to-print applications today, according to Rafner are "static applications and actually more appropriately produced on a DI type press."

Equipment vendors have not been altogether truthful relative to the total costs to run their equipment or to be in this business. For example, they state toner cost per page based upon coverage of 20%. The problem is that most advertising agencies, whose designers truly do not understand VDP, consistently design for 100% coverage with full bleeds "simply because they can," remarked Rafner. This significantly increases the toner consumption costs. Toner coverage in excess of 25% will not fold without cracking and therefore require scoring systems in order to fold the document. Nice Lines has experienced a $800/month hike in their electrical expense for their NexPress in producing their 66,000 average clicks, which was 20% above normal.

Rafner was quick to point out that he is not disparaging the NexPress alone as his peer relationships throughout the country indicate comparably frustrating business models with all of the equipment. He also acknowledged that there are several firms, such as W.A. Wilde Company from Holliston, Massachusetts that report profitable results from their VDP efforts.

While the market has not matured in terms of realistic database applications, digital press over capacity already exists. For example, "in the suburban Philly area there are 25 iGen3s, Indigos, Xeikons and NexPresses. And this does not include the quantity of mid-sized machines," commented Rafner. If he had it to do over again, Rafner said, "I would have started with a mid-range color unit" to give me time to test the sales waters and to build the volume before stepping up to a big unit.

He also suggested negotiating an equipment contract with click charges that include all consumables and maintenance fees. NAPL has a third party lease expert available that can suggest lease provisions that more equitably represent the user's position versus the one-sided manufacturer leases that most users don't understand until it is too late.

In order to expand effectively and efficiently into fulfillment, printers larger than $5 million in revenues might best consider acquiring an existing fulfillment firm. With that possibility in mind, Peter Schaefer, President and COO of Compass Capital Partners, Ltd of Radner, Pennsylvania, gave a presentation on the merger and acquisition trends in the graphic communications industry. His firm is among the largest investment bankers specializing in this segment of the M&A market, having closed 125 transactions since 1989. His presentation was based upon transactions with firms whose annual revenues exceeding $5 million that have been detailed in their periodic book, Compass Report.

Valuations of transactions expressed in multiples of EBITDA, earnings before interest, taxes, depreciation and amortization, have recovered somewhat from the lowest level of 2001-2002 to the current 4-6 X (times) EBITDA and are expected to remain in that range for the foreseeable future. Public companies, because of their larger size, will typically buy and sell for a little higher multiple.

There currently is pent-up demand among sellers motivated to sell at even lower multiples while there is a growing group of buyers looking for specialty firms, such as Mailing and/or Fulfillment companies. "It is quite unusual," according the Schaefer, "For there to exist both a buyer's and a seller's market at the same time."

Schaefer concluded by listing good attributes of a selling firm that are highly desired by buyers: non-union workforce, up-to-date technology (advanced website and integrated fulfillment MIS), 3-5 years of revenue growth and sustained EBITDA of +10%, audited financial statements, excess capacity in a plant that is not landlocked and is in the early stages of a market-based long term lease, good & energetic management team that is willing to stay, number 1 or 2 in their chosen market, no account concentration beyond 20%, no sales person concentration over 20%, strong corporate ethics and evidence of a tenured happy workforce.

There is little doubt that NAPL's annual fulfillment survey continues to attract responses from the larger and most mature practitioners and therefore does not really reflect Fulfillment Practices throughout the industry. But hopefully attendees at this conference and readers of this article will contact NAPL and Paparozzi to be included in next year's survey to broaden the statistical significance. In the mean time the message is clear from the more successful Fulfillment vendors;

"Learn your client's marketing objectives, integrate your services into your client's marketing programs and price your services consistent with your client's perceived value."

Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.