Colorscope

Case Analysis

by
Jeremiah Hearon | Joe Liao | Jay Dholakia

Team Name: J 3

February 3rd, 2016

A Brief Background:

Colorscope Inc., started by Andrew Cha in March 1976, is a graphic arts firm

specializing in special effects photography and pre-press production based in southern

California. The company’s service was reputed as an excellent service provider due to the

solid relationships Andrew Cha had built with key players in the marketplace and industry-

renowned efficient operating process.

Due to a technological revolution in the microcomputer industry in the late 1980’s,

Colorscope saw a huge transformation in the businesscape around them. Overnight,

competition became increasingly fierce with backward integration of large printing

companies and closer bond of standalone pre-press companies with their clients. In addition,
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Cha’s “solid business relationships” dissolved due to clients setting up in-house design and

pre-press processes.

By the mid 1990’s, because desktop computers and color seperation software was

readily available, the price of certain projects decreased by more than 50% and Cha, already

facing severe competition out of the blue, also had to suffer a lost profits as a result of

willingness to pay and high costs in production that he incurred because of his seemingly

“technologically advanced” production equipment and high direct labor expenses.

In short, a lot of adversity led Andrew Cha to wonder what to do to lower operational

costs, how to develop a better pricing strategy to build a larger client base, and what type of

accounting and control system to employ to Colorscope’s practice.

Business Analysis:

Colorscope’s production process involves a multi-station system that produces the job

orders that the company recieves. In analyzing the current system and data given, it is evident

that some stations need a closer look than others; specifically, scanning and assembly.

A job spends nearly 80.4% of its time in the system at either of these two stations:

27.9% at Scanning and 52.5% at Assembly. As one would predict, it is also the two stations
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where the majority of the rework time is spent, equating to about 79.7%. Another factor to

observe is the direct labor costs at these two stations. According to the 1996 financials, a total

of $96,000 is paid to employees who work at these stations, equalling to about 3/4th of

Colorscope’s total wages. By observing the time spent at these stations and the cost of

operation at each of them, we can conclude that these two stations are the meat of

Colorscope’s production process, and are worthy of our focus. Because of the scale of these

processes, optimizing efforts at these stations will lead to the most fruitful results.

In taking a closer look at the Scanning and Assembly stations, it is evident that these

seem like very complex process that take quite a bit of time to complete. Reading a little bit

more into the process, it is safe to say the speed of these machines would not be much of an

issue because Andrew Cha has spent a lot of money on his production technology. Thus, it is

very possible that the human element of these stations could be the trigger to slow production

times.

A combination of more documentation of processes, employee specialization rather

than cross-training and cross-working, and performance incentivization of employees could

be a few solutions to optimize Colorscope’s production process.

Since the process involves complex steps, Colorscope needs to start its optimization

by documentating its process so that errors can be minimized, leading to minimizing rework,

and speeding up the line.

In addition to that, as it currently stands, the employees of Colorscope’s production

facility are cross trained and work at whichever stage of the process. While this seems like a

positive, such styles of work is usually done when all stages of the production process are

similar, in time, effort, and complexity. Colorscope would be better off with more specialized

employees at each station so that they can ensure that their job is done as best as possible, not
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only leading to further quality improvement, but also making the process a little more

efficient.

Finally, the last suggestion would be to reassess the pay stucture of these employees.

Currently, the hourly pay of each employee ensures that they are in the plant for the amount

of hours they are paid for, but it fails to motivate them to give their complete best while they

are working, and could be a reason for lack of near optimal production. Adding an activity

based compensation to their payment to incentivize them to work hard and work smart could

deem well for Colorscope’s overall efficiency.

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In the current marketplace – as a glut of new competitors using more prolific and

sophisticated technology are driving pre-press profits down – pricing cannot be altered

significantly so accounting and control systems needed to be developed as a tool to reduce

cost.

Targeting cost, Cha focused on labor allocation and rework. He had employees

logging their time by job and by process stage to get a clearer idea of the cost drivers in the

pre-press process. By analyzing these cost areas, it makes it possible to leverage both capital

investments in technology and marketing efforts to upgrade technology to target the high-cost

areas of the process and seek customers that have fewer demands in high-cost areas.

An example of the former would be the design stage of the process that could be facilitated

by high-end publishing software and more powerful or compact computers to make creation

and editing of the product layout and images a less time-intensive process. This would be

especially significant cost-cutting measure considering he has very skilled and experienced

employees who likely have a largely complete vision of their intended design before they

even begin and are likely primarily limited by difficulty or inefficiency in creating or editing

their work on the computer.

Considering the relatively high cost of photography in relation to the time to its completion,

marketing could identify customers that already have advanced or in-house advertising

systems and already have the photographs necessary for the publication. Also, it is important

to note that customers were charged a pretty even per-page price, despite the potentially wild

variations in the amount of photography necessary to complete a project.

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Andrew Cha also focused on rework as an addressable driver of cost (or an

opportunity to honorably raise prices) and he divided it into two categories: customer-

directed rework and in-house error rework. The latter can be understood by management as a

simple dollar figure that should be targeted and eliminated where possible.

We tried to explore a proper pricing strategy by examining the profitability of each

job to address the rework concern. Cost occurred at every step of the workstations, so it is

natural to allocate the overhead to each workstation. The rent is proportional to the floor

space for each workstation, and others cost is associated with hours clocked in each process.

We use labor hour as a cost driver because the operational efficiency highly relied on the

“institutional knowledge of its employees and frequent supervision by Andy Cha”. Hence we

can come up with a burden rate for each workstation, such that the profit would be revenue

deducting direct material cost and rework cost and the overhead from the burden rate and cost

driver. Thus the most profitable job is number 61202, with a profit of $10163 and a profit

margin rate of 44.19%.

It’s easy to detect that, the jobs that required rework have eventually led to a loss,

either in response to clients requirement or due to in-house errors. To prevent such loss on

rework, one possible solution is to charge the clients additionally for the rework for the

change coming from their end. On the other hand, the cost of rework for house errors should
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be minimized. Typically those rework was initiated in Quality Control, which was the last

stage of working process. Once initiated, the work has to be done all over again from the very

beginning. According to the Exhibit in the appendix, QC has a relatively low burden rate and

less required labor hours than scanning and assembly, and since all in-house errors originated

in the scanning stage, so an additional QC process could be introduced between scanning and

assembly in order to prevent a costly rework of both of them.

There is another potential solution to the more complex problem of customer-directed

rework. The case hints that the focus of Colorscape’s management is to reduce or eliminate

both kinds of reworks. This is far too simple an approach and here lies the crux of the needed

improvements to the accounting system.

As Colorscape has neither the desire nor the capital to invest in a more sophisticated

accounting system, the improvements Cha already made must be exploited in the most

effective yet simple way, namely, focus on the customer-directed rework cost driver.

Customer-directed rework should be viewed as an opportunity rather than a pure cost. Why?

Because if you can save more time on the front end of design than it takes to rework it after

the customer changes their mind, then rework is a valuable cost-cutting tool! We propose two

ratios to be interpreted together:

RW% = Rework/Work and Cost Rate = (Work + Rework) / Revenue

After a few months of working with few changes related to rework, Cha should

establish a baseline RW% and Cost Rate by account. Then implement some process changes

whereby designers spend less time understanding the needs of the clients and spend less time

on the front end attempting to adhere to clients’ needs and submit proofs to the customer in a

somewhat less than complete stage and address changed customer specifications or other

desires of the customer in an expected rework time. At this stage, Cha should pay close

attention to the RW% and the Cost Rate. If the RW% increases and the Cost Rate decreases,
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then rework might actually result in cost savings and a drop in front-end quality but steady

end-product quality will allow them to address the cost issue in their market.

Exploiting the current accounting and control system for maximum cost-savings and

for targeting cost and service bottlenecks as candidates for process changes and technology

investment will allow Colorscape to streamline their process, delivering swifter customer

service while reducing expenses. Based on the existing changes and our recommendations,

we believe that Andrew Cha can successfully adapt to this rapidly evolving industry and the

new demands placed upon it by the market.