The Value of Value Added

By Andrew Paparozzi
In April 6, 2009

 Value added is one of the most fundamental financial figures and is used extensively in NAPL Performance Indicators. Yet some in our industry don’t track value added.

What is valued added? It is the additional value of a product over the cost of the materials and outside services that were used to produce it. Value added—calculated by subtracting the cost of paper, other chargeable materials, and outside services from gross or net sales (gross sales minus discounts, credits, returns and allowances)—provides an indication of how much value a company is providing for its customers or, as one Performance Indicators participant puts it, “the percent of sales that stays with us.”

Why should we care about value added? Because competition in our industry continues to intensify and to stay competitive we have to provide more and more value to our customers. Value creation becomes even more essential during hard economic times, such as we are currently experiencing, when purchases are much more closely scrutinized to ensure cost effectiveness.

Is there a right amount of value added that each company should have? Not really. There are no standards that every company must meet to be successful. But tracking value added relative to other key measures—such as sales, factory payroll dollars, factory payroll hours, number of employees, and number of salespeople, as Performance Indicators does—provides powerful insights into company performance.

Valueadded The accompanying graph tracks value added as a percent of sales for Performance Indicators participants. The top line tracks the highest 20% in terms of value added/sales, the bottom line the lowest 20%, and the middle line the average for all participants. All figures are on a 12-month moving average to capture trend. For more information on Three-Month and 12-Month Moving Averages, see our post on Moving Averages on 3/9/09 below or click on the Moving Averages category of posts on the left rail. 

As shown, the performance gap remained significant throughout 2008, with the top 20% maintaining value added/sales ratios near 75.0% and the bottom 20% consistently falling below 60.0%. The gap also highlights the need to go beyond averages when gauging business performance because there is so much variation beyond the average.

Of course, a high value added/sales ratio doesn’t guarantee profitability. But it does provide a bigger margin for covering the costs that separate the top line and the bottom line.

Value added too low? How you compensate sales personnel may be the reason why. We’ll look at that in our next tip.

Andrew Paparozzi

Epicomm's Andrew Paparozzi, Vice President/Chief Economist, is well-known for his accurate and thoughtful discussions on the economy and US commercial printing industry. A foremost author and speaker on economic business trends in the printing industry, Paparozzi heads Epicomm's Printing Economic Research Center.

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