Since the 2008 recession, prices for laundry services have fallen rapidly while the laundry costs have continued to rise steadily. This applies especially to Germany, Benelux and the UK.
Why then can some laundries still manage to produce results in the neighbourhood of 10 – 15%EBIT, even though they face the same significant price pressure as the rest?
The answer to this question can make all the difference between red and black on the bottom line and it seems to be closely related to the way individual managers control the operation.
In an industry with a few, large suppliers, producing solutions based on similar equipment categories, the difference between one service and another is not always immediately apparent.
There are always extremes, and I have seen examples of poor standards but a good quality sheet from a laundry working to high standards may at first glance seem very similar to a sheet produced by another laundry with good quality standards.
Has quality fallen with price?
Laundry production is complex, confusing and hard to manage. Responsible operations managers do not have the easiest of tasks. They arrive at the start of the week to face hundreds of laundry bags on the overhead rails. They have to deal with demanding customers on the phone. Scores of employees are awaiting their orders and all the while CEOs and boards are demanding to see data on consumptions and the way machines are used.
In other industries, such as automotive, electronics and food production, the results in terms of quality and the bottom line are supported by systems, methods and operating procedures. Personal intervention plays a much smaller part, sometimes none.
In our industry production results have little support from systems. Good results are often the consequence of having good, well-trained staff with the personal skills to deal with a stressed and hectic working day. A lot of good people are doing a lot of things right.
The downside is that in many cases results are so strongly related to management and personal skills that the good results produced in one laundry are hard to replicate in another.
This is maybe not so surprising since our industry is characterised by many small production units, as opposed to other manufacturing industries, operating with large production units and high value goods.
Laundry services are closely linked to geography. We seldom move laundry services over long distances. Even high volume laundries work on a much smaller scale than breweries, dairies, or slaughter houses where a high level of systemisation is essential.
It seems that we are balancing on the edge of the optimum laundry size, given the operational methods we use. At present volumes are limited by what a person can manage in a complex production setting.
So has the laundry sector seen its quality fall in the same way that competition has lowered prices?
The laundry’s physical output has probably not improved, compared with that of similar services 20 years ago.
We do see quality in the market that is certainly not in line with the laundry’s purpose, but the quality is perhaps now more uniform that it was in the late 1990s.
The textiles have developed considerably, especially with regards to factors that effect production such as machine consumptions, temperatures and speeds.
The industry suppliers have put a lot of effort into developing the laundry’s technology platform and reducing the costs related to laundry production.
It is true, that they are still producing ironers, folders and washer-extractors that look pretty much like the ones in the 70s, but still their processes have changed radically with the use of enzymes, reductions in water consumption from 30 to 3litres per kg, new polyester-cotton blends and constructions, higher process speeds, and so on. There has been less focus on the laundry service itself and on the product delivered to the customer.
My point here is that a laundry cannot purchase a competitive edge from suppliers simply by selecting certain solutions. There are no washer-extractors that wash with water under pressure, do not require chemicals and achieve 100% water re-use. The difference often comes from price.
The recession reduced quantities in the laundries, which in turn increased price competition because lower prices have always captured customers’ attention.
If cleanliness is the laundry’s core service, maybe we should measure it and make the customer aware of our achievements here to make the outsourced service stand out from the in-house option. Maybe we should supply customers with the tools to measure cleanliness, making it easy for them to quantify the need for the service and the result.
Even though the sector is experiencing price erosion, it is far from being in crisis as the results from major groups show. Indeed the sector could have remarkable potential as maintaining an EBIT at 15% is possible even in a market with intense price recession.
Total cost of operation
Price is the result of many factors, such as market segment, customer size, bargaining power, and competitors in the market, but one of the strongest influences is the total cost of operation (TCO).
The diagram opposite shows a typical economic profile for traditional, direct costs in western laundries.
There are variations in the cost profile to be found from laundry to laundry and from market to market, but the profile still provides a good guide to the ratio.
Depreciation on machinery is about 2 – 5% of the total cost complex. (In highly automated laundries the figure could be as high as 15%.)
Variable costs are at the other end of the scale, accounting for 60 – 70% of total costs. They may even reach 80% if textile costs are included.
The interesting point about costs is that if you remove costs worth 1€ from the accounts that 1€ turns up on the bottom-line but a sales increase of 1€, only improves the bottom line by 0.1 -0.2 €. This is because variable costs rise in line with production volumes and therefore with sales.
Missing an opportunity to reduce costs is five times more expensive than missing a sale, or putting this more positively, laundries will benefit far more from reducing costs than from increasing sales. That is why cost reduction has been a prime focus.
In the short term, focussing on the TCO presents the greatest potential for increasing a laundry’s competitiveness. Longer term, the potential probably lies in the services’ efforts to operate more sustainably with regard to natural resources – however difficult that may be to achieve.
Variable costs
Of the cost types that make up the TCO, it is the variables category that is the most interesting – more so than depreciations, a rather provoking thought when investment decisions are made.
Although the price is often central to discussions with suppliers this is not the most significant factor in the long term. The most important consideration is the effect the investment will have on the laundry’s operational efficiency.
This applies whether the company is investing in equipment, technology, software, textile stock or new chemicals.
When considering investment in the production platform we should ask: "How will this affect production and the laundry’s overall performance? Can we make a qualified estimate?
These are very difficult questions to answer, because they involve the actual flow of goods along a timeline, given the relevant laundry’s technology platform and specific pre-conditions.
The person or department that can provide an answer has the potential to radically improve the company’s competitive edge.
Every big investment involves intense negotiating with suppliers. Bargaining always has a part to play but it is not necessarily the most important one.
Comparative benefits
The industrial laundry’s greatest potential lies in knowing how to gain the full benefit of the technology it invests in.
A 10% discount on a ironer line is a one-off benefit worth approximately 20,000€. A 10% increase in operational efficiency has a lasting benefit of 130,000€ per year – year after year.
So the focus should be on operational efficiency and the way that suppliers’ solutions will interact with other aspects of the business – such as maintenance, system integration, optimisation of processes.
No matter how hard it seems to be to quantify a laundry’s operational efficiency, there is a need to estimate performance potential, ahead of finalising investment decisions.
Around, 7,000 western-oriented laundries spend approximately 8bn€ annually on variables so there is considerable potential here.
Laundry managers only have a limited number of ways to influence the operational efficiency on a daily basis. The flow of goods and machine up-time are the most important.
Operation managers control the workflow and machine work time is mainly determined by the way equipment is maintained.
Therefore questions need to be asked about what the laundry has done, or can do to support management and to ensure that the value of regular maintenance is being realised.
When 80% of the total costs are variable and when the level of those costs depends on production methods and systems, those methods and systems must be considered as mission critical in the present market.
Realising the potential
So perhaps management and owners need to ask: "Do we know whether our laundry production is realising its full potential? Do we know how to realise it?"
Again, the answer to such questions involves matters such as the flow of goods and the available options, given the laundry’s technology platform,
pre-conditions and constraints. This is not easy to quantify.
However, we can be certain that if the way the laundry operates is based on misconceptions or lack of knowledge, experience, or insight, this could have fatal consequences for the laundry’s economy.
I believe that optimising operational efficiency is the secret that lies behind each and every successful business. This is because in the accounts, 1€ of costs carries 5 - 10 times more weight than 1€ worth of sales and because variable costs are around 40 times more significant than the depreciations.
In an industry where price competition between businesses is fierce, it is the way daily operations are carried out that will help individual laundries gain an advantage.
Laundry production is both complex and confusing. We already know that bottom line results depend on the individual manager responsible for production on any given day. This personal dependence leaves the business exposed arbitrarily. Nobody wants this situation but bringing improvements represents an opportunity to realise potential in an industry that is struggling fiercely.
Service contracts are important
We will probably come to acknowledge the importance of service contracts in our industry too.
As an example of the role they could play, in the wind turbine industry the sales of service contracts are as high as those of hardware.
For the Danish wind turbine producer, Vestas, the figures on 30 June 2015 were: Hardware order backlog: 8.8bn€. Service agreements: 8.1bn€. This ratio could be the same in the laundry industry in a few years. We already see the signs that this is happening in some markets, such as the USA.
In the short term, laundries need information and systems that can support decisions. In practical terms this means more education, systemised operating procedures, and the necessary software. That is a gap that the industry needs to fill.
Software, the game-changer
Until the next major technological leap we only have our knowledge and production methods to rely on. This means systematic, formalised support of the laundries’ focus on total variable costs, enabled by means of software. That is the only practical way to solve the problem, which makes software a potential game-changer in the industry.
The industry needs the kind of solutions that make laundry managers able to realise the full production potential, not just of the laundry where they work at present but of those where they may work in the future.
Laundries need the ability to forecast and calculate the impact of changes and investments on the laundry’s production and operating costs, ahead of the decisions.