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Case Analysis
by
Jeremiah Hearon | Joe Liao | Jay Dholakia
Team Name: J 3
A Brief Background:
Colorscope Inc., started by Andrew Cha in March 1976, is a graphic arts firm
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-
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
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
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.
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,
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
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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
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
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
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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.
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
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
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
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
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