FMA’s financial survey illustrates the potential of process improvement
October 9, 2013
FMA’s recently released Financial Ratios & Operational Benchmarking Survey digs deep into the numbers. The results give a realistic view of the industry and reveal how successful its top performers can be.
At a recent shop visit I noticed a small collection of work-in-process sitting by two powder coating lines. This shop (which we’ll cover next month) had transformed itself over the past two years. It had eliminated process-centric departments (like cutting, bending, hardware insertion) and grouped equipment into eight cells, each with cutting, deburring, bending, hardware insertion, and (in some) spot welding.
The arrangement changed workers’ focus away from machine-specific productivity toward something that customers really cared about: part velocity, as tiny batches (call it “single-sheet” part flow) moved from one machine to the next quickly and seamlessly.
Then there was that pile of WIP by the powder coat lines, now the constraint process. Still, that WIP was well under control. Most parts I saw were destined to be painted within hours and shipped to customers the next morning. The goal: to shorten the order-to-cash cycle—or the time between paying (“cash out”) for labor and materials and receiving payment for the job (“cash in”).
Judging by a recently released study from the Fabricators & Manufacturers Association International (FMA), this shop probably represents a top performer, but even average operations produce respectable earnings. For the top performers, the numbers are truly stellar.
FMA’s 2013 Financial Ratios & Operational Benchmarking Survey delves deep into the numbers. This year 44 fabricators dug into their 2012 financials, providing data on operating profit; debt ratios; sales per employee; material expenses; earnings before interest, taxes, depreciation, and amortization (EBITDA); gross margins; and much more. They also revealed operational data like inventory turns, direct and indirect labor ratios, sales per employee, on-time delivery percentages, and win-bid ratios.
Consultant Dick Kallage, principal at Barrington, Ill.-based KDC & Associates and a member of FMA’s Management Advisory Council, analyzed this year’s survey and discussed his findings in a webinar the association hosted earlier this year. He highlighted a few key areas.
First, the survey shows a growing industry, but as expected, that growth is slowing a bit. In last year’s survey (which covered 2011 financials), sales growth averaged nearly 20 percent from the previous year. But of course this was when shops were rebounding from unprecedented lows in 2009 and 2010. In 2012 average growth slowed to just shy of 9 percent.
Second, average operating return on net assets (ORONA) grew slightly, to 24 percent.
This key metric divides operating profit margin by total assets minus accumulated depreciation. A high ORONA means that you’re getting more operating profit with fewer assets. You are, in effect, doing more with less.
Third, when it comes to managing debt, this industry is pretty conservative, which is a good thing. “The liquidity measures are really tremendous, almost spectacular,” Kallage said. “The average company is generating a lot of cash.”
Fourth, some profitability and operational effectiveness measures failed to improve significantly from the previous year, despite the increase in sales. “These numbers aren’t terrible,” Kallage said. “They’re decent. They’re just on the low side of decent.” For instance, average EBITDA margin remained flat, at just over 10 percent. Sales per employee was a little more than $159,000.
Thing is, a quarter of respondents reported EBITDA margins between 15 and 23 percent. And the top 15 percent of respondents reported sales per employee between $200,000 and $335,000. Some also reported on-time delivery greater than 98 percent. What are these companies doing to achieve such results?
Kallage referred to several measures that may provide some clues. For all respondents, inventory turns dropped to 9.68, down almost 2 percentage points from the previous year. A job shop’s inventory turns can vary with the product mix that happens to be on the floor, of course. But the average is telling all the same.
It may hint that it’s taking a bit longer for jobs to make it through the shop. Also, more shops may be building certain elements to stock, just to meet customers’ tight delivery deadlines.
Still, average on-time delivery was at 85 percent, unchanged from the last survey.
The average debt-to-equity ratio changed for many respondents. Some remain debt-free and so reported a debt-to-equity ratio of zero. But for many, the ratio rose to an average of 1.70, compared to 0.66 in 2011. Kallage said that this rise may come from an increase in equipment spending, and shops may be taking advantage of competitive financing offered by equipment manufacturers and others.
All this paints a realistic picture that reveals what makes contract metal fabrication so competitive and, at the same time, so challenging. Fabricators are built on a strong foundation of cash. But pricing pressures from customers are tremendous, making EBITDA on the low side. And everybody wants it done yesterday, hence the on-time delivery problem.
Despite all this, the return on net asset metric shows that most fabricators are extremely productive. With new equipment, they can produce a lot of value with little labor. The challenge may be in timing—that is, shortening the order-to-cash cycle.
Visiting the fabricator that had reorganized its shop floor into cells, I noticed how quickly parts flowed between different processes. Part-flow velocity is key—and it’s why my tour guide emphasized that the WIP just before the paint line was destined for the delivery truck the very next day.
These days, best-in-class fabricators are scrutinizing and improving every process in the order-to-cash cycle: sales, quoting, engineering, customer communication, part flow, packaging, and delivery. This shortens the cycle, which improves myriad financial metrics. If employees process more jobs in less time, sales per employee goes up, and costs per job drops, outpacing downward pricing pressure from customers and sending EBITDA skyward. This also improves on-time delivery and increases available capacity, which in turn opens the door for additional customers and a broader product mix.
That’s easier typed than done. But as this year’s financial survey reveals, some fabricators are indeed getting it done.
Source: FMA’s 2013 Financial Ratios & Operational Benchmarking Survey