Financial benchmarking in metal fabrication

Lately it seems that we are flooded with requests for filling out some sort of survey. I can’t even get an oil change without being asked to fill out some “short” questionnaire asking me to describe my experience. What experience? Why not ask the engine? OK, I’m just venting a bit here.

The fact is that surveys are upon us and they’re not going away soon. There are two reasons for the “experience” survey. First, the voice of the customer (VoC) has become a primary parameter in many modern total quality management (TQM) methodologies. It provides the feedback needed to gauge how effective a company’s quality system truly is. It helps grade the actual strength of the company’s value propositions as viewed by the only people who count: the customers. I have always been a proponent of VoC and remain so.

Second, modern marketing practices perceive a benefit in “democratizing” the customer experience. That means welcoming comments about a product or service’s performance in various formats, including overall ratings. The marketers are targeting the desire of (especially) younger people to have a voice in virtually anything they experience. Whether that voice is heard or means much is debatable, but it makes some folks feel good, I suppose.

The purpose of these experience surveys is to sell more products, focus resources, and maximize margins by aligning with real customer desires and needs. In today’s hypercompetitive environment, this knowledge is priceless, and companies are more than willing to risk some customer annoyance in order to capture that knowledge. These surveys are mercifully short. It’s just that there are a lot of them.

Another type is the “Who are you and how are you doing?” survey. Let’s call this a “status” survey. The U.S. Census is a prime example. This survey is for individuals, families, and organizations. As you know, this survey is not short. But it occurs infrequently and, at least in intent, remains indispensable for running a democracy.

In this class are surveys done by member-based organizations. They can have a number of formats and purposes and are generally done to monitor the “Who are you and how are you doing” part of providing value for the membership. The value is not just to the organization in helping to keep it grounded in membership needs, but especially to individual members as a benchmark for how they are doing compared to member peers.

When used for benchmarking purposes, the status survey is broadly regarded as highly valuable in a company’s ongoing improvement efforts. In fact, most high-performance companies view such surveys as indispensable.

Benchmarking for Fabricators

A major status survey for fabricators is the annual “Financial Ratios & Operational Benchmarking Survey,” or the FROB, launched several years ago by the Fabricators & Manufacturers Association International. The survey is not short, but it is complete and efficient as compared to similar industry surveys. (In the interest of full disclosure, I have been and am involved in the design and interpretation of the survey and its results.) This survey provides fabricators not only with the overall benchmarking needed to give purpose and structure for certain improvement initiatives, but also tracks the overall financial health of the industry.

It was not designed in a vacuum. Long-term, successful surveys from other organizations provided some inspiration, as did surveys done by marketing and other consulting firms. Other parts of the survey were designed according to specific fabrication industry parameters of interest and feedback from members.

Like all similar surveys, FROB is a continuing trade-off between completeness (quantity of information) and time burden to complete. In 2015 the average time to complete it was just over four hours; the longest was eight hours. Considering the survey’s content, this seems to be reasonable, according to the majority of participants.

Key Elements

FROB details liquidity and key financial metrics. It expresses the information as ratios to minimize the effect of company size. Since the terminology and definitions are generally accepted everywhere, they are useful for comparing across industries.

The survey shows the health of the industry and how it changes over time. The financials reflect not just how well management is managing and capital is being employed, but also (along with other data) help reveal the state of the served markets and the effects of changes in competitive position.

It also shows how an individual fabricator’s financial performance stacks up against other survey respondents’; and how the fabrication sector, as sampled by the survey, compares to other industries. Not least, it provides buyers and sellers of companies in the fabrication industry with critical data to help set valuations.

The operational data gives comparative information on operational effectiveness and has two primary uses. First, the information defines and reflects common operational metrics and the range of actual results. Items that have proven to be very useful include sales per employee, on-time delivery, value-added per payroll dollar, and direct and indirect labor costs as a percent of sales. These are key performance metrics in a large number of industries.

Operational metrics also give baseline data for internal improvement efforts. Virtually every significant improvement initiative should improve one or more of the operational metrics as well as the financial ones. The operational ones provide focus.

The final set of data in FROB involves value propositions and marketing effectiveness. This data is unique to this survey. It is designed to detect how well a company goes to market and how strong its value proposition set is. It’s representative of what professional marketers and consultants use to improve overall go-to-market performance. For fabricators, this data is extraordinarily important as the industry faces real and perceived threats of becoming more commoditized.

The value proposition section often takes many respondents the most time to complete. This is a bit revealing. Many fabricators are far more focused on and adept at internal performance measures than the common metrics in this section. It takes longer because the data is not readily available, meaning it’s not being used. This itself is a major opportunity for improvement.

Limits and Interpretation

Every survey has limits, and they are almost always related to how detailed and valid the data is. In the FROB, though, each question is carefully defined and the format is generally accepted across industries. In other words, further detail would not provide much more usable knowledge given the increase in time required.

Interpretation is a little more nuanced. First, enough responses must be received to make the data analysis relevant. So far it has been, but more is highly desirable since the stats become more significant as the response rate increases.

Second, a wide range of companies are considered to be “fabricators.” This means that the data range can be wide. However, the majority of respondents are sheet metal fabricators, just as the actual majority of fabricators fall into that class. This allows relatively accurate interpretation, but one must be familiar with the industry to know what data is an outlier and what is likely to be valid.

Helping this is the fact that individual data relates to the type of company. The FROB team has the interpretive expertise, and the data, both in segmented and averaged form, passes the reasonableness test. The data is good.

Surveys are great tools for improvement. I encourage all fabricators to not just use the FROB data, but to participate, thereby making the data even more valid and useful. Everybody wins!

For more information and to participate in FMA's Financial Ratios & Operational Benchmarking Survey, click here.

Editor's Note: Sadly, this will be Dick Kallage's last column. He died of cancer on Feb. 18. For more information, and to learn about a scholarship fund set up in Dick's honor, click here.