June 7, 2011
Mayville Engineering Co. of Mayville, Wis., has grown into a metal fabrication powerhouse, with seven plants that altogether employ more than 1,000 workers. But it hasn’t been an easy ride. Less than a decade ago, MEC was struggling to find its way. Today, the company has a conservative, healthy balance sheet, and plenty of runway room for serious growth.
Mayville Engineering Co. (MEC) is a metal manufacturing powerhouse. Over the last three years it has spent $45 million on buildings and equipment (see Figure 1), all of it funded not by leveraging to high heaven, but by reinvesting income from the company's significant growth, which has continued throughout the downturn. Revenue grew by 10 percent in 2009 and another 24 percent in 2010. This year the company expects earnings from its contract and prototype businesses to reach more than $124 million, while overall sales across all divisions could reach $168 million.
Throughout this growth the balance sheet has remained conservative, sources said. The company works with several large banks on a multiyear borrowing agreement of $50 million, and from that it has borrowed only $8 million. Its cost of money is 1.5 percent.
"We have plenty of runway room for a strategic acquisition," said Bob Kamphuis, company chairman, president, and CEO, though he emphasized no plans are on the horizon. Nevertheless, he said, "If we needed to spend $30 million tomorrow, we could do it."
Less than a decade ago many wouldn't even allow MEC to quote work. Not only was on-time delivery rates waning, so was quality. The firm was losing money and had $26 million in debt. Several major customers left, and the company's largest product line had been battered by the competition.
When Kamphuis left Giddings & Lewis to join MEC in 2005, he met an organization struggling to find its legs. The fabricator had failed to follow the market. But instead of continuing its downward spiral, it got back on track and followed market demands via a two-pronged approach. The first involved internal improvements. It dropped its unprofitable product line, standardized its sales and quoting processes, and worked toward improving quality and on-time delivery rates. Today MEC delivers by its promised due date 99 percent of the time.
The second prong tackled how the company identified existing and potential jobs. It handles jobs differently depending on where those jobs stand in the product life cycle: prototype, production, or after-market.
These strategies helped build MEC into a formidable competitor in Wisconsin, a state with plenty of metal fabricators. The company's 1,000-plus employees work in seven plants that together comprise 1.25 million square feet of manufacturing space. In less than seven years it accomplished dramatic growth through the Great Recession, all while minimizing its debt.
That's not bad for a company that in 2005, while not on the brink, was certainly heading down the road to bankruptcy.
In 1945 the founder, Ted Bachhuber, launched MEC as a tool, die, and specialty machine shop in a rented garage on a back alley off Main Street in Mayville. An avid sports shooter, Bachhuber eventually grew the firm by building and selling an innovative shotshell reloading system. He found that reloading shotshells was cheaper than buying new ones (see Figure 2).
These systems are still made in a separate product line manufacturing cell inside MEC's Mayville plant. But what really expanded MEC over the years was its contract work and, most significant, its aerial scissor lift product line. As Kamphuis explained, 15 years ago the fabricator made one of the best lifts in the business. In 1999 the company even bought a 163,000-sq.-ft. facility in Beaver Dam, Wis., to handle increased demand. Times were good.
But superior quality doesn't mean much without a market demanding such quality. MEC's major competitor, JLG, developed an articulated boom-type product. With the new technology in its arsenal, JLG dominated the rental market, where companies could buy JLG's scissor lifts at a deep discount as long as they bought boom lifts at full price. "We had the Cadillac of scissor lifts, but that's not what the market wanted," Kamphuis said.
These challenges left MEC no choice but to leave the lift market entirely, mothballing the Beaver Dam facility in 2001. This came with another hit: MEC's largest customer, Hewlett-Packard, shifted manufacturing offshore.
As all of this was happening, the company "didn't move fast to take costs out, because our balance sheet was strong," Kamphuis said, who added that people were hoping new work would come in and help turn things around. "But nothing materialized, and they went from having a very strong balance sheet to a very weak and leveraged balance sheet, which is not sustainable."
Bachhuber was known locally for his generosity. After he and his wife died, all their assets went to a local wildlife foundation that today has about $45 million in assets. In 1985, when Bachhuber retired from the firm he founded, he gave something else away too: the company itself. It was then that he began the process of turning MEC into an ESOP (employee stock ownership plan) organization.
Of course, with employee ownership comes risk, and MEC's workers have experienced plenty of it. Between 2003 and 2005 annual sales dropped by more than two-thirds, down to $40 million. MEC was fighting for its life. By 2005 employee stock was losing value fast, and as Kamphuis recalled, this partly helped instigate what the company desperately needed: a profound cultural change.
The turnaround didn't start on the manufacturing floor, even though the shop had plenty of room for improvement. Instead, managers decided first to overhaul and standardize the front-end processes, including sales and quoting. This is common sense, sources said, because the efficiency of downstream processes is governed by what happens upstream. A contract manufacturer may have fast changeovers and hold minimal inventory, but all that work is for naught if an ineffective quoting and sales process can't fill a shop's capacity.
The organization was already progressive when it came to information technology. In the 1990s MEC bought production management software from Hewlett-Packard, then the shop's largest contract customer.
"Our IT department modified that [MRP software] to fit our contract manufacturing business model," said Tom Verbos, vice president of sales and marketing for MEC's contract business. MEC's IT gurus also solved some of the software bugs, and "HP actually flew out a team of engineers to Mayville to see what we had done to solve the issues. We helped them troubleshoot some of their own software."
MEC knew how to gather manufacturing data, and during the turnaround the company perfected a process to best use that data for sales and quoting. Today the fabricator has an Oracle-based database system, but layered over this are specialized applications tailored for MEC and written by the fabricator's in-house IT staff.
For quoting, software examines a part's material, shape, tolerance, and complexity and matches them with similar parts or part families MEC has fabricated. Kamphuis said that, thanks to these systems, quoting time dropped by two-thirds. "Rather than adding more people—more estimators and engineers—to our front-end process, we did a thorough value-stream mapping of the process we needed to accomplish with our customers," he said. "We automated some processes [with software], and we almost tripled the level of quoting activity without hiring any more people."
Quotes are based on real-time data. When an operator pulls a component from the forming-area parts supermarket and sets it up in a robotic weld cell, he first scans a bar code on the part. On fork trucks, status screens, glowing back at the driver, show exactly what jobs are needed when and where. As a fork truck driver moves a batch of components, he scans them so that the system knows where they are. With a few clicks, front-office workers know available capacity of machinery on the floor, and can use that information when quoting and scheduling.
MEC also worked with its metal suppliers to arrange just-in-time deliveries. "We chew through about 30,000 tons of raw material a month," Kamphuis said. "We were putting so much of [the raw stock] on the floor, sorting and moving it—and we finally said, 'Enough of this. We don't want that inventory here.'"
The company set up electronic ordering with its metal suppliers, which communicate directly via MEC's Web-based production management system. As Kamphuis explained, "Our production planning software system is talking to [our metal suppliers'] warehouses twice a day, so that they deliver what we need within the next 12 hours. This took some collaboration, but it helped us save a lot of working capital dollars, and helped us pay down our debt."
Other improvement efforts abounded. Employees developed standard procedures that could speed setup between jobs and shorten overall manufacturing time. Software dynamically nests components for laser cutting by grouping different jobs on one sheet for maximum material utilization (see Figure 3). Press brake operators use quick-change tooling (see Figure 4). Managers consolidated suppliers to make ordering consumables, such as welding wire, simpler. They replaced standard cylinders in welding cells with a bulk-tank delivery system, which the vendor replenishes automatically.
Because the MEC operation is a job shop, its brand of lean manufacturing isn't a carbon copy of the Toyota Production System. For instance, if the shop floor followed traditional demand-pull manufacturing, pulling parts from a supermarket would trigger upstream processes to replenish that WIP. This doesn't happen at MEC.
"What we're making today may not be what we're making tomorrow," Kamphuis said.
Like many job shops, MEC's floor could be compared to a checkerboard, with each square as a process-oriented department: cutting and punching, bending, hardware insertion, welding, grinding, and so on. Everything moves through a different series of squares (shop routings). The routings may look similar, but they aren't identical. Certain parts (the "kinged" pieces, to keep the checkers analogy) may move in more than one direction. Some may go from laser cutting and flat-part deburring directly to assembly.
Not all parts fit the checkers analogy, though. Prototypes, for instance, move more like chess pieces, which is why these low-volume parts are processed in a separate area of the plant. Part flow is fluid, mutable.
Because part designs aren't set in stone, processes may change, and much of it can't happen without close collaboration with the customers' design engineers. The quoting process is different, too, because unknowns abound. And prototypes are made in a distinct area of the plant. Everything is set up for flexibility. The welding cells, for example, have modular clamping tables, because one part may be entirely different from the next.
All this stems from a significant business refocus. As Kamphuis put it, "We got out of the contract business and got into the product life cycle business."
The refocus has helped both internal operations and external marketing. Internally, the company approaches manufacturing based on where the customer's product stands in its life cycle, from prototype (low volume, close customer collaboration) to production (higher volume), and finally after-market (back to low volume).
Externally, the concept implies complete, wraparound service to OEMs and other entities looking to outsource manufacturing. When prospects see this, they infer a long-term partner, not a short-term contractor. Customers call early in the design phase to work with MEC manufacturing engineers on prototyping. As the product matures, MEC handles production and, near the end of the cycle, the low-volume production of after-market components. As old products fade out, new ones are born, and MEC's manufacturing engineers are ready to take the new concept through prototyping.
The number of manufacturing processes under MEC's roof gives this concept some credibility. MEC's capabilities list reads like the index to Machinery's Handbook: 10 laser cutting systems; four punch presses; plasma cutting; waterjet cutting; plate rolls; 24 press brakes ranging in capacity from 35 to 500 tons; 10 hardware insertion presses; 18 large-bed stamping presses from 50 to 800 tons, some with in-die measurement and sensing; coil processing equipment capable of handling up to 8,000 pounds; tube cutting and bending; a large manual and automated welding department that includes 16 robotic weld cells; milling and turning; powder coating, liquid, e-coat (electrodeposition coating), and CARC (chemical agent-resistant coating); silk screening equipment; and shotblasting. And this list isn't complete.
The firm operates under five divisions. MEC Shotshell Reloaders manufactures the product that first helped the company grow decades ago. MEC Contract is the contract fabrication business; MEC Prototype/Service covers low-volume prototype work; MEC Shotshell Reloaders handles the reloader product lines; Phoenix Coaters handles custom coating; and Fabricating Specialists handles tube and pipe fabrication. According to sources, the company's production management software keeps all divisions on the same page when it comes to scheduling. Altogether, these divisions have a presence in more than 20 markets.
In many respects, each business has a level of independence with its own repeat customers. For instance, Phoenix Coaters, acquired in 2004, proves that a metal fabricator can purchase a custom finishing house and still maintain and expand its customer base, even if some of those customers happen to compete with MEC's own metal fabrication operation (see Figure 5). Only about 20 percent of Phoenix Coaters' business comes from other MEC divisions, sources said. The rest comes from OEMs and other area metal manufacturers.
Wisconsin has had a strong metal manufacturing base for decades, and as Kamphuis explained, it's an area ripe for a large metal fabricator like MEC. "Right here in the Midwest is a great place to be," he said. "We've got a lot of blue chip OEMs here." Among them are Oshkosh Corp., Mercury Marine, John Deere, and Caterpillar—and all of them are customers.
So how will MEC prevent what happened a decade ago, when sales and profits were foundering? The key, sources said, is wraparound service that makes customers' lives easier, something that, according to Kamphuis, may have helped the company grow even during the worst of economic times.
"In 2009, when a lot of companies were going down quickly, our business actually grew right through, from the support of our customers who were concerned about some of their other suppliers falling by the wayside." When it came to market share, "we found we were grabbing a bigger piece of the pie.
"Generally, the large OEMs want to simplify," Kamphuis continued. "They don't want to invest in those basic manufacturing activities. They want to deal with designing, final assembly, and testing their product, as well as strong distribution of that product. They're putting their eggs in the basket that's going to give them the most return on investment."
More than a decade ago, with its lift business struggling, it seemed MEC had its eggs in the wrong basket—and it's a story that, as Kamphuis explained, should be a warning for any job shop manager wanting to launch a product line. "If you have a product, you might think you've simplified things, because you can make a certain volume of this one type of product. But you're still at risk of the market. Did you design the right product so that you'll be successful? That's still not assured. It sounds nice, but at the end of the day, everybody is subject to the market."
MEC still has significant revenue tied to product lines; the shotshell reloader business, for instance, is still going strong. But most revenue comes from contract work.
Tube work, performed by MEC's Fabricating Specialists division, shows how a larger company can help a few entrepreneurs with an idea jump out of the starting gate (see Figure 6). In 2008 several former Cummins employees were working with an angel investment group to launch a new tube fabrication company. The group had contacted MEC to inquire about its coating services, but that initial call led to much more.
At the time MEC was contracting out about $600,000 worth of tube work, Kamphuis said. "So I went to them and said, 'Would you be interested in joining an ESOP?'" The entrepreneurs apparently jumped at the chance. "We purchased the business but kept them as leaders. They were excited, because we took a lot of the aches and pains out of being a start-up, because we could do all the accounting, payroll, IT, and administrative work. There are economies of scale there."
The ESOP was a big selling point for these entrepreneurs, and this buttressed the employee-ownership model for MEC. The structure also may have helped the company turn around so quickly. A decade ago the employee shareholders saw the value of their stock plummeting and potentially becoming worthless if the company declared bankruptcy. "Bankruptcy is a big deal for a company like this," said Kamphuis.
The ESOP structure may also drive future decisions. As the value of MEC's stock grows, retiring employees may enjoy larger nest eggs. "With an ESOP, over time your repurchase liability grows as well, because as you grow the value of the business, the shares become worth more money. And while we look at that future obligation for repurchase, perhaps we're going to be sizable enough during the next few years to take this company public." (Kamphuis emphasized no plans for going public are in the works yet.)
The repurchase liability on the horizon may require changes. But compared to falling revenue and OEMs not even allowing MEC to bid for work, the repurchase liability is a good problem to have.
"I keep reminding people to remember where they came from," Kamphuis said. "Don't forget how we reached these record levels during the past three years." When it comes to continuous improvement, "don't be complacent. Never be satisfied."
Photos courtesy of Mayville Engineering Co. Inc., 715 South St., Mayville, WI 53050, 920-387-4500.
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