September 7, 2012
The results are in from FMA's 2012 Financial Ratios & Operational Benchmarking Survey and the message is clear: Raw material and work-in-process inventory eats cash. Successful fabricating shops have figured out a way to avoid excess inventory scenarios.
The industry doesn’t have room for waste. Fabricators don’t have that kind of time. They’re busy getting good products out the door quickly. They have become critical, reliable links in customers’ supply chains, and they aim to keep it that way.
This may be a fair assumption of reality, judging by the results of the 2012 Financial Ratios & Operational Benchmarking Survey, produced by the Fabricators & Manufacturers Association. Good shops are getting better and growing. The others—well, not so much.
Most fabricators got into the business by serving a few clients, and many still serve a small customer base. Out of 36 total respondents, a quarter of them said 80 percent of revenue came from five or fewer accounts. Fabricators have brought in a fair number of new customers: 30 percent said they landed between six and 10 new accounts during the past year. Still, almost 40 percent said that new customers represented a very small portion of overall revenue—2 percent or less. Meanwhile, many companies are reporting significant sales growth numbers.
Just after the Great Recession, the surviving fabricators stood ready to gain new customers and enter new markets. In last year’s survey, almost 20 percent said they had gained 50 or more new customers, and those new customers represented a greater portion of overall sales. This year’s survey shows that, although the race for new customers hasn’t stopped (it never does), the postrecession marketing sprint may have slowed a bit. This could be in part because existing customers have been pruning their supplier list.
Comments from Mike Jacobs support this assumption. The vice president of strategic sourcing, operations, and engineering services at Rockwell Automation in Milwaukee made some telling remarks at The FABRICATOR’s Leadership Summit held in March. Globally, Rockwell has more than 5,000 suppliers. “We are aggressively reducing that number. We think it’s in our best interest to work with a much smaller group of high-performance suppliers.”
Such scrutiny has led to some tumultuous times for fabricators. Some struggle while others enjoy significant growth. Almost 20 percent said sales growth had slowed, while 17 percent reported growth of over 40 percent. Match these figures with the fact that little revenue is actually coming from new customers, and it’s easy to assume there are a lot of sourcing managers like Jacobs out there. An OEM’s preferred supplier is taking on more and more work, while suppliers that don’t perform are struggling.
So how do these successful fabricators become preferred suppliers and gain so much new work from existing customers? The common answer is that if a shop reduces labor costs, it can compete with the world. According to the survey, though, the story’s subtler than that. A fabricator’s direct labor ratio can vary greatly depending on the niche served. Still, a fair number of survey respondents said direct labor costs less than 9 percent of sales, and many reported a similar figure for indirect labor.
What costs more than direct and indirect labor combined? For many it’s the material. Almost a third said material costs made up more than 40 percent of overall sales, and many are working to ensure that material keeps moving. Average inventory turns are rising. Last year 15 percent reported 15 turns a year or more, while in 2012 almost 20 percent of respondents reported the same.
To be sure, a contract fabricator’s inventory turnover can fluctuate month to month, depending on the mix of work on the floor. And, of course, a heavy industrial fabricator producing massive pressure vessels or large assemblies will have fewer inventory turns than a laser cutting shop. Regardless, the surveys show a noticeable trend: More shops reported higher average inventory turnover this year than they did last year.
This subtle shift may be significant. Metal inventory—be it raw stock, work-in-process (WIP), or finished goods—eats cash. Many fabricators hold finished stock to meet customer demands, as OEMs push inventory down the supply chain. Some fabricators also may carry a fair amount of raw stock, depending on how close (that is, the physical distance) metal suppliers are, how quickly metal suppliers respond, and the type of metal the fabricator buys. And once finished parts ship, a fabricator’s customer may be slow to pay. But WIP is under the fabricator’s control, and the industry’s best people continually work to reduce it.
Reducing labor costs with automation has become the mantra of modern manufacturing. This certainly can be true, but as shop leaders have told me, it has to be the right automation. What if that automation eliminates the need for a few operators but shoves excess WIP to a bottleneck downstream? The equipment may be fabricating furiously night and day, but parts aren’t shipping any faster. In fact, the machine may churn out parts that aren’t immediately due, which causes even more WIP to accumulate. If a fabricator bleeds too much cash because of excess inventory, it can get into real trouble, even as customer demand rises.
These days, when investing in people or equipment, some fabricators may not be thinking as much about reducing labor content; instead, they may be focusing on a different question: How can this investment help me ship more orders in less time? After all, a fabricator doesn’t make money until parts ship and customers pay.
The FABRICATOR® is North America's leading magazine for the metal forming and fabricating industry. The magazine delivers the news, technical articles, and case histories that enable fabricators to do their jobs more efficiently. The FABRICATOR has served the industry since 1971. Print subscriptions are free to qualified persons in North America involved in metal forming and fabricating.