Continuous improvement is forever

September 26, 2013
By: Tim Heston

When it comes to a lot of things about the economy, I’m a glass half-empty kind of guy. Will the government shut down soon because of the mess inside the beltway? Yeah, probably. The jobless rates are down this week! Yeah, we’ll see how long that lasts. Five years after the financial crisis and worst downturn in a generation, Fannie and Freddie still operate much like they always have, quantitative easing continues unabated, and nothing much has changed. That figures.

But when it comes to metal fabricators and manufacturing in general, I tend to be a little more optimistic. I started covering this business in the roaring 1990s. Since then, manufacturing has endured global competition and a roller coaster ride of booms and busts. The best fabricators keep on keeping on.

And even after all this, this isn’t a bad business, judging by the money being made. Honest.

Every year the Fabricators & Manufacturers Association International conducts its Financial Ratios & Operational Benchmarking Survey, an in-depth study that delves into the books, uncovers the vital metrics. This year’s survey covered 2012 financials. Average EBITDA (earnings before interest, taxes, depreciation and amortization) margins among respondents was just over 10 percent. Average direct labor costs are at 13.90 percent of sales, indirect labor at 8.65 percent, and average sales per employee are at $159,000.

“The numbers aren’t terrible,” said consultant Dick Kallage of Barrington, I’ll-based KDC & Associates. Kallage, who is a member of FMA’s Management Advisory Council, hosted a webinar on the study a few weeks ago. “They’re decent. They’re just on the low side of decent.”

So why am I optimistic? It’s because of what some of the top performing respondents reported. Some had EBITDA margins of more than 20 percent. A few had sales per employee as high as $335,000. And most respondents were job shops—businesses centered not around proprietary products, but on providing a service. True, profit levels can depend on the market sector. But smart use of technology and people changes everything. Being in contract fabrication without a proprietary product line isn’t a bad thing. After all, hot products come and go. Continuous improvement is forever.
Tim Heston

Tim Heston

Senior Editor
FMA Communications Inc.
2135 Point Blvd
Elgin, IL 60123
Phone: 815-381-1314