Inventory, cash, quarters, and economic growth

If you work at a Chicagoland shop and need to drive downtown, bring a few extra quarters for parking.

According to a recent BusinessWeek article, the Windy City’s government received $1.15 billion from a deal with Morgan Stanley, Abu Dhabi Investment Authority, and Allianz Capital Partners. In return, these investors now have the right to run the city’s 36,000 parking meters for the next 75 years, and they formed an entity called Chicago Parking Meters to run the operation. And thanks to some aggressive parking fee hikes, the group apparently will make more than $9 billion profit before earnings, taxes, and depreciation. Now that’s a chunk of quarters.

According to critics, the city essentially gave away future revenue to pay its bills today. The story says a lot about the importance of cash. The Chicago government needed it, the investors could get it for them, and officials apparently were willing to give up billions in future profits to get that cash immediately.

In the metal fabrication arena, one thing tends to help free up cash more than anything else: inventory reduction. And a recent survey from the Fabricators & Manufacturers Association supports that claim.



Last year FMA put together a comprehensive “Cost of Doing Business Survey,” which will be covered in the September print edition of The FABRICATOR magazine. Metal fabricators submitted data—a tremendous amount of data, really, including gross and operating profits, liquidity measurements, sales and administrative expenses, and labor cost ratios. They provided information on salaries for various job functions, employee turnover rates, average wage increases, medical plans and costs, employee benefits—the list goes on.

The figures showed that the most profitable companies happened to have the greatest number of inventory turns and the greatest amount of cash on hand--more than triple the amount of low-profit firms, in fact. Click here for more information about FMA’s complete survey.

The inventory issue may be at the heart of the apparent stalling of manufacturing’s recovery. This week the government released some weak durable goods data.

In the first quarter we saw the effects of an inventory rebuild. Of course, no one wants to hold on to that much inventory, and thanks to lean manufacturing and similar efficiency improvements, the manufacturing supply chain can ramp up production quickly.

Low inventories at multiple links in the supply chain seem to have changed the very nature of the metal fabrication business. Long order backlogs may have gone the way of the tape-fed punch press. That means shop owners and salespeople continually must hunt for business, bringing in one short-run contract after another.

Metal fabrication used to be primarily about, well, metal fabrication. Skilled technicians would write code by hand and had to know trigonometry inside and out. And because technology was sometimes lacking, plenty of fires (metaphorical ones, that is) had to be put out on the shop floor. On the sales side, things were somewhat relaxed. Fabrication shops served a local network of other contract shops and product line manufacturers. Everybody helped everyone else.

Today it’s the opposite. Modern machine tools and automation have made fabricating more predictable than ever. Once a job hits the floor, some of the best job shop managers I’ve talked to say they know where that part is at all times, and continually track efficiency and quality measurements. It’s not a relaxed environment by any measure; cross-trained floor employees may need to respond to fluctuating demand, for instance. But the best shop floors seem to run like a tightly wound clock: always ticking; pulling parts through shop floor processes; manufacturing and delivering just enough, just in time.

The sales desk is another story. Salespeople now seem to be continually hunting for new jobs and working to broaden the company’s customer base. Many shop owners have told me they hired a formal sales staff for the first time in their company’s history during the past five years.

And these salespeople don’t just offer proposals that beat the competition’s by a few cents. Some design-for-manufacturability or value-added engineering may be what’s necessary for a shop’s value proposition to far outshine competitors’. To win significant business, some have told me that they need to prove their business is in an entirely different league.

In this environment of unsteady demand and tight credit, shops can’t be caught without enough cash. This is what may be behind manufacturing’s short-lived inventory rebuild. Cash is too precious for anyone to hold significant amounts of material. And that has left everyone in the supply chain in a kind of “drip-feed” mode, continually processing small jobs (or “drips”) to meet immediate demand.

Some may say the future is just too uncertain for anything else, but I believe that’s a bit off the mark. Low inventories may just be the new normal. Besides, aren’t businesses with more cash and less debt healthier anyway? These firms may not be hiring or growing as fast as politicians would like; there’s a midterm election coming up, after all. But over time, these small but strong businesses may be bastions of steady, stable economic growth.