Metal fabrication financial benchmarking: The survival of the fastest

August 7, 2012
By: Tim Heston

How can a fabricator be successful these days? The common answer is that if a shop reduces labor costs, it can compete with the world. The story’s subtler than that--and a just-released financial benchmarking survey from the Fabricators & Manufacturers Association reveals these subtleties. This year, 36 fabricators anonymously shared some in-depth financial ratio data. Together, those responses helped FMA produce a valuable business tool: the 2012 Financial Ratios & Operational Benchmarking Survey.

One revealing data set was labor costs. 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. Collections may be slow too. 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.
Tim Heston

Tim Heston

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