When a custom metal fabricator launches a product

Many custom fabricators dream of having a product line to call their own. They’ve made a business out of juggling a variety of orders, playing in a market where demand is pretty much unpredictable. Wouldn’t it be great to have some control over the product design, tailored to run on the machines and tools readily available in the shop? Wouldn’t it be great to have something to keep the shop busy during the slow times?

The allure is there, but so is the risk. With a product line comes a different business model. In the job shop world, customers buy manufacturing as a service; the more reliable that service is, the better. In the short term, competitors can easily match a low price; reliable delivery isn’t so easy to copy. In the product-line world, customers buy the product; most people don’t care how it’s made, as long as it’s made well, it’s available at the right time and at the right price, and it meets or exceeds their needs. World-class job shops can make things well and deliver the right quantity at the right time, and some even do supply chain management and juggle a variety of purchased components. But when it comes to marketing and selling a complete product, will it satisfy an unmet demand? How stable is that demand? And in this world of information overload, will that prospective customer know the product exists?

As the late industry consultant (and former columnist for The FABRICATOR) Dick Kallage once wrote, “Despite the old adage about building a better mousetrap, in today’s environment, it is possible to have a wonderful product with almost no sales.”

He wrote this in the pandemic-free year of 2013, but it’s just as true—if not truer—in 2020. Still, plenty of custom fabricators have had success launching their own products, purchasing companies that make products, or licensing products from others. Two operations, Athena Mfg. and OMCO, are featured in this issue. Their stories are very different, but they share a common thread: They jump into the venture with eyes wide open, fully aware of the risks and rewards.

Four Possibilities

Vincent Bozzone, president of Delta Dynamics Inc., a Michigan-based job shop consultancy, described product-line manufacturing in a job shop with a metaphor. “Imagine a potential customer walks into a room with a wall lined with boxes. What happens next?

“There are four possibilities,” Bozzone continued. “First, the customer could open a box containing the item they wish to purchase. He removes the item, pays for it, and goes on his way. This is a completed sale with a satisfied customer.“Second, the customer could open the box for the SKU [stock keeping unit] they want, only the box is empty. This is a lost sale. Even though the item may be backordered, the customer is not satisfied and may go elsewhere to purchase the item.

“A third possibility is that potential customers never open a box. There is no demand for these items, and so they are a waste. Such inventory, built in anticipation of demand that does not materialize, is an expensive form of waste.“The fourth possibility is a theoretical box that does not exist. It represents an SKU for which there is potential demand. However, the company has not recognized the demand for this item, so it is not being produced. These lost potential sales are difficult to recognize and will go undetected.

“As a manager in this company, you are on the other side of the wall trying to figure out how many of what to produce in order to satisfy demand and minimize lost sales while not making items for which there is no demand.”

Put another way, you’re maximizing the first possibility—a satisfied customer walking away with a product—and minimizing the rest.

The metaphor helps differentiate a “product” from “contract work.” Job shop or contract manufacturing is really a service: Make and deliver this part to print. Eventually the order might be made regularly; a fabricator might even keep inventory, perhaps develop cells around work that’s ordered repeatedly at higher volumes.

Contract work could be made-to-order, configured-to-order, or even made-to-stock, available for the customer to pull from inventory as needed. Regardless, the company is marketing and selling not a product but instead a manufacturing service.

As Bozzone explained, the entire business model of the job shop is built around service, from the way the shop is organized to the people it employs. “Job shop people are versatile,” he said. “They can operate multiple machines and work centers and are very flexible. They’re not making the same thing over and over.”

Some job shop employees never experience the same workday twice, and that lack of monotony helps create interesting, fulfilling careers. For executives and owners, building a business off a manufacturing service reduces risks, at least in some ways. A job shop’s key differentiator lies hidden from view: the engineering and manufacturing processes on the plant floor, inside the company. A product, on the other hand, is always in the spotlight, there for customers to buy and competitors to imitate.

“The product is out there,” Bozzone said. “It can’t be a secret. And there’s so much innovation out there. If you make one product, you might be eclipsed by another company that makes a better product”—a “better product” meaning one that gains more market share. This could be because of a lower price, better design, better marketing, or a combination thereof. And for many job shops adopting a product line, marketing is their Achilles’ heel.

“Marketing [products] is different,” Bozzone said. “In a job shop, you’re spreading the word that you have certain capabilities, to get customers to put you on their bid list. Of course, you’re often bidding with other shops that do exactly what you can do.”

The trick is to offer what competitors can’t, like reliability. “It’s about price,” Bozzone said, “but it’s also about quality, delivery, and reliability. Price is only one factor among four that a buyer is considering when awarding work.”

Still, there’s the allure of selling a must-have, unique product. What if the product is so good it essentially sells itself? “Say you make a specialized aftermarket part for a Harley-Davidson,” Bozzone said. “The product improves the bike performance, and you’ve got a lock on it.” That product requires specialized equipment to make, and it’s not easy to copy. The demand is consistent, and you offer only a few product model variations. “You’re selling that product out of inventory. When you get the order, you don’t have to make it at all. It’s sitting on the shelf. All you do is pick, pack, and ship. There’s zero lead time.”

Because the fabricator controls the design, it engineers the product to take advantage of the shop’s existing machinery and tooling. And if it can forecast demand with reasonable accuracy, “a shop can build these products to stock and try to level-load the shop,” Bozzone said.

Risks and Benefits

Steve Zerio, industry consultant and member of the Management Advisory Council of the Fabricators & Manufacturers Association Intl., understands why launching products is so attractive for a job shop, especially when it comes to company valuation.

“A company’s value depends on its current profitability and potential growth rate,” he said, adding that it’s a core metric when managing by valuation. Owners may or may not intend to sell the business. Regardless, maximizing a company’s valuation also tends to improve the overall operation and make it more sustainable—and offering a unique product, especially one that’s difficult for others to copy, doesn’t hurt.

The benefits can be huge, Zerio explained, but again, so can the risks. There’s the fundamental risk of lackluster customer demand. This could be due to a lack of awareness (bad or insufficient marketing), apathy (customers don’t want or need it), economic conditions, or innovation that makes a product either a commodity or entirely obsolete.

Then come the operational risks. “Depending on the product, you might have an increased amount of inventory,” Zerio said, which can cause logistical headaches. For instance, engineers might change the product design, either to improve the product for customers or to make it easier to manufacture. “What’s in inventory on the shelf is a different, older version. And if products are sent to distributors, you’ll have to update those as well.” The result: A seemingly small product change can snowball into an extraordinary amount of waste.

Revenue concentration is another consideration, Zerio said. In the job shop realm, low-volume work that adds a lot of value (cutting, bending, welding, coating, etc.) can be very profitable. If a large amount of low-margin parts replaces existing work, profits can diminish.

In product-line manufacturing, profits don’t necessarily diminish, especially if the product fills a niche. “If you have a product that’s unique, you’re providing what no one else can, and you can build that into your pricing, well, that’s the best of all worlds,” Zerio said.

Of course, today’s innovation is tomorrow’s commodity, so market pricing pressure can reduce profit eventually, even while demand and production volume grow. Operationally, the business seems great. Compared to the job shop world, where demand is hard to predict and jobs can be incredibly complex, the world of repetitive manufacturing seems to be a breeze. Cells are created, setups are streamlined, machinery is well-utilized, and everything seems under control—yet profits are shrinking.

Still, the product line (and repetitive work in general) continues to provide a greater portion of company revenue. Because operations managers are starting to see it as the company’s bread-and-butter work, they dedicate the shop’s best equipment and automation, such as an automated blanking and bending line followed by welding automation.

Even so, some of this new equipment is actually designed to handle a range of jobs. Some even promise “zero setup.” Yet those machines still tend to produce repetitive product after repetitive product. “Companies are tempted to put high-volume repetitive jobs on a new machine that was purchased because it offered quick setup,” Zerio said. “They’d be better off saving that machine for the small jobs that require dozens of setups.”

If a fabricator has design control over a product, it can design it around available equipment and tools and keep the necessary setups few and simple: no need for an advanced press brake with automatic tool change; a few older brakes with static tool setups would do.

Zerio added that fabricators should consider the culture on the shop floor, particularly when an operation that had focused solely on custom fabrication—where no job is the same—now adds elements of repetitive manufacturing. The change might not be evident at first. To a machine operator, a low-volume job shop order might look the same as a low-volume order for the shop’s own product. An order’s an order, after all.

But as volumes grow, the situation changes. If the products requiring repetitive work become successful enough, it might make sense to separate the flow into a dedicated value stream or even its own facility. But what about the time before then, when the demand for repetitive product-line work rises and competition for shop floor resources increases?

Here, communication becomes paramount. Zerio described a situation in which a mixed-production-mode fabricator started a second shift, a move that immediately led to quality problems. A lack of communication was to blame. Yes, the operation had written work instructions and standard operating procedures, but with such a complex mix of custom and repetitive work on the floor, a seamless transition between first and second shift became next to impossible because they never saw each other.

“Overlapping shifts can be tremendously valuable,” Zerio said. Sure, overlapping shifts cost a little more, but any increase in labor costs is outweighed by increases in machine uptime and throughput. “You sometimes have businesses who do everything to shave a little labor costs, but they don’t realize that modern fabrication equipment can cost hundreds of dollars an hour to run,” Zerio said.

Overlapped shifts allow operators to communicate. These conversations help reduce rework, shorten setups, and, most important of all, spread knowledge. “It was about changing the culture and respecting the operator,” Zerio said.A mix of repetitive and job shop work effectively creates two kinds of fabrication jobs under one roof: the production operator and the cross-trained job shop craftsperson.

As Zerio explained, more repetitive product-line work could have several unintended consequences, and much of it hinges on the existing shop culture. For instance, consider a shop in which veteran operators on the day shift take the easy, repetitive jobs, while rookies on second shift take the more challenging custom fab work. If the second-shift operators run into trouble, the job has to wait until the next day shift, when quality, maintenance, and other support personnel are available. Obviously, the schedule should run the other way around, with veterans running challenging jobs during the day and rookies on the second shift getting their feet wet with simpler, repetitive product-line work.

Another unintended consequence is a changing shop culture, with veteran job shop workers not getting along with production workers with narrower job descriptions. Managers and supervisors at OMCO have worked to prevent this very thing. The custom roll former has ramped up its solar product lines in recent years, which has introduced a new, much more segmented production environment at some OMCO plants that is much different from the custom roll forming operation.

The unifying factor among all workers, though, is the plants’ culture of continuous improvement. “It takes a team to accomplish something well,” said Andy Kinkade, operations manager at the company’s Pierceton, Ind., plant. “People need to feel they’re a valuable member of the team. And even if [a certain challenge] is outside your realm, we still want to hear your input on improvement.

“We always make sure people have the opportunity to cross-train,” he added. “We need to make sure people have the tools they need to succeed, and one of the greatest tools is knowledge.”

A Hybrid Business

Launching a successful product line can do wonders for a fabricator’s long-term prospects, especially if it further diversifies revenue. The last thing a job shop wants is to be utterly dependent on just a handful of large customers.

But as sources explained, launching a product isn’t like bidding for work in an untapped market, especially if it leads to relatively high-volume, repetitive production. Done right, a successful product can make a fabrication business even more sustainable. For many employees, it can also create a very different place to work. And as OMCO’s Kinkade pointed out, “Just because something’s different doesn’t make it bad.”