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Why scaling up may be tough in metal fabrication
- By Tim Heston
- September 17, 2015
We always hear about how communization leads to consolidation. If you’re product or service is sliding closer to becoming a commodity, it makes business sense for you to consolidate and scale up and increase purchasing power so you can offer your product or service at the best price possible.
Metal fabrication historically has had low win-to-bid ratios. During the past four years, data from the “Financial Ratios & Operational Benchmarking Survey,” compiled by the Fabricators & Manufacturers Association International, has shown that average bid-to-win ratios are around 35 percent or so. So out of all the request for quotes (RFQs) a shop bids on, it wins only about 35 percent of the time.
This shows that the market is extremely competitive, one ripe for shops to merge and scale up, right?
Not so fast.
Yesterday I spoke to Brian Lueger of KVCI, a private equity firm near Kansas City, Kan., which recently invested in A&E Custom Manufacturing, also based in Kansas City. KVCI (along with other investors) also owns Bennett Tool & Die Co. in Nashville, and now A&E operates as a business unit of Bennett. Together the two now can offer a broader process offering (fabrication, stamping, and machining) and gain access to a broader potential customer base.
Lueger mentioned that the sales teams for the two firms are working together, selling the capabilities of both shops. But will the two organizations combine other operations, like engineering? After all, that’s a big part of scaling up, right?
Leuger said that engineering teams, while they’re working together, remain separate, and that’s because of one aspect of this business that really can’t be scaled up very well. Engineers and programmers in the front office know (at least they should know) the capabilities of the workers and machines on the floor. This means that a lot of front office work really can’t be “centralized” into one large operation.
Exceptions abound, of course, but most high-product-mix operations ship work to a specified distance from the shop—a few hundred miles, typically. Customers demand quick response, and it’s difficult to respond quickly if you have to drive parts across the country. In the “digital economy,” location doesn’t matter as much. Companies set up shop where the talent lives (like in San Francisco), not necessarily where customers are. But when you’re making tangible things, that’s not the case.
No matter how big shops get in this business, the small, local shop will probably dominate. Being part of a larger organization may change a shop’s purchasing power to some degree, but these high-product-mix, low-volume operations really can’t centralize or “scale up” much of anything else. That human connection—including the knowledge sharing between manufacturing experts in the front office and shop floor—really can set a shop apart. That’s especially true in a shop that fabricates hundreds of different parts every week.
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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 1970.
start your free subscriptionAbout the Author
Tim Heston
2135 Point Blvd
Elgin, IL 60123
815-381-1314
Tim Heston, The Fabricator's senior editor, has covered the metal fabrication industry since 1998, starting his career at the American Welding Society's Welding Journal. Since then he has covered the full range of metal fabrication processes, from stamping, bending, and cutting to grinding and polishing. He joined The Fabricator's staff in October 2007.
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