Expert tips to diversify, strengthen your fabrication company

Nearly every small fabricating or manufacturing company gets caught up relying too much on a single customer or single industry. Getting out of it for good is a matter of planning and putting forth consistent efforts to stay out of it. Columnist and former fabrication company executive Lisa Wertzbaugher shares a few insights. Getty Images

While I can guarantee you that this column will not wade into the dirty waters of partisan political opinions and predictions, there is no denying that 2020 is an election year. There also is no denying that the American public will be equally fatigued by the unpleasant campaign process and concerned about potential economic outcomes. One thing is certain: This will be a year of uncertainty. While the economy is still relatively strong after slightly slower growth, history confirms that waves in the political arena will impact the economic outlook in the private sector. Many strategies can serve to hedge against market changes, but if I had to administer some advice in one word, it would be this: diversify.

Here Be Dragons

When medieval mapmakers got to the end of known territory, they often drew dragons and other terrifying beasts to signify unknown dangers and mortal risks in uncharted areas. In modern parlance, “Here be dragons.” As a fabricator embarking on a metaphorical voyage, you have it much easier and the journey is much less frightening, although it does carry some risk. An abundance of research can help to mitigate the risks.

Diversification is a discipline and must be a priority at the highest levels of the organization. The word has many implications, and I will touch on some key practices for securing your business against economic ups and downs.

Diversify Who You Serve

No single customer should constitute more than 30% of a company’s total revenue, including all subsidiaries. For example, John Deere builds products for a variety of industries—agriculture, forestry, construction, and turf care—but it would be prudent to consider John Deere, as a whole, one customer. While it is best practice to sell into all subsidiaries of an OEM (agriculture may dip while lawn and garden booms), I would still consider the parent company to be one client. Something catastrophic could impact the OEM, and you don’t want too much revenue at risk.

When compiling sales projections, check to see if the largest customer is projected to grow at a slower rate than others in the portfolio. If it’s close to 30% (or a lower threshold, if your appetite for risk is lower), keep tabs on this trend. At the same time, your company needs a robust pipeline, a conduit for growing your many small customers. Tracking quoted revenue, won quotes, and the hit rate will help you determine how much pipeline is needed to ensure equally distributed revenue growth.

Also, diversify the industries you serve. Many small businesses find a niche, gain a client, and settle into a comfort zone. The tendency is to do more of the same—“If I have one oil and gas customer, I can find another.” The trend leads to one industry often providing more than 70% of a company’s total revenue. A safer threshold is no more than 40%. For example, according to a December 2018 report by 24/7 Wall St., the photo finishing industry experienced a 57.9% decline in employment between 2008 and 2017. Consumers simply don’t print photos anymore. They share images online, and if a company was built to serve only that industry, it probably shared the same decline. Discipline yourself to research industries for diversification on an annual basis. Attend trade shows to view products, evaluate potential customers, and gather intel. Develop marketing strategies that target desired customers in specific industries and support sales force activity.

Diversify Your Staff

This is a well-researched topic, so I won’t repeat what you already have heard, except to reiterate that countless studies have found benefits in diverse workforce and detail the benefits to revenue and profit. While thinking about diversity, it’s helpful to go beyond the traditional categories of sex, race, and ethnicity. For example, my 15 years in medical device sales probably doesn’t seem relevant to metal fabricating, but it came in handy when I went to work (went to work for pay, that is) at my parents’ manufacturing company. Medical device manufacturers rely on their salespeople to be extremely proactive and relentless—aggressive—and this background really helped in developing the company’s revenue strategy. We adopted several business practices that were out of the box for manufacturing but worked very well with a little tweaking to suit the customer base.

Diversify Products and Services

A percentage of research and development investments should target new markets. Take Amazon, for example. In December 2019 Amazon released a statement that it is now its own largest carrier. After a painful holiday season in 2013 when other carriers could not keep up with Amazon shipments, many delivering Christmas packages late, Amazon took matters into its own hands. The logistics division now employs 90,000 associates. After it successfully delivered more than 3.5 billion packages in 2019, it’s clear that the strategy has paid off.

Are you struggling to find qualified powder coaters for your finished assemblies? Maybe you should consider a paint line that services your company and others. Is there a play in additive manufacturing, a growing market? Is there an inventory program you can offer customers, and charge for it? Assemble your staff for a strategy session and develop a big list of options. No ideas are bad ideas.

Where Be Dragons?

The options for diversification are many. You can provide new services, expand into new markets, sell through different channels, explore new geographies, and so on. If you see a dragon, good for you—you’ve gotten into unknown territory, and you’re well outside of your comfort zone. Diversification strengthens and stabilizes those who are willing to take the journey, making them much more equipped to weather the next downturn than those that don’t.