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Diversification: The true competitive advantage in metal fabrication

FMA survey data reveals industry growth, challenges, and opportunity

These results are adjusted averages and are drawn from the previous fiscal year. For instance, the 2015 survey shows financial results from 2014.

A shop owner once told me the secret to his success: keeping his powder dry. That is, his shop had little to no debt. Recent “Financial Ratios & Operational Benchmarking Survey” data, compiled by the Fabricators & Manufacturers Association International, may explain the reasoning behind this.

Almost all survey respondents worked in custom or contract fabrication, and for them, having little debt is a bit like a war chest for when business goes south. That drop can be dramatic, especially if a shop has high revenue concentration—that is, most revenue comes from just a handful of customers.

The average debt ratio (total debt divided by total assets)in this year’s survey was 0.33, though 26 percent of shops reported debt ratios of 0.1 or less. A handful of shops reported no debt at all. The average debt ratio is down from 2012, when it was 0.37. This implies that though fabricators are careful not to overleverage, they also know they need to put the money to good use through investments, be it in software, machinery, or personnel.

Revenue concentration has remained high, and for some it’s getting higher. The average number of customers that make up 50 percent of a shop’s revenue declined slightly in this year’s survey. Last year the average was 4.35; this year it was 3.89.

It also seems to take a while for new business to turn into major accounts. During the past three years respondents to the annual survey have reported success in obtaining a range of new customers. Some report just a few, while others report several dozen new accounts. One respondent in the 2015 survey reported gaining more than 40 new customers in the past year—not bad.

But most or all of those customers are probably small orders. Almost all respondents in the survey said that sales dollars from these new accounts make up less than 10 percent of overall revenue; more than half reported this figure as less than 3 percent of overall sales.

The rebound immediately after the recession created an exception to this trend. In the 2011 survey, for instance, 15 percent of respondents reported that new-customer sales dollars accounted for more than 15 percent of overall revenue. That survey covered the 2010 fiscal year, when a lot of OEMs and other customers were scrutinizing their supply chains. But even then, fully half of survey respondents said that new-customer sales dollars accounted for less than 5 percent of overall revenue.

At the same time, the average win-to-bid ratio has remained low for years. This year the survey reported an average of 34.16 percent; that is, of all the requests for quotes (RFQs) a shop bids on for new work, a fabricator wins less than 35 percent of the time.

Delivery also remains a challenge. Although a few shops did report on-time delivery rates of greater than 98 percent, the average this year is 87.12 percent, near where it has been during the past four years.

The survey has reported significant sales growth numbers during the past four years. In the 2012 survey, shops gained ground fast after the recession, reporting more than 19 percent sales growth on average. Respondents took a step back in the 2014 survey (covering fiscal 2013), with many shops reporting negative growth, driving the average down to 1.65 percent. But this year the growth rebounded again to 7 percent.

Regardless, during the past four years, earnings have remained somewhat steady. According to the most recent survey, the average earnings before interest, taxes, depreciation, and amortization (EBITDA) margin was 9.39 percent for fiscal 2014, a jump from fiscal 2013, when the average EBITDA margin was 8.40 percent. Still, for the past four years the average EBITDA margin has ranged from 8.4 to a little less than 10.5 percent—not a huge variance.

So what are the takeaways from all this? First, this business is full of variability. If a shop wants to stand out in a crowd, it can shorten its order-to-ship cycle and increase its available capacity so it can handle all that variation. Shops do this by shortening the time orders sit between jobs (all that non-value-added time) and by making investments in machinery and software to make the operation more flexible. This includes automating changeovers, shortening fixture development time (for robotic welding and other processes), reducing batch sizes, and making sure the right job information is available at the right time.

With that, a shop ideally can improve its on-time-delivery rate, fill that newly created capacity with more sales, and, ultimately, better diversify the customer base. The numbers in the survey, particularly in on-time delivery, show that opportunity is there, both for shops that streamline shop floor operations as well as those who make quoting and order processing more efficient.

Yet the numbers also imply that it takes a lot to turn a new customer into a major account. The shop owner who finds a way to do this efficiently and effectively will have uncovered a major competitive advantage.

For more information about FMA’s “2015 Financial Ratios & Operational Benchmarking Survey,” call 888-394-4362, or visit www.fmanet.org/store.

About the Author
The Fabricator

Tim Heston

Senior Editor

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.