The state of custom metal fabrication: How’s business?

So how’s business? I’ve asked readers that question more times than I can count. It’s good to ask if people are crunched for time, and in precision metal fabrication, that’s par for the course. But whenever I can I try to dig a little deeper, because the real answer has, like an onion, many layers.

You have the top layer, which includes the general economic trends that matter for metal fabricators. Periodically Pat McGibbon, vice president, strategic analytics at the Association For Manufacturing Technology (AMT), presents a webinar showing a group of key economic indicators: manufacturing technology orders, durable goods orders, the Purchasing Managers’ Index from the Institute for Supply Management, mortgage rates, consumer sentiment, light-vehicle sales, bond yields, capacity utilization, and a few others. He usually color-codes the indicators green (good), yellow (worth watching), or red (cause for concern). In late February, all but one of those indicators was green.

The only yellow arrow was by manufacturing technology orders, which at the beginning of the year was slowly turning a corner. Still, judging by survey and anecdotal data from other sources, I’ve got a feeling even this arrow will turn green soon (if it hasn’t already by the time you read this).

So on the surface, the onion looks almost perfect, shiny, with no bruises. But when you peel back layers, what do we see? For an idea, I listened to presenters and attendees at The FABRICATOR’s Leadership Summit, which occurred March 8-10 in New Orleans. It was part of the Fabricators & Manufacturers Association (FMA) Annual Meeting, which drew more than 300 leaders in metal manufacturing.

Overall, meeting-goers had a positive outlook for the rest of the year. Sure, the calls for better-skilled, more engaged people are as persistent as ever. But attendees said that customers, expecting higher interest rates to come, are pulling the trigger on big projects. True, industries related to commodity production and transportation, including oil and gas, mining, and rail, have seen better days. But if a fab shop’s customer portfolio is well-diversified, it’s likely poised for growth in 2017.

Still, growing in this business isn’t a straightforward affair. Riding the train of a handful of large customers can be a quick way to grow, but a fabricator can fall hard when those large orders stop coming in the door.

This presents a challenge hidden within the onion’s inside layers: How does a custom fabricator effectively scale up? As one attendee put it, “How do I take our business to the next level?”

Every June this magazine publishes the FAB 40, a listing of some of the most successful operations in custom fabrication, ranked by annual revenue. Look at the list and you’ll notice a clustering of fabricators at the high end and low end. A growing number of big fabricators are getting even bigger, while the vast majority of operations earn between $8 million and $20 million.

So what’s driving the revenue gap between the big and small? Part of it probably comes from large customers parsing their supply bases in recent years. It costs less for OEMs to manage fewer suppliers, who now grow bigger as a result. Growing a custom fabricator, however, requires additional investment that can be difficult to make without riding on the backs of existing customers and climbing aboard the risky train of high revenue concentration.

Jumping this gap has been a recent driver of strategic acquisitions. As The FABRICATOR covered last year, a big reason the owners of Impulse Mfg., a Dawsonville, Ga.-based custom fabricator, agreed to sell to BTD (a $190 million-plus operation) was that it helped the Georgia operation scale up to the next level while still maintaining its diverse customer portfolio and low revenue-stream concentration.

Another challenge hidden in the inner layers of the onion: selling. Launching a massive sales effort isn’t easy in custom fabrication; people who do it successfully are difficult to find. In fact, if they’re really good, there’s a good chance they’ve already launched a shop of their own.

One fabricator at the Leadership Summit told me on background, “It’s difficult to find a salesperson that cares about the company, and not just about the sale.”

Survey data backs up the anecdotal evidence. According to a study The FABRICATOR published in November 2016, more than half of respondents said they were operating without a dedicated sales force. Some of this may be a function of company size; the CEO of a 10-person shop is likely its national sales manager too. But managers at larger companies in this business, some of whom attended the summit in March, also work without a formal sales team.

Another challenge: New technology gets old extremely fast. In fact, several shop owners at the summit spoke about equipment leasing strategies in their future. This makes perfect sense when you consider the speed of a 10-year-old CO2 laser versus a modern fiber laser. Big technology advancements make old equipment worth less.

However, modern equipment also brings up another, less pristine onion layer: job costing. Knowing a job’s exact cost isn’t the issue; it’s grossly underestimating it.

A blazingly fast laser doesn’t always mean a job costs less. It’s about the velocity at which a job moves through the plant. If a new machine cuts a job in half the time as the previous system, and yet the job doesn’t move through the laser system in less time (from loading to sheet shaking and part sorting), the costs haven’t necessarily changed. In fact, they may have increased, especially if the fabricator needs to hire more people to handle all the parts coming off the machine.

Automation is one answer, of course. This includes both hard automation (robots, material handling towers) and—what will perhaps become more significant in the coming years—the soft automation that tracks information.

Leadership Summit keynote speaker Shawn DuBravac made a key insight about this. The chief economist and senior director of research at the Consumer Technology Association, Arlington, Va., spoke of a future full of sensor technology.

“With the cost of sensors close to zero, there will be billions of sensors everywhere,” he said. “This will lead to microcustomization and ultimate personalization.”

In custom fabrication, this could include the increased use of radio frequency identification (RFID): A job hits the floor, and an RFID tag attached to it automatically transmits its location from station to station, no typing or other data entry required.

So how’s business? The onion’s outer layer is bright, and even the stained inside layers—finding skilled labor, keeping up with technology, tracking information, and all the rest—have a positive undertone. Collectively, fabricators seem to be saying this: “Times are great, we’re growing, and we’re working as hard as we can to keep up with it all.” As challenges go, that’s a good one to have.

Look for further coverage of The FABRICATOR’s Leadership Summit and FMA Annual Meeting next month. Next year’s meeting will take place March 7-9 at the Talking Stick Resort in Scottsdale, Ariz. For more information, visit www.fmanet.org/annualmeeting.