By: Paul Van Metre
The machining industry has thousands of CNC machine shops. Many of them struggle to stay profitable and deliver on their promises, and as a result, don’t grow as fast as they want to. A small number of shops are highly effective and grow faster than the rest and go on to have amazing results. I’ve talked with thousands of machine shops around the world and seen the common themes, and of course, with our own experience growing a shop from $0 to $12M in revenue, we have a few thoughts to share today.
There are many more effective habits that are also important, but here are the most important habits we’ve seen over the years.
By focusing on these 7 points above, you can grow your CNC machine shop into a highly effective, profitable, and growing business that can support your family’s long-term financial goals, provide great jobs in your local community, and help strengthen our manufacturing economy. I can’t think of many things that are more worthwhile than that.
Sign up for the ProShop newsletter for an invite to The 7 Habits of Effective Shops webinar which will take place in a few weeks.
By Paul Van Metre
Author: Paul Van Metre
Machine shops are a hotbed of research and development (R&D). Yes, you heard me right. R&D isn’t just scientists and equipment working in a lab. Job shops especially, and machine shops of all kinds participate in substantial R&D efforts every year. Did you know that R&D costs are eligible for a tax credit? According to Fabricating & Metalworking Magazine, it’s been estimated that just 1 in 20 shops apply for the R&D tax credit. Most are leaving hard-earned dollars on the table when it could be in your bank account! Just consider these common scenarios you likely engage in daily:
These activities are considered R&D from a tax point of view and may qualify for the R&D Tax credit. Heck, even researching a trade show is considered R&D!! Few shops take advantage of this credit and end up paying way more in taxes than they need to.
Let’s go into a bit more detail about a few of the most common activities that a CNC machine shop or job shop may be able to apply to the R&D Tax credit. I’ll also preface this by saying, I’m not a tax professional, and you should always consult with your accountant or tax advisor on any of these topics. There are also companies who specialize in helping shops apply for the R&D tax credit.
The tax code says eligibility for the R&D Tax Credit hinges upon improving a product, process, technique, formula, invention, or software. Sounds like things you do every day?
Does the Activity Qualify?
When trying to figure out if an activity meets the requirement of the R&D Tax Credit, there are 4 tests it must pass to potentially qualify:
Sounds a lot like things your shop does every day, huh?
Improvement in general is R&D
Improving a process or a product is something that most shops do all the time and falls directly in line with all 4 of the above test criteria. Just think about all the activities that meet the criteria that you do every day. When a client asks you to quote on a prototype job, or you provide DFM feedback, you’re working on an R&D activity. When you build and help iterate to improve that product or process, that’s absolutely R&D. When you decide to build a new fixture to improve the work holding of a part you’re manufacturing, that’s R&D - both the labor and the materials you have to buy. When you decide to reprogram a part to take some cycle time out of it, that’s R&D. When you buy a fancy new insert mill or other cutter and need to dial in the cutting parameters, that’s R&D. When you think of it through that lens, you’ll quickly realize that you do R&D every day!
Research is R&D
As shops grow in the sophistication of their equipment and machines, taking on new manufacturing processes and learning how to use them, that activity should qualify as R&D. So the cost and the time to learn about new 5-Axis machines or a new EDM technology at IMTS or other trade shows is considered R&D. If the cost is incurred on these types of activities, it will likely qualify.
Lean Improvements are R&D
I can’t think of a better win/win than spending time on dedicated improvement activities to reduce waste in your value stream while receiving tax credits for the time and cost incurred! If you move machinery around to promote better flow of product, build new lean workstations, or just study a process with a Kaizen team in order to analyze your before state, and then work to improve the process, that’s all likely eligible for the R&D Tax credit.
We’ve identified that many common shop activities may very well qualify for tax credits, so what’s next?
Documentation of Activity and Cost
Uncle Sam isn’t going to take your word for it. You must have hard evidence of your activities and cost. This documentation should include things like:
It’s not on the top of everyone’s list to document these things, but when a bit of thought is put in upfront, and a system for this record-keeping is developed, you can easily see that the small amount of effort to document the costs will be well worth the time.
Carryforward and Other Things
If you’re one of the 19 out of 20 shops that hasn’t applied for an R&D Tax Credit, you can retroactively apply for up to 3 years. So think back on what projects or activities you could apply for and what records you have, talk to your tax professional and get some of your hard-earned money back. Around 36 of the US states also have their own tax credit system, so the benefits could multiply if you operate in one of those states. There are upper limits to how much tax credit you can apply for, but if you’re a typical job shop doing lots of the activities outlined above, you should have ample activities to apply for.
How Can ProShop Help?
ProShop can primarily help with the documentation side of things. There are a few ways we can help with this. Every Work Order can have a “WO Class”. R&D Tax Credit is one of the default options, along with our “WO Types” of Prototype or 1st Run/New Rev. All three of those are likely to have highly qualified costs. You can also add any other options to WO Class or Type you’d like if you want to further segment your work. A quick query by the WO class will pull up all the work orders in a given time period instantly. From there, it’s a simple function to pull out all the labor hours and out-of-pocket expenses which can dramatically reduce the time spent on researching costs for the credit.
If you’d like to pull out just isolated time tracking activities, it’s possible to add notes to any time tracking event. So if you train your staff on what activities qualify as R&D, then it’s possible to pull up a list of time tracking for the year and filter just the ones with the R&D tag on it, pulling out thousands of dollars of credit in just a few minutes of work.
Recently we had a customer email us in the early afternoon telling us his accountant needed this data. He wasn’t quite sure how to pull it out the easiest way. By 4 pm we were on a Zoom call with him and shortly after had compiled all the information he needed to apply for thousands in tax credits for the prior year. When it’s that fast and easy, you’re much more likely to do it, and get those credits that Uncle Sam genuinely owes you!
For more detailed information, this guide from Moss Adams is a great one to start with.
By: Lacey Hill
Purchase orders (POs) are legally binding contracts between your company, and the company placing the order. If you aren’t treating each PO as a formal contract and reviewing the details of it as such, it’s time to!
When you send the Buyer your order confirmation, you are agreeing to that contract and all the terms therein.
For the past decade, I’ve sat on the customer side of the table (as a Buyer, Purchasing/Planning, and Supply Chain Manager), and I’ve issued and reviewed hundreds of POs and order confirmations. When I say I know a lot of the scenarios you’ll run into during order entry/contract review, know that I’ve experienced them first hand myself. I’ve been on both the advantageous side of a supplier not completing a thorough contract review, and I’ve been burned by missing contract terms myself….and there’s nothing worse than the moment you realize what you missed!
There are numerous aspects of a Customer PO to be reviewed before sending your order confirmation back to a Buyer. I’m going to review 4 scenarios that I’ve commonly run across in contract review and suggestions for how to address them, but know that there are hundreds more. The more attention & effort you put into contract review the more you reduce your risk of agreeing to terms of an order you shouldn’t.
1. Orders placed within the quoted lead time
You open the email from the buyer, you see they’ve awarded you the job. ‘YES!!!’
You open the attachment, look at the total value of the order, you’re excited ‘this is just the size order we needed this month!’
Then you look at the delivery date… ‘2 WEEKS?!!! But I quoted them a 4 week lead time!’
If you aren’t thoroughly reviewing all aspects of Customer POs that are coming into your shop, you may miss that a buyer has just cut your lead time in half, requiring you to pay for all the expedite costs out of your own pocket.
Make sure you’re being allocated the time needed to complete the job. After all, you took the time in estimating to accurately calculate the lead time and outlined that lead time on the quote to the Buyer. If you rush a job you run the risk of high scrap rates, defects, poor quality, negatively impacting other jobs, eating into your profits...just to name a few.
If the delivery date on the Customer PO is under the quoted lead time, this is a great opportunity to contact the Buyer and discuss expedite charges or other options.
Would they like to pay to have the parts delivered in the expedited window? This can cover overtime labor charges, charges to program/run the job on an alternate machine, or expedited outside processing charges.
Would they consider taking partials of a delivery? You might be able to run 1-2 parts through a prototype cell and the rest of the order at the standard lead time as intended. If the prototype cell is more expensive, outline that cost to the Buyer and consider breaking out the early delivery quantities to a separate PO line and charging them the increased cost.
Are you scheduled to run another job for them at the same time and could that job be scheduled out to make room for this one? Depending on the ERP system your Buyers are using, most can run an open order report that shows all open jobs they have with you and advise potential shifts in schedules that could be made.
2. Orders placed with outdated pricing
You sent the Buyer a Quote three weeks ago, but on the PO you just received from them, the pricing they listed is last year’s quoted price. What gives?!
There are several reasons a Buyer might have entered the incorrect pricing.
Here are a few to consider:
If the pricing isn’t current on the PO, when you conduct a thorough contract review, you are more likely to catch these mistakes. Seeing these mistakes gives you the opportunity to contact the Buyer and have them revise their PO before you send them an order confirmation.
In ProShop, to ensure you are accepting the PO at the latest quoted price, we developed a best practice workflow of creating a Customer PO (aka Sales Order) directly from the Quote! The pricing, quantities, rev levels of each part, etc are all copied from the Quote onto the Customer PO. So it’s obvious as you look at the PO the Buyer sent you compared to the fields in ProShop if there is a disconnect.
3. Customer directs you to use preferred or single-source supplier
A Buyer calls you up, “I’m sending over an order today, and I want the finish to be done solely at this designated finish house. Then go ahead and have the finish house dropship the completed parts to us once complete. Here’s their contact info, they’re expecting your call in the next week to schedule the job with them.”
‘Great’, you think! ‘They did the leg work for me and I can skip final inspection AND shipping!’
This CAN be a great job for you, HOWEVER, it’s worth some effort upfront to ensure that the customer’s preferred supplier arrangement is going to work for you. Factors to consider are:
Without review and answering many of these questions you are putting yourself at risk for being liable for aspects of this job that should be handled by either your customer or the supplier. Also, the moment when parts are scrapped, or shipments are delayed (time is of the essence), that is not the time you want to be developing or negotiating a workflow process to handle this scenario with the supplier. Taking the time upfront to discuss these scenarios ensures that the customers preferred supplier arrangement is going to work for your shop in a smooth manner.
4. Extensive, in-depth, or easy-to-miss Terms and Conditions (T’s & C’s)
T’s & C’s are the fine print of the contract you are reviewing. It is in your best interest to read the fine print thoroughly, ensure you understand each aspect, and ask the Buyer to provide clarification if needed.
T’s & C’s may be printed on the bottom of the order for you to easily review, HOWEVER, they may also be listed on a website, and/or on the order portal. Be sure to look for statements on the base of an order that read something like “Purchase order subject to Terms and Conditions form/document in your possession or available at [URL link]”. If you have not received, or have in your possession, their T’s & C’s document, be sure to ask for it before confirming the order back to the Buyer.
If up till now the customers you’ve worked with have minimal T’s & C’s, then it’s probably good for you to be aware that they can vary quite a bit customer-to-customer. When quoting and taking jobs from new customers it is critical to review their standard T’s & C’s and dialogue with the buyer on questions or concerns you have.
I’ve listed some of the common components you’ll find outlined in T’s & C’s, but know there are many more that can be included:
How can ProShop help?
In ProShop, contract review at the point of Customer PO order entry is built into the system! You can’t miss it!
We have included checkboxes for the critical fields on the PO that need to be reviewed (ex: Part Rev, Part Number, Delivery Date, Qty, shipping Address, Price, Terms) and added a list of key aspects to be completed as part of Contract Review/Risk Evaluation (ex: Payment terms, T’s & C’s, FAI requirements).
We even leverage the ability to create and review a Task in ProShop dedicated to following a step-by-step process for Contract Review/Risk Evaluation.
With these tools at your fingertips during order entry, you can quickly & efficiently complete the required contract review and get to the best part…..making parts!!!
If you aren’t using ProShop, I can’t stress enough the importance of developing & implementing a standard contract review process now for your business! A small amount of time upfront can save thousands of dollars and a lot of fire fighting in the long run.
Or if you’re interested in knowing more about the solutions ProShop offers for this and many other challenges facing your shop, we’d be happy to talk with you.
By: Lacey Hill, Implementation Specialist
Author: Paul Van Metre
When I started writing this blog post, it seemed oddly familiar to me, and I had a feeling I had written something similar before. So I went searching in my Google Docs, and sure enough, I had written a blog post on this exact topic for Production Machining Magazine not more than 6 months ago, with a focus on how Covid has forced many shops to look for new clients. Besides needing to visit the doctor to get my memory checked, I thought I’d just link to that article and update this blog with a bit more client feedback I’ve received in the past 6 months.
The premise is that shops can’t just promise great quality and delivery. They need to prove they have the processes and systems to guarantee they will execute. This will open doors to more discerning clients. Through discussions with clients over the past few months, this theme has proven itself to be true. Here are just a few examples of things that clients have told us about their usage of ProShop as a sales tool:
“Just last week we were able to get on the approved vendor list for a new customer, which is very promising. It’s a globally recognized brand, and we can compete now on larger volumes than we are used to seeing, and that’s something we want to do more of. We wouldn’t have been able to get on that approved vendor list if it wasn’t for proving that we could meet their quality requirements, and once we showed them once what the inspection reports and dim-tagging and quality capabilities were in ProShop. Once we showed them what that output looks like, they said, "Perfect, this lines up exactly with what we need. So here’s a bunch of drawings to quote.” And that was huge! I was so excited. I’m not trying to sound like such a ProShop fanboy, but the reality is without having ProShop we wouldn’t have been able to do that. So we’re very excited at the doors that are opening as a result of having this system in place, and how that enhances our reputation, our manufacturing prowess, if you will, to be able to compete for jobs we traditionally haven’t been able to...It almost felt too easy.” - Dave, G&S Tool
“Our new sales rep is blown away by its capabilities, and he’s bragging about it every time he makes a call. I am setting him up with the proper equipment to do a short demo of its capabilities when he’s out and about. One client that followed him to Kajan is interested in ProShop for his own business.” - Kurt, Kajan Mfg.
“ProShop has been a cornerstone sales tool for us since we got it. We’ve had customers like SpaceX come in here and literally tell us that this is the best system they’ve ever seen, and when we open up ProShop, their eyes get wild...We had one of the toughest customers we do work for, tell us that ProShop was sexy! We thought that was one of the best compliments you could get.” - Matt, 3D Industries
Lastly, here is an article that was written in Modern Machine Shop Magazine about a client of ours who saved a very large client and grew their business with them based on their use of ProShop and having it feature prominently in a vendor audit. It’s a hard-hitting, real-world example of the stakes that shops deal with every day.
Want to read more examples? Click here
Can ProShop Help?
While we’d love to talk with you about adopting ProShop in your company, these principles are universal and you can build robust business processes yourself starting tomorrow. Possibly with your current ERP, connected digital travelers using something like Google Sheets or Office 365, or some other creative use of the tools at your disposal. The main takeaway is that in order to stand out from the competition and grow your business, you must overcome the skepticism of your potential clients by proving to them proof that you’ll deliver as promised.