Written by: Paul Van Metre
As I talk with shop owners, see their posts on social media, and even talk with my guests on the Machine Shop Mastery Podcast, I’ve been noticing a trend for the last several months that I believe is accelerating. As I ponder what I’m seeing, the phrase “Haves and Have Nots'' comes to mind. That term is generally used to describe the difference between rich people and poor people. But in this context, I think it goes a lot deeper. Ultimately it certainly does describe the difference between how wealthy the owners of these shops will end up being. This is a universally true dynamic in any industry. There will be companies that thrive and generate tremendous wealth for their stakeholders, and there will be those that go bankrupt and wipe out the life savings of those brave entrepreneurs whose dream was to start their own shops. The latter is a tragic and avoidable outcome in many cases. Let’s dig into what I think is happening and what can be done to change the outcomes for those on the Have Not side of the equation.
I’ve seen a widening disparity between how busy machine shops are. Some have had a record-breaking 2022 with significant growth over 2021 and record revenue and profits. They are going into 2023 with large backlogs of high-quality, good margin work. Many can’t buy machines or hire people fast enough to meet the demand. As the old saying goes, the sun is shining, and they are making hay!
Unfortunately, this situation isn’t universal by any means. On the flip side, I’ve seen many shops that are not having the same outcomes. Many are sharing that they have “open spindle time” and can offer fast turnarounds. This is a euphemism for “we are nearly out of work.” Some more candid shop owners say they are struggling to make ends meet. They are looking at layoffs, or if they’re very small shops, even having the owner get a day job just to help cover the expenses of the shop and their families. I’ve even seen a few shop owners say they are getting out of the business and putting their equipment up for sale. It’s those posts that pain me the most. I just know that there have been countless late nights at the kitchen table talking with their spouses about what they can do to save their businesses. These shop owners feel like they are failing themselves, their employees, and their families. The dream of being their own boss and owning a thriving business hasn’t panned out. And our economy needs more, not fewer, shops to meet the demands of re-shoring.
This situation is very complicated and isn’t caused by any one single thing. I’ve even seen shops doing all the right things but still not having the financial success that other shops are having. I know very savvy business owners who are still struggling, so I want to assure all of you that this article isn’t designed to cast shame on anyone who isn’t rolling in work and profits right now. It’s complicated and very difficult!! I’ve always said that machine shops are the hardest types of businesses to run, and I think it’s just getting more true with every passing year.
Here are a few things that I believe are contributing to this situation.
Being/Not Being a Sales-Driven Organization
In 2002 our machine shop, Pro CNC, nearly went bankrupt. We went from having lots of work to almost nothing in a matter of months after the 9/11 attacks. We didn’t have enough variety of clients and industries we served. We weren’t a sales-driven company. We would do sales and some marketing, but only when things got slow. When the shop got busy, we would stop doing sales and marketing, which invariably led to a dip in sales a few months later. It was a vicious feast or famine cycle that killed our profitability. After 9/11, we couldn’t do enough new selling fast enough to make a difference and keep our team employed. We had to do layoffs after the owners stopped taking any paychecks for several months.
I see many (most?) machine shops that are not sales-driven. And marketing isn’t even something they ever think about. The more mature ones have been lucky enough to get in a niche or on the supplier list of a few good customers and have ridden that horse for years. But it’s starting to catch up with them. The monumental shifts in the supply chain post Covid, have both positive and negative trends for North America. Mostly it seems to be positive, with lots of re-shoring happening, but it’s not equal. Some industries are doing much better than others, and the shops that are diversified into many seem to be doing the best. To be honest, the ones serving medical, commercial space, and defense are doing the best of all.
Inconsistent Adoption of Technology
Technology can be a major driver of efficiency and hence profitability. More profitable shops can invest in more technology - hardware and software. They’re buying new 5-axis pallet pool machines that can efficiently churn out small volumes of complex parts very quickly. They are buying zero-point tooling that is very flexible, fast, and accurate. They’re buying high-end tool holders that give them longer tool life and accuracy. They’re buying new shop management software, quality management software, and others that help reduce labor costs, cut lead times, and dramatically increase efficiency. They can serve clients better with fewer people. They can therefore be cost effective, winning more work with good margins and still investing lots of money back into technology. It’s a positive upward spiral of goodness that is very hard to beat.
On the other hand, many shops are buying more inexpensive machines like vertical mills and 2-3 axis lathes with the goal to “add spindles.” These machines often sit idle 75% of the time, require skilled labor to keep them running, and aren’t driving more efficiency. They conceptually drive capacity, but only when scarce labor is available to load and unload them. For very small shops, more spindles do allow higher revenue to be generated, but often create a hamster wheel of busyness for the owners who have essentially bought themselves a job. However, this model can still be highly successful when the proper business processes are in place. I visited a shop last week with mostly VMCs, and they were growing very fast, were very profitable, and had a huge backlog. They also used ProShop, so they were paperless, lean, and highly efficient. They were very sales driven also, and their clients loved how technology focused they were. It was a very successful recipe.
Technology-driven machine shops attract clients who care about such things and are willing to pay for it, like the shop described above. Especially when that technology can reduce risk for the client. When you find a prospective client that will send out a quality team to audit your company, then you know the potential revenue from that client could be substantial enough to justify the expense of adding your shop to their approved vendor list. That audit team will look for chaos, which many shops have plenty of when you pull back the curtain. But if you can show them a well-run, technology and process-driven company, with a well organized team focused on continuous improvement and exceeding customer expectations, you have a very high chance of winning a substantial new customer and being one of those shops in the “Have” category. Suppose you aren’t a shop like that, and you’re still working with basic machines, paper-based manual processes, and too much reliance on the owners and bottleneck individuals to get things done. In that case, I’m sorry to say, it’ll be a much steeper uphill battle to win those lucrative clients, and you’re much more likely to be in the “Have Not” category. I understand that there seems to be a catch-22 to getting in the “Have” category - nobody said it was easy.
Cybersecurity Will Make or Break Shops
Cybersecurity will become a make-or-break topic for many shops in the near future. Those that serve the Defense Industrial Base (DIB) or any US government sector will be required to achieve CMMC certification. And even companies who don’t will likely see similar requirements show up on their RFPs and contracts from clients who are similarly concerned about their data security. In fact, I’ve heard from many shops who say that these requirements are already showing up on RFQs, and they aren’t able to bid on those jobs if they can’t show compliance or progress to the standards. Those shops keeping their heads in the sand are starting to pay the price.
For shops that do a small amount of defense work, they’ll need to decide if the cost of gaining certification will be worth the business in that sector. It will not be inexpensive, and they’ll need to make a hard decision on whether to go for it or retreat and focus on other industries. The strength of the defense and space industries is very tempting, but the regulations are serious business and a significant cost driver.
You Can Become a “Have” Shop!
I recognize that I painted a pretty stark image of shops that fall into the “Have Not” category. My intention isn’t to beat up on anyone or any type of shop. I do intend to keep it real and not sugarcoat things. We all have to start somewhere, and most have very modest means like we did. When we started our shop, we could only afford one CNC vertical mill, and everything else was manual equipment. But we quickly learned what drove efficiency, what made us attractive to customers, and what set us apart from our competitors. When we could afford it, we bought more automated machines and technology. We became deeply sales and marketing driven. We focused heavily on continuous improvement. We built a world-class culture, so we had almost no employee turnover. We focused on building robust and scalable processes that were highly efficient. And we had the benefit of the “backbone” of our growth - ProShop.
Everything I just mentioned is available to any shop. Most of it requires a shift of perspective and a lot of hard work. But I know every shop out there today has the opportunity to become a thriving, profit machine that exceeds the owner’s expectations and goals. The long-term prospects for precision manufacturing in North America are exceptionally good, with very strong demand for a very long time. I’m a champion and cheerleader for every shop out there and hope that my thoughts inform, inspire and provide a perspective that is helpful for all shops to find their way to great success.
How can ProShop Help?
ProShop has become the backbone of our client's companies. It helps them drive efficiency, instill confidence in their customers, set their shops apart from the competition, meet regulatory requirements with ease, reduce cost, keep their data safe and secure, improve their cultures, build robust processes, win new business, and become significantly more profitable. It can help with all the categories above and helps ProShop customers thrive and grow. We’d love to help your shop get these things dialed in and strongly in the “Have” category.