A frank discussion of the time value of Precision Machine Shops…

By: Steven Deam, Sr.  –   CNC Industries, Inc. Fort Wayne, Indiana

A few days ago a friend of mine from another job shop gave me a call.   He wanted us to quote a simple job for them.   Since we had not talked for a while, we did some catching up on each other’s families.    After explaining Steve Jr’s role in CNC Industries as Vice President of Finance, I asked if he currently had any children in his company.    He indicated that one of his sons worked in the business for a while, but then went to college and earned a MBA.    I asked if his son planned to work in the business now.  My friend laughed and said his son once told him “dad, you have the stupidest business I have seen.”

I was a little taken back and asked how his son meant that.  He said his son explained it this way: The last time you hired a plumber, what did they charge?     Probably $90 to $110.00 an hour. A copy machine repairman?   Probably about the same.  How about an electrician?  About the same.  A mechanic?  Roughly the same…

Now, how about (U.S. based) web site developers?  Maybe $150-$200.00 per hour.  Sales consultants?  About the same.  And most of those companies have a relatively low capital investment compared to a job shop.  The typical precision machine shop will have several million dollars worth of CNC equipment on their floor, will have a sizable investment in real estate, will provide good health insurance and benefit packages, will inventory large amounts of raw material (as well as finished goods), and then put large amounts of labor into the product.    After all of that, they are lucky to make a shop rate of $60.00 per hour!

Unfortunately, I had to laugh at the situation too!   I can remember that most precision machine shops made a shop rate of $60.00 to $100.00 an hour forty years ago!   You might say, yes but the equipment today is much more efficient than it was forty years ago.  That is very true.  But that is an argument for why the hourly rate should have significantly increased.   Due to amazing advance in CNC equipment, much more output is being produced in a given amount of time!   Remember, I’m not talking about unit price, I’m referring to a shop’s hourly rate.  With increased productivity the unit price will go decrease, but the hourly shop rate should increase.

Additionally the equipment of today is vastly more expensive than it was forty years ago.   I recall purchasing our first CNC turning center in the early 80’s.   It cost $80,000.   At the time, you could purchase a dozen manually operated lathes for the same cost.    Today it’s not uncommon to spend $100,000 to over a million dollars for a single CNC machine.    Our Toyoda CNC horizontal machining center pictured below, represents an investment of over $500,000.

Toyoda-2

So, how can it be that after forty years of substantial inflation and almost unbelieveable advances in efficiency and productivity a modern CNC machine shop is still making about the same hourly rate?   The answer lies in the fact that for the last twenty years or so U.S. based CNC machine shops have been forced into global competition from countries with extremely low wage rates.  

Consider that in the United States the hourly wage for a first class machinist is $18.00 to $25.00 per hour.  In China a first class machinist earns the Yuan (CNY) equivalent of $.90 to $1.30 per hour.   Given that countries like China have the same equipment as U.S. shops and they have well educated people to program and operate the CNC machines, it’s very easy to see why it is literally impossible for U.S. shops to compete with “global” sources on a purely “shop-rate” basis.    Additionally, most foreign countries have significantly lower real estate costs as well as substantially lower regulatory and benefit costs.   In many cases the costs associated with operating a U.S. based shop may be 20 or 30 times as high!

As if the extremely low global labor rates aren’t enough, the cost of doing business in the U.S. has been steadily rising for small machine shops.  The cost of health insurance, for example, has been skyrocketing.   The cost of raw materials, utilities, capital equipment, wages, fuel, etc. has been rising.  Small machine shops are being squeezed from every direction.  This fact explains why so many small shops are simply fading away.

Where does all of this leave us – the small (U.S.) machine shop?   Obviously it leaves us in a very challenging position.  Global competition is the new norm.  It’s not going away, so we must adapt to the situation.  We have to understand the dynamics and find creative ways to stay in the game.  In most cases, it means becoming ever more lean and productive.  It means finding ways to operate on extremely thin margins.   Unfortunately, it also means that many more U.S. Job Shops will be forced to close their doors!

Shop-5

At CNC Industries, we believe that we have taken the steps necessary to stay in the game.  Even as shops all around the country are struggling for survival, we are thriving.  We believe that along with all of these challenges comes opportunity.  With careful planning and maximum use of Information Technology, we have positioned our company to take advantage of the opportunities that lie ahead!

In the final analysis it’s all about providing the best value.   When a customer factors in the cost savings associated with:

> Dependable quality

> Dependable on-time deliveries

> Inventory reduction through Kanban, demand-flow manufacturing, on-site stocking service, etc.

> Rapid development of new parts

> World-class Information Management

> Outstanding customer service

we believe that CNC Industries is very competitive – even with global sources.

Despite all of the conditions and challenges that I have talked about, I am more optimistic about the future of CNC Industries now than I have been in many years.

December 1st, 2010|