Bigger is not always better

Owning a machine and fabrication shop offers me opportunities to do business with some interesting companies. I’ve been able to visit many that produce millions of dollars’ worth of products and these experiences are one of the best parts of the job. Rarely would most people be able to see this kind of amazing stuff otherwise.

I’ve always been fascinated by big industrial companies. It’s easy to get excited about the vast potential to make their parts. Who wouldn’t want to generate $2 million, $5 million or even $10 million from one customer? I still have many goals to reach in my business life, and those numbers are certainly in line with what I want to accomplish.

But after working in the machining and fabrication business for 21 years, including 4 running our company, it has become clear that bigger isn’t always better and that big numbers don’t guarantee big profits.

From the beginning of my tenure as shop president, one goal has always been to increase total revenue per employee as opposed to just increasing total sales. This has meant increasing efficiencies to sell more products with the same or even fewer employees producing them.

The reasons for not getting fixated on large numbers was made even clearer after visiting with a friend who handles outside sales for a large and reputable machine and fabrication shop. He was in my area over the summer and we caught up over lunch, during which he discussed how his shop was doing. He informed me they were on target to reach $23 million in total sales this year. My first thought was how great it must be to reach that level.

With my curiosity piqued, I asked how many employees they had on the payroll and what it took to generate such a high sales volume. He said it took about 125 employees with the shop operating 20-plus hours per day. This sounded quite impressive and a goal we should be striving to attain.

Once I returned to the office and reflected on our conversation, I was prompted to run some quick calculations to see how our shop compared to such a large operation. Based on the figures I came up with, it didn’t take long to realize that the larger sales totals weren’t necessarily worthwhile, because to achieve them would require far more employees, equipment and overhead.

My friend’s large shop produces about $184,000 per employee and, while our total sales volume is much lower, recent history has shown we’re producing around $200,000 per employee. Not only that, we’ve also been scrutinizing various activities and have come to realize there are some machines, services and valuable shop real estate that isn’t providing a great return on investment.

A few services we’ve traditionally performed in-house would be more cost-effective to outsource, further reducing overhead. However, in our case, those eye-opening discoveries were more from the fabrication side than the machining side.

After a lot of analysis and discussion with my team and others, like my salesman friend, I came to realize that being big doesn’t make you highly efficient. A well-run small shop is more likely to generate profits than a large shop with a sizable overhead. When you think about it, producing $5 million in revenue with 20 employees is a better use of capital than generating $23 million with 125 employees.

There are many ways to measure performance and success, but big sales totals shouldn’t be the ultimate goal. Whether it has five or 100 employees, producing more per employee should place more money in the shop’s bank account and, hopefully, your pocket. CTE