July 10, 2016 / best practices, customer service, LIT, strategic planning, value-added services
In today’s uncertain economy, diversification continues to be a key strategy for fabricators and other industrial metal-cutting companies. Forming new customer relationships, expanding into new OEM segments, and offering existing customers value-added services can all help dilute the impact of external influences and provide an additional stream of revenue.
Companies also use diversification to reduce business risk. According to an article from Forbes, most small and mid-sized manufacturers fall under the 80/20 rule—they make 80% of their profit from 20% of their customers. In some cases, that 20 percent may mean only one or two customers. While no one denies the value of landing a big customer (or two), relying on a select few to solely sustain your business can be extremely risky.
Diversification in Action
As described here, diversification saved many fabricators in 2015. In fact, companies like Merrill Technologies Group (MTG) are hoping the strategy will help double its business in the next five years, according to another article from the The Fabricator. Starting out as a small machine shop in 1968, MTG has now turned into a $72-million metal manufacturer offering light and heavy metal fabrication, machining, nondestructive testing, machine building, and engineering services.
This type of business evolution, the article states, is a sign that times are changing and that more and more fabricators are moving away from defined customer niches. “The modern metal manufacturing landscape is different,” the article states. “Large OEMs are consolidating their supply chains. Rather than source a large project to umpteen suppliers, they may well be looking for one source—a one-stop shop like MTG—to handle it all.”
Other industrial metal-cutting companies have found the same to be true. Jett Cutting Service, Inc., a 30-year old shop featured in the case study, “Best Practices of High Production Metal-Cutting Companies,” started out with just a few band saws. However, the industrial metal-cutting company has grown over the years to better serve its customers, acquiring new companies and expanding its capabilities to become a multi-faceted cutting service. From precision circular saw cutting to a lathe cut-off on round tubing, Jett Cutting has evolved into what it calls “a whole processor” that serves steel service centers, machine shops, and some mills.
Making the Move
Both the MTG and Jett Cutting examples demonstrate that diversification can be just as advantageous to customers as it can be to your business. If you are considering diversifying your business, an article from Inc. lists several ways to accomplish that. The following are a few of the strategies listed:
- Adapt. Tweak your product or service so it appeals to a new group of consumers or users.
- Find related services. Are there additional services that go along with what you sell or do?
- Open another location. If you only have one physical location, consider opening a second.
- Go overseas. Not every small business has the wherewithal to launch an overseas operation. Right now the big players are eyeing Africa the way they eyed Asia 10 years ago. Network in your community, and see if any businesses are exploring overseas ventures. You might find a project where your company fits in.
- Follow the growth. If you’re in an area with disheartening demographics or punishing tax rates, see if you should expand to a lower tax growth area. Look at the South, Texas, and North Dakota. Would one of these areas be a good candidate for a branch office?
As the Inc. article points out, smart investors place a high value on diversification, and smart business owners should consider doing the same. Could diversification be an option for your fabrication shop?
To read more about other manufacturers that have successfully diversified their business, check out the Forbes article, “The Argument For Market Diversification In Manufacturing.”