Fabricators Look for Sweet Spot in 2016
April 10, 2016 / continuous improvement, industy, LIT, maintaining talent, operator training, skills gap, strategic planning
As we covered in our annual Industrial Metal-Cutting Outlook, the outlook for 2016 is—in a word—flat. Slow growth from 2015 carried over into the first quarter of the year, leaving most analysts expecting little to no growth.
According to the Manufacturers Alliance for Productivity and Innovation (MAPI), manufacturing industrial production will likely register zero growth in the first half of 2016, with 1 to 2 percent growth in the third and fourth quarters. For the entire year, the research firm forecasts only 1.1-percent growth.
Unfortunately, MAPI’s outlook for fabricated metal parts is also a little disappointing. The most recent forecast shows production of fabricated metal parts down 0.9 percent in 2016, with small growth of 1.4 and 2.0 percent in 2017 and 2018, respectively.
A recent uptick in manufacturing activity in March, however, provides some hope. The monthly Purchasing Manufacturers’ Index (PMI) from Institute for Supply Management (ISM) increased by 2.3 percentage points in March, putting the index above the 50-percent growth threshold for the first time in 2016. In addition, ISM reports that 12 of 18 manufacturing industries reported growth in March, including the fabricated metal products and primary metals industries. According to one survey respondent from the fabricated metal products segment, “Capital equipment sales are steady.”
Even with some small movements forward, business for most of the metals industry has been tough. For fabricators, a lot of the challenges stem from the struggling agriculture and energy sectors, as well as bigger picture issues like high inventory levels and a strong dollar. However, none of those challenges seem to be sending the industry into a total panic.
According to an industry survey from The Fabricators & Manufacturers Association Intl. (FMA), most small and medium-size job shops and fabricators entered the year expecting growth. Specifically, the survey found that 39 percent of respondents were positive about 2016, and 38 percent said conditions are at least stable. Even so, a significant number (23 percent) didn’t expect conditions to get any better.
FMA’s “2016 Capital Spending Forecast” projected that total capital spending will increase a little more than 2 percent next year, with some equipment categories such as welding and bending seeing dramatic gains. As reported by The Fabricator, “…this shows that the metal fabrication manufacturing technology business has regained its losses from the Great Recession and then some.”
Whether or not that is true is up for debate, but it seems some fabrication shops are finding ways to still be profitable in the midst of an uncertain market. According to an editorial from Tim Heston, senior editor at The Fabricator, several fabricators he has spoken to are faring really well, depending on their customer mix and the specific OEM plants they serve.
“2016 really will be about hitting the right spot when it comes to the customer mix,” Heston notes. “Some sectors will continue to struggle, but others will thrive.
“Figuratively, the future will really be about hitting…the right mix of fabrication services, talent, technology, and customers,” Heston continues. No matter what economic headwinds may come, the right mix will help a custom fabricator land on its feet.”
Finding the Right Mix
Like any strategic decision, this so-called “sweet spot” will require some risk and will depend largely on your current customer base, capacity, and resources. In other words, there is no silver bullet formula. While it is tempting to assume that growing markets like automotive and aerospace should be your target, as Heston noted in his editorial, some aspects of agriculture (i.e., small equipment) are still profitable.
There are some key areas, however, fabricators should focus on as they attempt to make 2016 a profitable year. Based on our research, the following three areas deserve consideration:
- Diversification. In uncertain economic times, it is not uncommon for manufacturers to diversify to dilute the risks that may be associated with some OEM segments. As described here, diversification saved many fabrication shops in 2015, and experts believe the trend will continue in 2016. In some cases, this may mean forming new customer relationships, or it could mean offering existing customers a few value-added services for a more predictable stream of revenue. One fabrication shop, featured here, added prototypes to its mix as an added service.
- Advanced Technology. Fabricators both large and small can no longer afford to underestimate the role technology can play in their shop’s success. Whether you decide to invest in predictive analytics, mobile technology, or the latest cutting technology, the truth is that today’s competitive environment requires leaders to stay on top of manufacturing advancements. Jett Cutting, a metal-cutting company featured here in a case study, says that investing in new technology allows his shop to offer competitive pricing, which has led to many new customers. “We need to constantly keep on top of the latest technology out there,” Baron states. “We don’t want to spend extra money, but if it’s going to cut 20 percent quicker than I do now…then we’ll go after it.”
- Good Talent. As most manufacturing executives are well aware, the industry’s skills gap continues to widen. As The American Society of Quality’s 2016 Manufacturing Outlook Survey confirmed, an increasing number of U.S. manufacturers are struggling to fill open positions. Respondents stated that the biggest challenge was the lack of qualified applicants, followed by the time it takes to hire a new employee and lack of budget to fill open positions. However, the survey also found that many companies are proactively addressing the issue: 55 percent of manufacturers say they’ve hired an agency and 41 percent are working with local colleges on programs that teach the required skills.
Will 2016 be a year of growth for your fabrication shop? Although economists may tell you no, some strategic shuffling and smart investments may just prove them wrong.