Bring work back in-house

Manufacturers invest in new equipment for many reasons. And, having performed equipment financing for about nine years, I have been fortunate to get a unique perspective on many of these transactions.

One thing is always clear: Regardless of whether a manufacturer chooses to use its own capital or money from its financial institution, putting a new piece of equipment on the floor comes at a significant cost.

When I am approached to look at a new transaction, the manufacturer typically needs new equipment because it has landed a new contract and requires additional capacity to manufacture more parts.

If the new work is for an existing customer, the manufacturer is under pressure to get equipment on the floor and up and running because it needs to get more parts out the door and doesn’t want to do anything that will negatively affect a valuable existing relationship.

If it has landed business from a new customer, there is of course the same pressure to deliver parts on time, and also make a good first impression.

Manufacturers also invest in new equipment when they have decided they need to make parts more efficiently. At some point, it is investment in new technology -- finding quicker and more efficient methods to make the same parts – is the only way to remain truly competitive.

Reduce outsourcing

A trend I have seen from my client base in the last year, one in which there has been a relatively busy market, is bringing work back in-house as opposed to subcontracting it to another company. I have a number of clients who looked at the amount of work they were outsourcing every month and realized that financing a new piece of equipment and keeping the work in-house would have a number of benefits.

One client of mine is a Tier 2 automotive manufacturer that has been in business more than 15 years. It has a concentrated customer base that it needs to expand because the sector is, without doubt, the toughest and most competitive in the industry. This client is tired of getting pushed around on pricing, which has been squeezing its margins, and tired of waiting at least 90 days to get paid.

This manufacturer finally made the decision to start taking smaller local jobs, which it traditionally had turned away, to grow its customer base. The shop is laid out extremely well, being predominantly in automotive production it has to be, it owns the building and property so there is a lot of space for growth, but it had been subcontracting large parts because it did not have the proper equipment.

It also was having problems getting parts machined within the required tolerances locally.

Together we realized that the monthly payment on a large vertical machining centre would cost less than paying subcontractors in another shop. In addition, it had just landed a small contract to mill some larger parts from another customer that was also having difficulty getting it done locally. Essentially, putting a new large VMC on the floor became an easy decision.

Control scheduling

A second example is a client that manufactures its own product line of specialized packing equipment. It had been doing just design and assembly while subcontracting all machining work.

The amount of work it was subcontracting cost hundreds of thousands of dollars per year, and the company could not control its own deliveries because it was at the mercy of whomever it had contracted to make the parts. It also had small margins on all the work it subcontracted.

Fortunately, the unit next door became available and the company set up its own small machine shop with a VMC and a CNC lathe.

From a monthly cost standpoint, bringing the work in-house, which included hiring some new people, was still far less costly than sending the work elsewhere. Most importantly, there were the ancillary benefits of controlling its production and deliveries, plus it now had a new income stream.

Successful manufacturers that finance equipment look at the transaction and make the business decision based on monthly cost, not overall equipment cost. Once the thinking moves into this type of evaluation, the sticker shock of buying a new machine is minimized significantly.

There is no doubt that if you have the ability to perform work in-house, it will be the best and most profitable course of action.