Don’t overlook the small things

Many areas of capital equipment investing, beyond machine tools themselves, have a positive effect on a manufacturer’s business. The most successful clients I have are the ones that install new technology because they have recognized the need to upgrade.

In one case, it was a switch to a multi-axis CNC lathe because the manufacturer had jobs that needed both turning and milling. Adding one machine that can complete the part in a single setup dramatically increased both capacity, efficiency, and bottom-line profits. Another client purchased a 5-axis machining centre to eliminate multiple setups being done on an existing 3-axis machine, which improved profitably and allowed for more competitive job quoting.

In both of these examples, the business decision to upgrade was easy, particularly because the funding did not come from either working capital or an operating line.

It a common belief that cash is tightest during a contracting market, which we all have experienced in the last few years, and no doubt pressure exists during any slow market. However, in my experience, it is growing companies that struggle the most with cash flow.

Additional business from this growth also comes with significant cost increases that cannot be financed, such as material, tooling, and wages. While these expenses must be paid with cash, there are other areas in which cash might normally be spent where a lender’s money can have just as big an effect on the bottom line.

Automation

Historically, equipment providers sell stand-alone machines, but just getting another machine on the floor doesn’t always eliminate bottlenecks or provide immediate additional capacity because there is more to getting a machine running efficiently than powering it up. Adding new equipment can cause a strain on the existing workforce.

Many economic problems were created by COVID-19, however, even before the pandemic, finding and holding on to good people was very difficult. One option for manufacturers is the automating of a stand-alone machine.

This could be as simple as adding a barfeeder to an existing CNC lathe or something more complex like a parts conveyor or robot for loading/unloading. Manufacturers can optimize their equipment by removing the human element from load/unload process, which not only reduces costs, but also increases both efficiency and capacity.

The amount of work required to enable such an automated service is considerable, and, therefore, the cost often can be substantial. If you can source the right lender and finance the automation, it can make the decision to invest a no brainer.

Software

Having the newest machine tool technology on your floor is great, but if the best systems aren’t in place to support it, the gain could be minimal. The best example I have come across recently is a manufacturer that installed a new machine but continued to use 10-year-old CAD/CAM software.

When you upgrade your machine technology, don’t forget about new software.

One customer of mine, a Tier 3 supplier to the aerospace industry, just bought a new 5-axis machining centre but had not upgraded their software system in years. The new machine improved cycle time, but not as much as anticipated. It wasn’t until new software was implemented, at a cost of roughly $12,000, that the benefits of the new equipment were fully realized. In this case, cycle time for a part that had been 2.5 hours was reduced to just 25 minutes.

A second shop, this one working in the telecom industry, also recently installed a 5-axis machine. It produces several different parts that were taking eight hours to program and then 12 hours to machine. Its investment in new software was approximately $30,000 and the result was a reduction in programming time to only three hours with an eventual cycle time of five hours.

The savings for this shop were so dramatic that the ROI for its machine—originally pegged at 24 months—was less than one year.

In each of these cases, the software was financed over a three-year term, which makes sense for transactions of this size. But, most importantly, it did not have any effect on cash flow.

I also have other clients implementing new software systems (or several seats) that cost more than $100,000. In those cases, I can arrange a lease with a five-year term.

New Accessories and Repairs/Rebuilds

In the last year I have had more than a few customers land new work, but instead of investing in new machinery, which didn’t make sense based on the size and duration of the contracts, as well as their concerns with COVID-19, they wanted to use their existing equipment.

Unfortunately, the machines were not configured properly and also were in disrepair. In the first case, my client had landed work that required a rotary table. They had a vertical machining centre that had capacity, but it needed both a software and hardware upgrade to run job. The rotary table itself provided the collateral needed for the transaction, so getting the application approved was just a formality.

In the second case, a long-standing client had landed enough work for the two EDMs in the shop, however, only one of them was functional with the other requiring a significant amount of parts and service.

The repair and rebuild for the second EDM was going to cost $45,000, which the manufacturer was not comfortable pulling from working capital. Because the machine, when repaired and functioning, would easily be more valuable than the repair cost, all we had to do was use the machine itself as collateral and arrange for a lease to pay for the repair.

To remain competitive, investing in new technology is very important. But it is just as important to ensure that investment dollars are being used as efficiently as possible. Sometimes it could be a small addition that makes all the difference.

Ken Hurwitz is vice-president of Equilease Corp., 416-499-2449, ken@equilease.com, www.equilease.com.