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Do high-speed machining and time compression mean increased profits?

May 3, 2000

6 Min Read
Do high-speed machining and time compression mean increased profits?

Makers of machine tools talk about 4- and 5-axis milling machines and high-speed machining centers being a large part of the answer to moldmaker competitiveness and profitability issues. In theory, getting the man hours out of the mold build means less cost, which translates into lower pricing that's more competitive with Asian shops. Also, this equipment is supposed to increase productivity and efficiencies and translate into greater profitability. But what's the reality?

Machining Trends
A national survey of 84 mold shops conducted by Plante & Moran LLP, a CPA and management consultant firm in Southfield, MI, found, surprisingly, that there was no correlation between the use of high-speed machining and sales growth, return on assets, or profitability.

Jeff Mengel, a partner with the firm, noted that this could be a result of how the equipment is operated. "Just buying a high-speed machine to have it on the shop floor doesn't guarantee greater profits," he said to a group of 100 moldmakers attending the AMBA conference in the Bahamas. "There's a learning curve and you have to provide training. Too many shops run their high-speed equipment like their old equipment."

Equipment that did correlate with sales growth, return on assets, and profitability included horizontal boring mills, and to a lesser extent, vertical mills. Companies with horizontal boring mills produce molds that are more expensive, and have more employees, higher sales per employee (direct and total), and higher profits. These mills themselves didn't create the profits, Mengel explained, but rather the environment that supports horizontal boring mills creates the profits-primarily one of larger molds and larger companies that allows spreading of costs. There was no correlation between CNC machining or utilization rates and profitability or sales growth.

"The ability to generate sales had less to do with machine utilization than with getting parts out the door," commented Mengel. He also noted that ceasing to use older machines as new machines are put on the floor depresses a shop's total utilization rate.

Plante & Moran didn't look at the effect of unattended machining on profitability or sales growth as a correlation to turnover on second and third shift. (However, a recent survey by the AMBA of its member companies showed that 164 of the 179 respondents to the question "Do you use unattended machining?" replied "Yes," while 107 respondents said they use high-speed machining.)

Another surprising result was in the area of time compression. Mengel noted that compression of the time to produce a rapid prototype part enhances profitability and return on assets. However, time compression for other design or production efforts-which ties in closely with the use of high-speed and unattended machining-was not statistically significant.

Value-added Services
You've been hearing it for years, but the survey showed there was "a very strong correlation" between providing mold design services and a higher Ebitoc (earnings before interest, taxes and owners' compensation) as a percent of sales. Companies subcontracting design services to an outside vendor had a lower Ebitoc, commented Mengel.

Moldmakers that provide molding services do much better than molders that do moldmaking. Molding tends to be a better profit center for companies whose primary business is moldmaking. Moldmakers that provide molding services tend to be larger companies and have higher profits. Companies that use reliability and maintainability data from the molder to produce better molds also had higher profitability and growth (evidence of stronger collaboration).

However, some services such as production machining and assembly are so fundamentally different from the skill sets required for moldmaking that profitability suffers. Conclusion: "Not all value-added services add value," says Mengel.

Snapshot of the moldmaking industryWhat does the moldmaking industry look like? A good snapshot appeared out of the results of a 1999 survey by Plante & Moran LLP in Southfield, MI. Recently, 84 moldmakers responded to the survey in which 47 attributes and 632 variables were measured, the results evaluated, and correlations determined. Jeff Mengel, who heads the company's plastics industry consulting team, reported the results at the American Mold Builders Assn. annual conference in Nassau, Bahamas in March.

The majority of the respondents (92 percent) were injection moldmakers. Most respondents were located in the Midwest (62 percent) and the North Central states (21 percent); however, all regions of the country were represented (see more profile data at right). General conclusions generated from the survey:

Size is everything. In the moldmaking business, bigger really is better, said Mengel. The larger shops tended to build larger molds and have a more narrow market focus, which equates to a more stable business on a gross dollar basis. The smaller the shop, the broader the earnings range (from -6 percent in the lower 25 percent to 23 percent in the upper 25 percent of shops with sales of less than $1.3 million).Larger shops, meaning those with greater than $6.5 million in sales, had Ebitoc (earnings before interest, taxes, and owner compensation) ranging from 6 percent in the lower 25 percent to 11 percent in the upper 25 percent, reflecting a much narrower range.Those shops that serve the automotive industry tend to be larger shops with higher Ebitoc and more sales per customer. However, the earnings (as a percent of sales) were very similar to other industries served. There was a strong correlation between serving the automotive industry and long collection periods.Mengel's conclusion is that the automotive industry appears to provide mass in place of comfortable profit margins and timely payments. Larger shops can withstand that type of trade-off. Operating issues. Employee turn-over is up in the 1999 survey. This is very disruptive in building molds, both in terms of percent of sales and gross dollars. The rate of turnover for molders runs from 66 percent to 700 percent, much higher than for moldmakers at almost 17 percent. However, that rate is double what the survey showed two years ago. Also, shops that run more than one shift have higher turnover than others, and the rate is much higher on second and third shifts.Companies that conducted capacity planning and used formal operating plans and strategic analysis generally had higher growth, profits, and return on assets. Companies that used an outside advisory board, although primarily true of larger companies, also had higher sales per employee, value added per employee, sales per mold, and sales per customer.Sales methods. Using commissioned sales representatives did not enhance sales with the exception of the automotive and medical industries. Commissioned sales reps also don't do as well for companies that serve more fragmented markets as a typical custom moldmaker or molder would. "Sales reps do better in a concentrated market like automotive or medical," Mengel explained.Specialties. The survey revealed that there is a distinct advantage to being a specialist in moldmaking, said Mengel. The competition is less and there is a tendency for molders to go to a specialist for molds.One conclusion Mengel made was that there are far too many mold shops. It's simple supply and demand, he explained. In the metal stamping industry, where consolidations and fallout of small shops has whittled that group down to fewer companies that are larger and have more resources, companies have seen a significant rise in their profit margins.Contact information
Plante & Moran LLC
Southfield, MI
Jeff Mengel
Phone: (248) 223-3224
Fax: (248) 352-0018
E-mail: [email protected]Editor's note: If you would like to
participate in Plante & Moran's surveys
of molders and moldmakers, use the contact
information above. Participants receive a
full report that they can use in their
benchmarking and continuous improvement
efforts.

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