Starting in early 2009, my discussions with fabricators in the Northeast began to include our guesses as to the timing of the “recovery” that surely was coming. The last half of 2008 saw a shocking drop off in orders, coupled with a shattering of confidence in where it would all end. But by Spring of 2009, the worst seemed to be behind us, and we started speculating on when things would get back to ‘normal.’ Conversations about when the economy would improve, banks would begin lending, and people would again be buying new houses have continued from that time right up until this Spring.
Now, over two years later, these speculations don’t seem “right” anymore. It’s a feeling that, “Yes, there is indeed a problem, but waiting for time to pass isn’t going to fix it.” Why would I say that? It seems to me that since about May of 2009 that a new “level” of demand for building components emerged and for the past two years (and taking into account some seasonal and regional fluctuations) things have been pretty consistently at this ‘new level.’ If that’s true, what are the implications?
Excess Capacity
Let’s make an assumption that may not be too unreasonable. Specifically, let’s assume that in mid-2008 the market (or “demand”) for components in the Northeast was about equal to capacities of the fabricators in the market. If it was in fact only about 90% of the capacities of the fabricators, it won’t make a whole lot of difference to our analysis. The market then plunged and I’ll suggest that the new demand level is roughly 35% below the old level. During this same period several component manufacturers closed their doors, which may have taken about 10% of the production supply out of the market. This leaves roughly 25% additional unused capacity in the Northeast. After years of having the problem of ‘getting the work to and through the shop,’ things have changed drastically. Having built and run our businesses in one market, we found ourselves competing in a completely different one.
The Response
Cutting costs and lowering overhead were the logical responses to the relative lack of work. Everyone made adjustments over time. The decreased demand means there is much more volatility, and often fabricators are busy for a few weeks, and then orders drop off to almost nothing. Staffing for the “valleys” while coping with the “peaks” has been a feature of life in this new market. When there wasn’t enough work to go around, a sense of desperation caused many to lower their margins – to “give it away” in order to meet sales objectives or “give the shop something to do.” The market understood this, and took further advantage – waiting longer to place orders and demanding unrealistic delivery schedules.
Reduced margins are expected when supply exceeds demand, but market forces have not put things back “in balance.” Not enough fabricators have closed down, in part because of a belief that things will “come back,” and in part because many have the resources to weather the storm, and in part because quitting is just not in our nature.
Changing
If demand for components continues to be considerably less than the supply for the foreseeable future, is there any way to be profitable, or more profitable – doing a lot better than ‘breaking even?’ I think there is, but it will require changing the way we look at things. I think margin discipline is the best hope for a profitable component manufacturing industry in today’s ‘buyer’s market.’ How to do it?
1. The key to margin discipline is understanding your costs, including overhead. Once you know your costs and decide on your minimum margin, stick to it. Get more if you can, but don’t sacrifice margins to get the job.
2. Coming to the realization that you and your competitors are all in this boat together. You are part of a community of suppliers in a market with excess capacity. You can continue to fight for the work that’s out there by sacrificing margin – or maybe do something different. An outward reflection of this realization would be to reach out to your competitors more. Get to know them, sharing your common struggles and questions. Doing this will help to build the sense of community this initiative requires.
3. Respect the product. This ain’t lumber, and not only is it custom designed and manufactured, the design work you do it still the best quality control check your customer has prior to construction. The services and products supplied by component manufacturers is worth every penny (and then some) you charge for it. You demonstrate your respect for the value of what you provide each time you price a job.
4. The fabricators that consider themselves leaders in the market can demonstrate that leadership now. Lead by example. Encourage and help others to follow.
