Expect Margins and Lead Time to Decrease in Most Markets

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Issue #11239 - June 2019 | Page #22
By Todd Drummond

Many of us have been in the industry long enough to clearly remember the pain of the ‘08 crash. Before the crash, everyone was very optimistic about their own growth potential because the building economy was on fire, which gave everyone a reason to expand their manufacturing capacity like crazy. Today, most economists are optimistic about the new building economy based on multiple factors, such as a shortage of housing versus the growing population in most markets and a healthy economy keeping inflation at bay for the near term. However, I would like to throw a cautionary warning that what you experienced in 2018 for the good margins and long lead times may not be what you will be seeing this year and in the coming years.

For those of you in the wood truss and wall panel world, 2018 should have been a banner year for your net profits. It was a year when many rightly stated that, if they had greater capacity, they could have had even better sales and, therefore, larger total net profits. The natural result of such good times is that everyone expands their capacity. Most equipment vendors are 9 to 12 months out for new orders. More than a few component manufacturers are not only purchasing new equipment but are building brand-new manufacturing locations to provide even greater capacity, rather than just adding equipment to their existing locations. The capacities to create more wood trusses and wall panels are expanding at a tremendous rate for, at least, this year and the next. This should be a concern for all of you, as it concerns to your bottom line.

Big money is being invested in all types of component manufacturing by outside investors, such as Katerra, Berkshire Hathaway, and others. They are not only investing in the manufacturing process but all aspects of the complete building process. This inclusion goes way beyond what was considered typical vertical integration of component manufacturers supplying their own framers in the field. A simple internet search shows multiple purchase announcements of material suppliers, architect firms, home builders, and many other formerly segregated trades in the building industry, in other words, every aspect. If you think the increased competition somehow will not affect your sales, you may be in denial. This increased competition goes far beyond just component manufacturing but also impacts lumberyard building suppliers. Everyone is expanding, and there are new players jumping into the game with plenty of cash.

Just because the building economy remains strong, it does not mean you will be able to maintain your margins and net profits. Increased capacity on the supply side is accumulating at a substantial rate, and it will inevitably suppress lead times and margins. Heed my advice, there are two important areas where you should be very cautious: investing and improving existing practices.

Investment in new equipment to better meet their needs is what most people naturally depend on when thinking of improvements. However, as an operations guru, I cannot tell you how often I find existing equipment being underutilized, and the new equipment being purchased is not the right fit for their changing needs. There is simply too much group thinking happening within companies and within the industry. Yes, many of you should purchase new equipment to meet the challenges of increased competition, but how much investment and what type is not always obvious. When it comes to investments for new equipment and buildings, I cannot emphasize enough that you must avoid getting into so much debt that you are unable to ride out the next economic downturn. Every economic cycle includes down cycles. When the next one hits, if you are carrying too much debt, you will be the first to go.

In order to stay truly competitive, you are going to have to do more than buy new equipment. The best investment that impacts every area, not just the manufacturing process, and has the potential for the greatest ROI is real process improvement. Process improvement is, without a doubt, the hardest to accomplish, the least understood, and most resisted within the majority of companies. No matter the size of a company, a small single-location or a large multi-location, internal resistance to a change of processes is a common problem. Often, upper management talks a good game about always looking for and implementing process improvements (including continuous improvement or kaizen), but reality will not live up to the talk. The two biggest barriers are a company’s bureaucracy and, more importantly, people being unaware of better alternative processes. When someone believes they have a better idea, too often someone else will view the change as a threat to their given area of expertise and perceived authority. Therefore, the new idea dies before it is given a chance.

            The other most common problem is people simply do not know how to make the process changes because they were never taught or exposed to alternative ways. I can honestly tell you that people often do not know about better alternatives because that is the case at all of my consultations. When I show people an alternative and better way to do something they have been doing for years, they are often left speechless. People become defensive, and they look at things as wrong versus right, which only causes more problems. The new method may look like common sense, but it was only after being taught that it became apparent because they just never knew better. Most companies need 6 to 12 months to implement all of my new suggestions after a consultation. Average process improvement gains are that most manufacturing locations have a minimum increase of 10%, with many achieving greater than 20% with their existing equipment. Other improvements are fewer mistakes, greater optimization of material use, more sales potential, and, of course, greater net profit as a percentage of sales and the total amount of net profit.

            There are many valid reasons why Todd Drummond Consulting (TDC) is your best source for learning about the very best and latest practices to keep your company competitive. No hype, just simple real-world expertise that goes far beyond what many expect. Whether you are a new or longtime operation, save your company a great deal of time and money by getting professional lean manufacturing help and training to improve all of your processes, not just manufacturing. TDC uses proven and practical lean manufacturing best practices combined with industrial engineering principles. So, before you buy equipment, get TDC’s advice! TDC does not receive referral fees from any equipment or plate vendors, and you can trust TDC for unbiased vendor and equipment recommendations shaped only by customer experiences. Please don't take my word about TDC’s services though, read the public testimonials many current and past clients who have decades of expertise and experience have been willing to give: https://todd-drummond.com/testimonials/.

 

Website: www.todd-drummond.com - Phone: (USA) 603-748-1051
Email: todd@todd-drummond.com - Copyright © 2019

You're reading an article from the June 2019 issue.

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