Almost every industry under the wide umbrella of “manufacturing” is cyclical and at the mercy of economic factors beyond its individual control. Like OEMs, contract metal fabricators are not impervious to these forces and business varies relative to the diversification of their customer portfolio. Specific sectors, such as construction and aerospace, are especially sensitive to business cycles. As a business attempting to strike the right balance between the output of labor and capital equipment with the seasonal demands of products, it’s important to realize how your business can increase efficiency, and thus profitability, where possible.
Labor Hoarding and the Management of Labor Overhead
Intuitively, it would make the most sense for OEMs fabricating their own parts to match the demand for their products with correlating inputs of labor. For many reasons, maintaining this kind of churn with employees is simply too costly and logistically challenging to be worth the effort. Manufacturers instead practice labor hoarding, keeping employees and paying labor costs regardless of fluctuations in demand. In the end, the investments companies make in their employees through hiring and training outweigh the costs of hiring and firing as demand rises and falls. Humanitarian factors are also at play, where employees bring value to businesses as people, not just as a means of production or service.
Nevertheless, there are periods where manufacturing companies are well under their maximum capacity, leading to higher costs per part. Some processes, such as final assembly and R&D are essential to the functioning of an OEM. Others, like welding, cutting and other forms of metal fabrication, are often among the first services to be outsourced to a third party.
Capital Equipment Upkeep
Like labor hoarding, the upkeep of machinery and other capital equipment can be just as costly. Machinery, like labor, isn’t used to its maximum capacity during production valleys, raising the costs per part. Further, each piece of machinery requires specialized labor to function. This labor and equipment goes largely underutilized during valley periods.
While the underutilization of capital equipment is an inevitable reality for all manufacturers, there are specific situations where this is especially true. Industries that are prototype-dependent, such as the elevator and escalator manufacturing industry, must produce several prototypes of designs that need to be tested before being released to the field. The equipment and labor needed for prototyping is costly, especially since it takes away from the capacity required for mass production once a design is approved.
Passing the Burden to a Custom Metal Fabricator
Passing the burden of labor and equipment costs to a third-party custom metal fabrication partner can ease some of the strain that’s inherent in a cyclical business. A custom metal fabrication partner is likely to have a more diversified array of industries that it services, which allows it to remain at a healthy capacity for most of the year. This allows it to keep the costs per part down even as it maintains its labor and equipment costs. For industries looking to ease the pain of cyclical valleys, outsourcing fabrication services — the heart of the manufacturing process — allows for reinvestment in more vital areas.