increase competitiveness. North American industrial robot shipments rose 10% in 2016 over 2015 levels,
according to the Robotic Industries Association.
Additive manufacturing, also known as 3D printing, is another technology with applications in machine shops.
Additive manufacturing produces solid, three-dimensional objects by successively layering materials according to
a digital design. Hybrid machine tools are being developed that combine additive and subtractive (cutting, milling,
turning, and grinding) manufacturing technologies to offer machinery capable of a wider variety of parts with
complex geometric shapes.
Marketing for machine shops consists largely of direct contacts with local manufacturers. Because of the need
for close technical consultation between machine shops and customers, the work of most machine shops is
usually confined to a very local area. New business may also come through requests for proposals (RFPs)
from manufacturers familiar with the company. Customers can be in a wide variety of manufacturing industries.
Because work is local, companies often have a large concentration of customers in the same industry.
Major end-users include the aerospace, automotive, chemical, electronics, medical, oil and gas, and industrial
machinery industries. New work is often acquired through job bidding. While pricing is always a consideration
for new business, product quality and the ability to meet production timetables are often of greater concern.
Management expertise is very important in properly pricing a bid, since the workability of materials, the
complexity of machine setup, and the capabilities of individual pieces of machinery can vary substantially.
Machine shops have large investments in machinery and equipment, including drill presses; lathes (turning
machines); and milling and grinding machines. Individual pieces of equipment may cost several hundred
thousand dollars and can often be bought with financing provided by the manufacturer. On average, capital
expenditures represent about 5% of sales. The industry is labor-intensive: average annual revenue per
employee is about $135,000.
The US industry's working capital turnover ratio averages about 25%. Shops generally don't have large
investments in inventory, because customers typically provide materials. There is very little seasonality in
production or cash flow, but the industry is susceptible to customer work stoppages and economic cycles, which
can produce highly uneven and unpredictable cash flow. The value of inventory is usually about 10% of sales,
and inventories turn about six times per year. Machine shop inventories tend to be split evenly between finished
goods, work-in-progress, and raw materials.
Demand for machining services depends on the level of US manufacturing activity, which can vary significantly
from year to year. Many machine shops depend directly on the health of a single end-use industry. The machine
shop industry gets large amounts of business from the auto and aircraft industries and electronics and industrial
machinery producers. If a major customer or industry group closes or moves manufacturing operations, local
machine shops may experience a precipitous drop in demand, and collection periods and questionable accounts
may increase. Accounts receivable average about 50 days, but collection periods tend to be longer for smaller
companies (under $5 million in annual sales).
Working Capital Turnover by Company Size
The working capital turnover ratio, also known as working capital to sales, is a measure of
how efficiently a company uses its capital to generate sales. Companies should be
compared to others in their industry.
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