An established shop needs advice

Here’s the problem two shop owners posed to me last week:
They have a machine shop that is running pretty well and profitably.
A machine tool company wants to sell them one of their top-of-the-line milling machines, and the machine is very tempting - they expect that they will find plenty of work for it, and it has all the bells and whistles, so who wouldn't want it?
However, it costs $750,000, and the manufacturer wants a 10 percent – that’s $150,000 – down payment, with a delivery date of six months after the down payment is posted. (Delivery is not guaranteed in six months, it might be 7 or 8 or 9 months after posting the down payment.)
So, the shop owners don’t know if they should do it or not.
They have annual sales of about $15 million a year, about 100 employees, and a full-enough schedule with business in the medical and food industries. Their current operations are about half turning and half milling, and the new machine would significantly advance the shops capabilities.
The question that the owners have though, is:
Is the gamble worth it?
Although they think they will be able to keep the machine busy once it’s installed, spending $150,000 for a piece of equipment that won’t be delivered for 6, 7, or 9 months is putting them on edge. They can make the investment, but they'll be stretched thin, and they're understandably worried.
What if the economy turns down in four months, or two months after the machine is installed?
Like anyone else who's in business they've been through a lot to survive, adn they’re doing pretty well right now, so they are also worried that, if they grow too fast, their quality of life will suffer. I think that sounds like being a bit afraid of success, but that's what they said and it's one more thing they have to worry about after spending all that cash.
So, what'd'ya think?

When I went to school 10% of $750,000 was $75,000, maybe things have changed more than I thought.

They'll be relieved to hear that 10% of $750,000 is only $75,000

I'd take a look at whether you need all the bells and whistles. Sure they look good on paper, but if you never use them, what's the point? Another point to look at, is there anyone reasonably proficient at running said machine. There's a bunch more time training someone to use the machine efficiently.

The biggest hangup I would have, If I had use for the machine right away, why would I let 6-10 months of good paying work slip away(down 150 grand to boot), while I wait for a machine to arrive. I'm sure there are many lesser known companies that sell a similar product with less delivery time.

My 2 cents,
Mike

Have they done business with this machine tool company before? If they don't know much about this company, I'd spend some time investigating them before dropping that kind of dough, even if you were willing to wait the 6-8+ months for delivery. Ideal situation for a scam (with a big payoff) if they don't know who they're dealing with.

This is not scientific at all, but whenever I've ignored the red flags or felt uncomfortable about a transaction, it has virtually always gone bad in the long run. If something is bothering them about the proposition right now, then I'll bet there's still a lot more to go wrong. I'd steer clear of it.

Chad

Put a penalty clause for late delivery in the contract so if the supplier is late the buyer at least recovers the cost of the money; a interest payment if you will. We see this all of the time now and haven't been afraid to be on the supplier end. A daily late penalty charge is not unusual. We recently supplied two high pressure deburrs to a parts mfg under a daily late penalty clause. The original PO was over $2mill. It keeps the supplier on his toes.

To clarify (because Bruce described this to me in conversation, and I know that he's in transit away from his computer right now): It was 20% down -- the percentage must have been a typo.

The machine tool comes from a well-established company that they know and trust very well on a personal basis. And they are used to running sophisticated equipment. These guys use bells and whistles to make high-value, high-precision parts. Their plant is currently running pretty much at capacity.

What if the economy turns down in four months, or two months after the machine is installed?

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Our present administration has printed and spent more FRN's than is imaginable the last couple of years. How will that affect the next 6 months? I heard someone say that If they could look 15 minutes into the future they could rule the world in a week! Who knows.

What is this machine... a 5 axis gantry, or a large horizontal, or... ???

I started to write all the obvious, then thougt about this part
"An established shop needs advice"....
"Here’s the problem two shop owners..."

One shop two owners? or two diferent owners with the same problem?

"They have annual sales of about $15 million a year, about 100 employees,"

They got that big and sucessfull and they are looking for business advice from people they don't know?

Common, what's the REST of the story...

whos the manufacturer? Is the machine a horizontal cell setup?

20% down is really pretty low. Most of the machine tool companies that we deal with want 30,30,30, &10%. We're putting together a PO now for that amount with a 39 week lead time. I've got one coming in that was ordered last August and is "supposed" to be here in June.

It's tough on a small business. My suggestion would be to look into leasing the equipment. There are many ways to write and arrange a lease. They should talk to their local banker and see what can be done for them.
JR

If you don't have the cash for it, don't buy it. Thats the safest way to go about it. Of find someone who can get you the machine up and running right away. You don't want to be paying for a year on something you don't have. It takes a long time to get out of that hole. I think right now its a time to put money in the bank and make sure that you own all your equipment. Make things perhaps a little more efficient and keep the customers happy.


Although things may be a bit different in the USA. Maybe more countries will be buying products from you now that your dollar is going down, or ours that is going up.

Really, I think that something of a cost-benefit analysis must be looked at, at least in the short term.

-Is the machine going to up productivity (as in reduce cycle times) by taking work "away" from other machines (hopefully freeing them up)?

-Or will it open up a new class(es) of work that were formerly unfeasible?

-Will it be more reliable than perhaps an older machine that's starting to give trouble either electronically, or with increased (worse) tolerances? Downtime or repair expenses certainly play a part in owning any machinery.

-Are there additional startup or long-term costs, proprietary toolholders not already stocked, proprietary or new software, network upgrade needed, etc.

I think we all know that some kind of continual investment is necessary in a business. But what's the real gain? I haven't seen it yet in what's been provided.

At the risk of sounding like a cheapskate owner who is hell-bent on running everything into the ground, it sounds like if they were to continue investing in newer (or additional) forms of what they are already running, they will probably be more secure and continued profitable in the long run.

The smartest business advice I'd heard yet is: I don't mind paying as long as I got my money's worth (the anticipated results or advertised benefits were realized after some Pareto analysis, and some detailed plans well-executed).

This kind of decistion is impossible to make intelligently given the information set.

Basically, these guys should also be considering other opportunities for expansion. If this is thier only route, then all they have to deside is if they want to expand or not. They've got to be comparing this opportunity toother opportunities... that's what running a company is all about. This may be the best deal out there, maybe not.

If they are thinking about this interms of "life style" I would wager that this group of managers are not the folks who built this business in the first place.

B

OK my $0.02,

first thing is, check from your current customer base if they would be giving you extra work that would be suited to that machine that's currently going elsewhere.

then look at emerging markets and then possible uchartered markets.

if that looks promising take some orders and subcontract out to someone with the same machine or at least very simmilar.

if that looks stable you can then seriously consider the purchase, but information is going to be the most vauable thing you can get your hands on, these are the questions you need to ask of yourself/the vendor: -

Has the vendor a full orderbook?
if No then he (to win your business) maybe willing to offer better terms, start negotiation at 0% to 5% depending on the initial feedback your getting from the rep.

Do you neeed all the bells and whistles right away? can they be retrofitted at a laterstage? and what would be the impact of retrofitting in terms of cost, complexity, downtime?

what can you offer the vendor in return for a lower downpayment/earlier delivery? could you perhaps offer to be in the market for somthing else from his stable at some later point in time?

Then you need to look at the process capability of the machine, can the machine make parts that you typically make repeatably within tollerance and if so to what degree (3 standard deviations would be an absolute minimum requirement for me)

next i would want to see some concrete evidance of overall equipment evectivness achivables, and in what timescale this should realistically be achivable (again I'd be looking for 70%+ here within 12 - 18 months)

Look carefully at the maintainance contract, how much time do you get, when would the visits be, how has the vendor determined the intervals from your expected use, what would be your downtime? (work this information into your own projected four year plan for OEE and CPk)

find out what typically drifts on the machine and the frequancy of calibration required.

look into the training programm, how efective is the vendor in this regard? just how much of the machines capabilities can be realised with the initial training, and to what extent is that training efective? (historically speaking)

what are the top 20% most common production problems encounterd with the machine by other users? how does that effect theire throughput?
what are the route causes of these problems? and how (if) they been overcome?

work all that information (OEE, CPk cost of training, maintainance etc into a budget, can the machine pay for itself? what is ther expected ROI and what tollerance on that ROI have you allowed?

Finally (hardly final actually) do the same exersizes with your current machines, can you push your existing machine to 80%OEE? would that realise the value your looking to achive)

armed with this kind of information you can make a sound business desicion based upon well reasond assumptions and facts, rather than a hunch.

if you decide YES, write out a project deliverables contract, stating deliver date (to a specified hour if your German) penalty clause for late delivery (whithold the final payment of 30 - 40% untill all criteria is met)commisioning schedule, get the vendor to run the machine on site and proove out the CPk and projected OEE, training schedule and costs (ask if these can be defered; high value to you low value to the vendor, this is the art of negotiation)

keep your subcontractor on standby to ease you through any dificulties

Dont forget, even if the vendor is flush right now, he still wants NEEDS your business and your within your rights to ask for such thing when you're investing $3/4M

GARY E

They got that big and sucessfull and they are looking for business advice from people they don't know?

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they got that big and sucsessfull precicley BECAUSE they ask such questions BEFORE chucking a $3/4M investment caution to the wind, they'd be nuts not to. just because you're big, sucsesfull don't mean you have all the answers or had all the answers to get to where you got, but i sure means you know how to ask and work out which anse=wers matter and which are just bull

my $0.02 (actually that would have cost you $100 if you where paying me )

They can make the investment, but they'll be stretched thin, and they're understandably worried.

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One of the better pieces of advice I got in the past was, "When in doubt, do without".

It seems a bad time to me, to be stretched thin. The way things are going, a lot can change in the next 9 months plus the time it will take to pay for the rest of it.

I wish I had followed that advice more often.

i wouldnt do it if i was either stretched thin before, or if it would stretch me thin to do it.

i would also investigate what the 150k could do for my existing business over the next 9 months,(i know you said 6 months, but i would figure 9 months and wouldnt be surprised if it was 12)

that same 150k might turn over 3 or more times in profit over the same time period, and that needs to be looked at closely and applied against the total cost of this machine.

for instance, if i had 150k and kept it working in my business i might have 450k at the end of 9 months, add that to the 750k price of the machine and now the machine has a true value of over a million bucks,, now figure how long it will take to turn a profit. keeping in mind the first 150k would generate another 300k over the next 9 months or so.

i would be hesitant to put down that kind of deposit based on that reasoning.

far better to have the cash to buy outright in my estimation, even then i would want to see solid evidence to support a good ROI.

don't smell right to me.

recently i heard a news report on a study by the university of wisconsin re: dairy farms.
the report stated that small dairy farms milking an average of 100 cows had a return profit of 343 bucks per head annually, larger operations that milked and average of 1000 head only returned around 35 bucks per head annually.

i know dairy farms ain't machine shops, but heck business is business, and there are other examples if one looks around to support the same result.

bigger clearly is not always more profitable.

getting bigger just to be bigger is not a good thing and not sound business, being forced to get bigger to keep lucrative accounts may be another matter.

are their existing accounts needing them to step up and buy this animal? if so they may have to, but if not i would run with what i had and make money running the same old play.

bob g

If they have that big an operation the -should-
be well versed in beating the tar out of the machine tool salesmen and their come-ons....
If not, its a BUYERS market....time to start taking lessons in price/bid/contracts negotiating for capital investments.

Does anybody think the economy is anywhere near stable these days?? Not to mention 6-8-9??? months from now....

Imagine signing on the dotted line, writing a check for $150 GRAND and then waiting....and waiting....and then business goes south for that
'never before imagined' reason. Then they'd be hoping it takes lots longer to actually show up.
There needs to be some extra incentive to wait and
gamble for X months......given all is rosey in sales and projections for the next 18-24 months.
The incentive might be: Knock off another $25K on the delivered price, or much lower down payment.
Whatever it takes to make the Machine Salesman fume and fuss about. If he ain't doing that and
bringing in backup, you're paying TOO much...

Sometimes there's only one bad decision between sucess and YOUR auction flyer in MY mailbox.....

dan k

"Sometimes there's only one bad decision between sucess and YOUR auction flyer in MY mailbox"

amen,,,, amen,,, amen,,,,

that goes for everything in life from women to business... (most especially women)

you can heal up from a bankruptcy much faster than a bad woman.