March 11th, 2014
Financial Leverage – What Level Makes Sense?
I read with great interest the recent article in DWM written by Tara Taffera entitled “To Make or to Buy – The Big IG Question.” I found this article particularly interesting because this is a question which I constantly am asked by my customers and prospects on an annual basis. Many are deciding to take the plunge from buying IG to making their own IG and the question oftentimes arises, “How far do I want to leverage my business? Do I buy a small manual line with no automation or do I invest more money and purchase a more automated line?”
Well, given the state of affairs with IG durability testing and third-party certification required by the National Fenestration Rating Council (NFRC), many are finding that a higher degree of automation oftentimes yields benefits in terms of improved quality and consistency of IG fabrication and both of these factors may definitely come into play when it comes to passing the IG Certification standards required by NRFC.
I took data that was compiled for various sized window companies, those making 10,000 windows per year all the way up to companies making 100,000 windows per year. The cost of making their own IG and was compared to the cost of buying their IG from a third party and a payback period in years was calculated on three various levels of investment: $250,000, $500,000 and $1 million. The assumption in each case was that the companies had room in their plants for such machinery and did not also have to invest in a new building.
As you can see from the chart, a window company making only 10,000 windows per year would take 16 years to pay back the investment in a $1 million IG line, whereas a company manufacturing 100,000 windows per year enjoys a payback of fewer than than two years on the same $1 million equipment system.
But this doesn’t mean that the smallest company making only 10,000 windows should never consider vertical integration. Look again at the chart and you can see that the company making 10,000 windows can still enjoy a decent payback period of close to two years by keeping the equipment investment in the neighborhood of $250,000. Perhaps this means buying a totally manual line, or maybe this company can locate a pre-owned automated line in that price range. Now we know why there is such as strong market for both new and used equipment!
Does a manual line make it tougher to make high quality IG and will the smaller companies find themselves making inferior product that cannot stack up against what they were once buying? This is where proficiency comes into play. If the smaller company has a stable and proficient labor pool and is well managed, it absolutely can make IG units that will stack up against the best, and I have seen this accomplished year after year. Eventually, many of these smaller companies will grow their businesses to the point where they are soon selling their equipment and buying the latest and greatest IG equipment that will help propel their businesses into a leadership position in the next ten years.
So YES, vertical integration can make financial sense for companies both small and large as long as they choose an equipment package with a level of sophistication and price tag which makes sense given their volume and manufacturing proficiency. Our industry equipment suppliers have just about any option we could ask, and that what helps make the fenestration industry such a great place for both small and large window companies to compete successfully.
So, are you trying to make decisions that could take your business to the next level? Whether it might involve a new or used IG line, vinyl processing equipment or new production software, the decision as to how far to financially leverage your company is an important one that, if done correctly, can reap increased profitability and enhance your competitiveness in the marketplace!