The Equipment and Tooling Debate

Equipment and tooling are two of the biggest costs that affect the ability to manage cash flow, yet they boast the latest technology and support customers effectively.

As the last article in a series of articles on “What It Takes to Create a Sustainable Company,” I will focus on equipment and tooling in a shop. 

This is an interesting topic in today’s environment because increased volumes are forcing many companies to consider whether or not to invest in new equipment. Tooling costs are increasingly making cash flow and overall financial management a challenge.

During the recession of 2008 and 2009, many companies spent the time to remove old equipment that needed to be discontinued, and get it off of their books. They did all they could to cut costs and eliminate any financial drain while they waited out the storm of the recession.  There are some people that were well positioned financially and invested in good used equipment on the market in order to capitalize on low cost equipment availability. 
 
Today, the market has rebounded quickly as many industries are replenishing supply, and many companies are booming with new orders. This has created a potentially huge capacity crisis in the marketplace, while companies struggle to fill customer orders. Some have considered new equipment purchases, and although they would like to buy good used equipment, it is not available on the market anymore. So they must turn to new equipment purchases, which are not any easier because leadtimes vary between equipment companies. Some are taking as long as 48 weeks. 
 
The real debate is whether or not new equipment is needed or should be purchased with the uncertainty in the market. The economy is still not strong. There are many concerns about the current administration, and some banks are still concerned about backing equipment loans for many small companies. 
 
The best companies have spent time in their businesses to strategically determine how to get incremental capacity from their existing equipment. This is being done through elimination of waste, different scheduling patterns that may even drive some inventory, but are increasing throughput and a focus on understanding demand from the customer to enable better planning. Once these segments are optimized, they are looking toward new equipment purchases. These moves have allowed many of them to purchase equipment with cash because of the increased throughput and profitability. 
 
Tooling is another huge cost for many companies. Although discrete tooling costs are down for an individual tool (in other words, what companies paid for a tool 10 years ago is much more than today), the problem is complexity. In most industries and processes, complexity has crept into the process and is creating a significant amount of tooling with much lower volumes than seen in the past. 
 
This is great news for the toolmakers because they are running strong in today’s market, quoting more than ever before and as busy as they have ever been. But for the total cost structure of a production part company, this is having a huge effect not only on the actual cost, but also on timing of programs. There are more tools to manage and more intricacies than ever before, driving not only tool cost, but actual throughput cost. Total cost to run many of these products is increasing, and companies are having a harder time funding the cost of tooling, which typically has poor payment terms. 
 
For all companies, equipment and tooling are two of the biggest costs that affect their ability to manage cash flow, yet they boast the latest technology and support customers effectively.  The activities outlined in previous articles will help companies to drive profitability and free up the necessary capital to make the right investments. That said, detailed research and the right business case are critical to long-term success.