Machine Shops – How to Make the Small Shop Profitable

According to the US Census there are over 25,000 machine shops with less than 4 employees, not counting thousands of 1-man operations scattered across the country. Making a profit while owning a small machine shop can be tough in these economically depressed times. Here are some tips on making a profit.

Hire family or close friends and classify them as officers not employees. This will help with insurance charges. Check with your insurance agent and state for particular requirements.

Down size – Do you really need that 10,000 sf building? If possible run out of your shed, garage or barn. If not many self-storage facilities now offer storefronts.

Upgrade to CNC Milling – If you have all manual machines consider upgrading to a CNC.

Offer reduced rate services to local manufacturers. Locale manufacturers will have contracted large shops many miles away to machine their product. There are times when they need to rework, modify or make changes on the fly. They will turn to the closest, cheapest ship in the area.

Offer reduced rate services to local Hobby Clubs – Many hobby clubs including RC Model Clubs, Model Building Clubs, and Engineering Clubs require prototypes and custom parts and accessories built. Offering a group discount hourly rate to these clubs will insure all machining requirements come to your shop.

Quote on government work – The United States Government is the largest spending customer in the world for goods and services. There are hundreds of machining opportunities everyday.

Overflow Work – Find the largest shops in town and offer overflow work. Many large machine shops love working with small shops, the reason is they can instantly expand their workforce and machining capability at a lower rate then there own. This assists them in their tight deadline critical projects.

Raw Material – Group orders together as much as possible. Never order cut lengths instead of full lengths. Full lengths of material are always cheaper then cut pieces. If small pieces are absolutely necessary ask your vendor to quote you “Randoms” These are the pieces that are left over from a previous cut order and are usually offered at a substantial discount.

Cutting tools – never order the made in china cutting tools. A $25.00 Made in USA end mill will out perform the $10.00 Import any day of the week. Expect to go through 3 import Endmills to every one domestic end mill. This will add to your cutting tool overhead, lower your per piece volume and add to tool change cycle times. Also don’t be afraid to shop around for your cutting tools. Many tool vendors are in the same boat you are in and will sell you tools at a very low mark up. If at all possible talk to someone at your vendors inside sales department. Many tools can be offered at great quantity discounts if you pool your order and just ask for a discount.

Recycle your chips – Scrap your Stainless and Aluminum chips. Also don’t forget your broken and dull carbides.

Many machine tool manufacturers will refer to you clients who are interested in purchasing the same machine you have but cannot afford it at the current time. This is especially true with specialized equipment. Just call up your tool salesman and ask.

Precision pays – The tighter the tolerance the more time consuming and difficult the job is. If you are a true journeyman machinist this niche will always be profitable regardless of the economy.

Welders – Contact all the local welders in your area. If they scratch your back you will scratch theirs. All the welding work you get you contract to them in exchange for all the machining requirements they have.

SBA- Take advantage of all the resources, loans and grants offered by the SBA. (If you have been in business for 2 years)

Accounting – A good CPA will be your best friend in business, always do what they say financially. If you have a doubt with what they say question them and have them explain their reasoning.

Market your business – Create business cards, brochures, capability cards and a website. Let your prospective customer know upfront exactly what you can do, what you specialize in and what your capabilities are. You don’t want to be wasting your time quoting jobs you cannot handle.

Quoting – When calculating your hourly rate due not include profit in the rate. That way when you quote a job the price that calculates is your “zero” rate. This is the price that you will break even on if you do not factor in your profit (Sometimes you will want to quote a job at “zero” to win that new customer). Once you have your zero rates you can play with it. For the first 3 or so jobs quote it at a 5% profit margin. Then jobs after that you can bring it up to 12%-15%. Using this method you will always know your break-even rate and can adjust your profit margin to the market at any given time. When the jobs are good your profit mark up can be high. When the jobs are not so easy to come by you can quote at a very little mark up or no mark up at all.

Contingency in Quoting – Always add a small 3-5% contingency to quotes. This will cover the inevitable price increases or expedited shipping or other unforeseen charge that will break your profit margin.

Niche Markets – A couple Niche Examples that come to mind are:

A Grinding shop
Equipped with a larger capacity surface grinder
A rotary Blanchard type grinder
And an OD/ID Grinder and a skilled machinist

A 5 Axis Shop
Don’t be intimidated by 5 axis machining
Equip yourself with one Medium Capacity VMC
and 1 seat of 5 AXIS Software and away you go.
Total investment $100,000 new or $50,000-$80,000 used

Rapid Prototype Shop
Equipped with a CNC VMC a Bridgeport and a lathe. Must be able to make a part from concept to reality in less than 48 hours. Expedite everything. 1-2 part runs only. Absolutely no production can be performed using this concept.

Standard Walk In Job shop
Equipped with a manual mill and lathe. This is especially useful and suited for the walk in repair customer. Best for mechanics and do it yourselfers you need just a hole drilled or one diameter turned down or some threads repaired.