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Thursday, June 9, 2011

Necessity is the Mother of Invention

by Smyth Performance on Thursday, May 5, 2011 at 10:44am
It has been a velveteen rabbit kind of month here at Smyth Performance.  I say this because a prototype is a test mule and a nice reduction to practice but the "becoming real" moment is when you have a prototype AND you have the means to manufacture it.  This means drawings, a bill of materials, a factory , a good network of suppliers and of course a solid and experienced team.  As I call the vendors  to get quotes for the various parts and raw material for the Smyth car, I am reminded of the basic discussion any student of business has regarding horizontal and vertical integration.

In a nutshell, vertical integration is when you are making cars and you bring steel making in house.  In a vertically integrated company you follow the raw materials up the supply chain  to your operation and you own the companies or process in the supply chain.  Horizontal integration is when a company expands by buying a competitor in the same kind of business...Fiat buying Chrysler.

Most modern business schools are long on supply chain management and focus on the advantages of outsourcing and the concept of letting your suppliers do what they do best...which allows you to focus on those areas of your business that add the most value.  Vertically integrated companies never get too much respect since they are viewed as old school turn of the century(19th to 20th) control freaks.

While watching and taking part in the raising of capital for several companies these last two years it is very clear that this anti vertical sentiment is not only still in place, but getting even more powerful.  Manufacturing as a category is being viewed as a losing environment for venture capital.  This has had some interesting effects on small growth firms in the U.S..

Back to my search for vendors.  Let's look at steel.

There are a handful of steel cutting and plenty of steel fabricating companies in New England and any area of the world that has a manufacturing base.  Metal is a wonder of a material since it is readily available, strong, and form able.  Most of these suppliers are medium to small service companies that started out family owned.  The competition is pretty intense at this level since anybody with a saw can start cutting steel tubes.  The tubes for any car part tend to be cut at different angles and shapes and there are  a hundred different tubes sometimes in  a design.  The fewer the better of course.  The quotes you get when you send in the drawings of the tubes to a vendor come in two forms,.  The first is the company who sees a high margin opportunity and quotes high because they don't know the car business and the tight margins we operate under.  These guys are the ones that the Chinese are feasting on right now.  You can see who they are at a glance...or after a quick phone call.  There is no such thing in 2011 as high margin work that uses standard machinery....period.  If you own a cnc band saw or mill and you are cutting steel for a living you are competing with 5 other guys(20?) within miles that are hungry....quote high and the email wont even be returned...the key is for you to stick with customers that will sell your service for you since you are doing a great job...without that, that credit line gets pretty hard to service doesn't it?  Good know where I will be....buying a band saw.

The other guys are the suppliers that get it.  These guys are working hard AND smart.  They know you can get your stuff anywhere and they are candidly talking margins and what they can do for you.  Unfortunately this country is running out of these guys.  For now they are still out there, but it is getting harder to find them as they are getting destroyed along with the rest of the manufacturing base in this country.  In Detroit as in many heavy manufacturing regions around the U.S. the real loss these last years was the closing of so many of these mid level suppliers that the rest of us in manufacturing depended on. A real shift in strategy is needed if you are to succeed here in smaller scale manufacturing.  Enter the possible return of a vertically integrated company...Smyth Performance.

I went to a previously reliable vendor the other day and got a little push back.  Interesting in this economy...something else must be going on.  How much time do you think I spent worrying about it.  Exactly the time it took to pick up the phone.  Another vendor said "sure, I will do it" within the same day.  I will still give the first guy a look if the price is right...but he has been relegated to a secondary supplier.  In the end it dawned on me that it may not be that hard to cut some tubes in my new place...and I was honest with supplier number 2 in saying that I was looking into it.  His response was great..."well if we weld up the sub assemblies for you then we will keep that business"  ...the perfect professional opportunistic reply.  Good business indeed.

But taking a look at the production efficiencies of an in line steel cutting operation has taken hold here. Lower inventory carried buy putting the cnc cutting operation just before the frame welding line should be fun to analyze after the launch of the Smyth G3F sports car.  My Dad will have a ball with it if I can get a share of his brain. The reason Tom Smith Sr. will like the project is more than just an operations gift for him.  In the eighties he was interviewed for the book "Re-engineering the Corporation".  A great read that talks about designing the whole corporation by the real flow of information and materials inside the firm.  I think of the book often as I set up the Smyth production line and decide how much to keep in house vs what to outsource.

By getting the cold shoulder from the steel cutter it forced me to think about cutting myself...which leads to other re evaluations of the value chain.  Steel cutting is a good example of fertile ground since joining steel with fire is what we do...and I realized it wasn't that hard.  Sure I have to go to band saw cutting school now(not really but there are plenty of cutting tricks of the trade I am sure) but we only cut one size of tubing and don't have to be a general cutting knowledge base...just 1" tubing experts.

The flexibility to control part of the very complicated process of manufacturing an automobile kit car will pay huge dividends in the end I think and makes for a nice old school vertically integrated operation.  I had already designed the tubes with maximum 60 degree cuts(limit of most cnc band saws).   Instead of 50 different bundles of steel tube coming in the front door that lay around waiting to be joined...we will have 1" tubing bulk 24 foot lengths that gets cut to order next to the welding/positioning station.  We the employees of Smyth Performance add the value to the steel and capture the quality control that Henry Ford did.  Not all things from the 1920's are bad.  We can learn some lessons from the old guys...they vertically integrated by necessity since the supplier network didn't exist or wasn't good enough...same here in 2011 as the suppliers move overseas.  This comes at a pretty good time since the machinery is getting less expensive.  We will set up an inexpensive band saw and test the flow of material...if it looks good we buy the high quality machines and we are in business.  So if you find yourself spending too much time describing what you want a vendor to do for you or fighting for a share of their time...think about doing it yourself and explaining the opportunity to your own people first...they already know how you think...give them a shot.


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