Every year, Modern Machine Shop does studies on the machine shop industry. One of the most helpful things they do is their Top Shops report, which does a detailed breakdown of the differences between what the fastest growing and most profitable machine shops are doing compared to the "average" machine shop.
That's pretty awesome, because you can easily look at the report and tell if you are a "top shop" or not. If your statistics are not in line with the top shops, the report can easily point to the changes you need to make to become a top shop.There's not many industries where free reports are available that give you a road map of how to make more money.
Moreover, the difference between the top shops and average shops was huge. The median profit margin for the top shops was 17% versus 9% for everyone else, while the median year over year growth rate for the top shops was 20% versus 9% for everyone else.
Horizontal Machining Center Costs And Benefits
The top shops had a higher gross sales per machine that average shops - $266,123 versus $152,000. That is huge. One of the major differences: top shops spent 10% of their gross revenues on equipment versus 2% for average shops.
One place that makes a difference: invest in horizontal machining centers. You probably know that a horizontal machining center (HMC) costs more than a vertical machining center (VMC) - but do you know that 61 percent of the "top shops" invest in HMCs - and an additional 41% of them also invest in multi-face tombstones?
More important: an HMC can be as productive as two or more VMCs. In fact an article written by Modern Machine Shop in 2013 called "Worth Three Machines" highlighted how one company used its HMC to do as much work as 3 VMCs.
A Review of HMCs vs VMCs
HMCs cost a lot more than VMCs. How much more? The Association For Manufacturing Technology says the average HMC costs $375,000 vs. just $115,000 for the average VMC. That's why 4 times as many VMCs are bought than HMCs every year.
If you look at just the cost of the machine, it might make sense to purchase a VMC, but if instead of looking at the price, you look at what you get for each dollar spent, the numbers look a little different.
Since very few companies pay cash for their machines, let's look at monthly payments on HMCs Versus VMCs:
For an easy comparison, we'll look at a 5-year lease on each machine, assuming your company has a good credit profile.
- HMC average cost: $375,000. Average monthly lease payment: $7,050 per month
- VMC average cost: $115,000. Average monthly lease payment: $2,250 per month
- Difference in monthly payment: $4,800 per month
OK, so a HMC costs, on average, $4,800 a month more than a VMC. Yes, that's a lot more, but the real question is:
Will the extra profits you reap by having that HMC be more than that $4,800 a month?
The key driver in machine tool utilization is spindle run time. This is where HMC's really shine. The average spindle run time on an HMC is 85% versus 25% on a VMC. So what does that mean? That means, on average, less than a third of the labor required to make the same part.
Whether it makes sense to invest in the HMC depends on your business model, as obviously the savings in setup times from the HMC are more important on long runs than on short runs, but if you do any long run stuff at all, the savings are pretty apparent.
Figure the minimum cost of a machine operator after accounting for wages, benefits, labor burden, etc. has to be roughly $6,000 a month. Since your HMC can do the work of three VMCs, it would cost $18,000 in labor to do the same work on VMCs as you get done on HMC's.
True Costs And Pricing of HMC VS. VMC
OK, yes, the example above is a little bit simplified, but doing an apples to apples comparison, it gets us "close enough" to the info we need to make a decision. With everything else being equal:
- An HMC costs $4,800 more per month to finance than a VMC.
- Using a VMC will cost you $12,000 per month more in labor than an HMC.
- All other things being equal, the HMC will save you $12,000-$4,800, or $7,200 a month.
Let's repeat that: after taking into account the extra monthly cost of the HMC, it will still save you $7,200 a month in labor costs.
As an added bonus, more expensive equipment can typically be financed for longer period of time: on the average $375,000 you would be able to finance for 7 years instead of just 5, which would drop your payment from $7,050 per month to $5,450 per month.
In both cases, if you lease you should be able to write off the entire payment as an operating expense, with the option to buy the equipment at the end for 10% of the original price. Another option, is an equipment finance agreement, which costs a little bit more (roughly 8% higher payments) but you would own the equipment at the end for $1.
The advantage of leasing over buying - tax treatment. Prior to January 2014 Section 179 of the tax code gave you a huge upfront deduction (up to $500k) when purchasing but that number has been curtailed to just $25,000 for 2014 so leasing is starting to make more sense for most companies.
Which Is Better?
The choice of HMC vs. VMC depends on your business model, and some other things, but hopefully this article has given you something to chew on while making this decision.
No matter what your choice, HMC or VMC, loan or lease, we can help you finance it. We'll take the time to understand your business and your needs, and give you straight answers with no shenanigans.
For more information, or to get a personalized quote, please contact us or give us a call at (866) 631-9996.