It was interesting to hear the many stories of how their businesses are changing with the economy. Many of my relatives are small business owners, which I thought would be caught up in the economic crisis, but to my surprise many are doing very well – and some of them are having their best year ever.
What I Learned
One of my uncles has a machine shop where he primarily builds small products like pig feeders for the agricultural industry. It was interesting to learn that it’s more important for him to purchase raw materials at the right time then anything else, because of the drastic changes in commodity prices. He bought a lot of raw Iron last year at a low price which allowed him to continue selling products at lower prices this summer when prices of Iron and Steel went through the roof. And now he’s looking to make another large purchase of raw materials at low prices before prices jump up again. The price of oil is of course a large contributor to the prices of these raw materials because of it's relation to shipping costs.
At the moment, inflation appears to be under control. But, this activity is very typical of inflationary economies, when cash management becomes the primary factor in the survival of a business. Building new products is not necessarily going to result in more revenue and sometime the most profitable thing to do is to stop producing and keep the business cash in the bank. Here are a few related articles, Free Products are Toast, The End of Just-In-Time Manufacturing.
Another one of my uncles works for a manufacture of airlock equipment, which is used by manufacturing facilities to meet air quality regulations and enhance plant air quality since the passage of the 1970 Clear Air Act. In simpler terms, an airlock is a giant fan that keeps air moving inside a manufacturing facility. The manufacturing industry is not doing very well, so my assumption was that the airlock business would be down as well. But, apparently I was wrong, because my uncle’s employer also repairs old airlocks, which is 40% cheaper then purchasing a new airlock. The slowing economy has them working overtime to rebuild old airlocks as their customers are cutting back on purchasing of expensive new airlocks.
A third relative of mine owns a furniture refurbishing business. The furniture business has taken a turn for the worse over the last year as the declining housing market has dried up the home equity loans to purchase furniture. Therefore, my assumption was that my aunts' business would be slowing down, but I was wrong again. Apparently people are refurbishing their old furniture rather than buying new, and they are tired of low quality furniture made outside the US even at low prices. From what I understand, over the last decade, almost all furniture manufacturing has been moved out of the US in order to compete for low prices. But, the process has also drastically reduced the quality of the furniture produced. (Gee, I would never have guesses that would happen)
Now, all off a sudden Americans are sick of cheap China made products that are disposable after a few years. Americans are starting to once again look for quality over price, as money becomes harder to come by, people will continue to look for products to last longer and maintain value even after they have been used for several years. This trend could be the beginning of the rebirth of the US manufacturing sector, because who else in the world can produce higher quality products then the US? No one.
I took me a while to figure out the common thread that was helping each of my relatives to grow their business in the mist of the largest economic crisis since the depression. The key to growth seems to be repairing older products. Perhaps this is a great time to start a repair business. Of course like any business I’m sure the repair business will have its challenges, like; Now that the market has been flooded with low quality imported products - how do you repair low quality products that were only made to last 2-5 years without telling your customer that their product is junk and has no value? Or how do you get parts for imported products? Or how do you charge more money to fix a product then its worth? With this in mind, you may want to look for a market that still has a high percent of high quality products that are fixable.
If your business is looking for growth, consider adding a department to repair or fix older products - even your competitor's products. In many cases products can be fixes cheaper then they can be replaced. Even if you lose money on your new repair business, you may be able to sell enough new products to these customers to result in a net profit. Adding a repair business also gives you a new opportunity to talk to your customers and those conversations may lead to a better understand of their needs, which may lead to the development of a new solutions to the new challenges that your customers are facing.
This week I participated in one blog carnivals.
They did an excellent job and as usual, there are tons of great articles. If you have the time, I highly suggest you skim through this week’s carnivals.
Carnival of Financial Planning