This Manufacturer of One-Offs and Short Runs is Shooting the Lights Out
John Hayes posted on May 26, 2015 |
Four Lessons from Proto Labs, a company that grew 30% last quarter and earned $10 million

In case you haven’t heard, Proto Labs makes prototype molds and parts and does short-run manufacturing.  They do it all with incredible efficiency, happily taking on the jobs that nobody else can afford to do. And here’s the nut. Last quarter the company turned revenue of $58 million, along with a profit of $10 million after tax. That revenue is up from $42 million in the same quarter of 2014.  

View of the shop floor at the Proto Labs facility in Plymouth Minnesota
View of the shop floor at the Proto Labs facility in Plymouth, Minnesota's Jim Anderton and I spent an afternoon at a Proto Labs facility near Minneapolis in hopes of learning some lessons to share with other manufacturers. Note that:

  • Proto Labs is a contract manufacturer. It doesn`t invent and sell its own products.
  • Proto Labs makes products in the United States. Although they also have manufacturing facilities in Europe and Japan, most of their revenue is in North America.  These customers are serviced by plants in Minnesota and North Carolina.
  • Its success is largely due to process engineering, driven by automation and proprietary technology.

And just to underscore its success, Proto Labs is a Wall Street darling. At 1.84 billion, its market cap is roughly eight times annualized first quarter (Q1) revenue. By comparison, Apple’s market cap of roughly $750 billion is 3.2 times annualized Q1 revenue. 

How can a company not only survive, but thrive, on doing the sort of manufacturing that common wisdom warns against? Those short runs and single units that involve too much set up to make efficient use of a mill. And what can it teach us about manufacturing?

Here are four key takeaways that may help other manufacturers re-think their businesses:

  1. Automate the manual low-value processes, but not the ones you think.
  2. Standardize the machining processes when you can’t standardize the parts.
  3. Use the Internet to find your ideal customers.
  4. Charge a premium for doing something that nobody else wants to do.

Invest in Automating Manual Low-Value Processes, but Not the Ones you Think

When it comes to automating low-value processes, most of us think of having a machine doing repetitive tasks. But there`s only so much efficiency to be gained from streamlining shop-floor tasks. Every manufacturer has already done that, so where is the competitive advantage in more automation?  Proto Labs has separated itself from the pack by automating the “expert” tasks, such as quoting and mold design. 

One of the most tedious processes in a job shop is quoting. In fact, it is so time consuming that most contract manufacturers won’t even quote a job for a small run, let alone for a single part. Most engineers know what that feels like from the other end. You send in a file and you follow up with a phone call.  When you tell them that you want a quantity of one, they either hang up or quote you an outrageous price and an endless lead time.

But most job shops don’t consider automating the quoting process, or the mold design.  These are, after all, expert steps. That’s not the case at Proto Labs.

The request for quote interface. Just upload a file and enter an email address.
The request for quote interface. Just upload a file and enter an email address.

At Proto Labs, you upload your 3D CAD file to its website. Most of the quotes can be automatically generated based on your selections of materials and build method (CNC machining, injection molding, 3D printing). For those models that cannot be automatically quoted, Proto Labs maintains a team of “analysts” and designers who can help clean up the models and pinpoint issues. This team completes more than 1,000 quotes a day. 

How is it possible to achieve such a high level of quoting? I visited only one facility, so I can’t really say how many designers and analysts there are. But 24 may be a good guess. If that’s correct, the math works out to more than 40 quotes per person each day. How can they do that? Proto Labs has developed proprietary software that analyses CAD files and applies automated expertise during the quoting process. The human analysts help further identify manufacturability issues.

By the time the quote goes to the customer, the software has already run the tool paths. This technology determines how long the job will take on the CNC mill, 3D printing machine or injection molding press, as well as the amount of material that they will need.

Standardize the Machining Processes if you Can’t Standardize the Parts

When we visited the newest Proto Labs site, we saw more than 200 HAAS milling machines. Why HAAS?  Well, the manufacturer of the mill isn`t the important point – what`s crucial is that all of the mills are the same. Is HAAS the best machine for every application? Probably not. But Proto Labs more than makes up for any shortcomings by having standardization in its post-processing operator training.  When we looked down the aisles of machines, we saw only one operator in most of the lengthy rows of mills. That is particularly impressive when you consider that nearly every machine is running very short runs.

Material selection is also important. Today, Proto Labs prides itself on offering a range of materials and processes. But it wasn’t always this way. The company started with injection molding that accommodated a limited range of plastic materials. It has since added many new thermoplastic materials, as well as metal and liquid silicone rubber (LSR) materials for metal injection molding (MIM) and LSR molding. When a new material or process is introduced, Proto Labs fully vets it to ensure there is enough consumer demand before fully launching it to market.

Finally, its shop floor scheduling is more than impressive. We saw a large dedicated server room with what appeared to be hundreds of servers. Rob Bodor, the company`s Vice President and General Manager, told us that this set up is mirrored in the other locations. That way, the jobs can be directed to the right machines in whichever location they may be. The end effect is surprising; there are no carts on the floor, no “travellers” of information packets following jobs around. Instead, the floor was virtually empty except for the machines and the operators.

Servers at Proto Labs` facility in Plymouth MN, near Minneapolis

Servers at Proto Labs` facility in Plymouth MN, near Minneapolis

3. Use the Internet to Find Your Ideal Customers

Here is an area where traditional manufacturers are still shockingly weak. Most manufacturers consider their market to be the customers they already know, often in their local geography. What Proto Labs has done is extend its expertise to reach a wide audience of potential users, almost regardless of geography.

The ideal Proto Labs customer is an engineer on a product development team who needs a physical prototype, or even a production part. They don’t want to send it overseas and wait eight weeks, only to find out that they need to make some changes. These product development customers are engaged in an iterative process, so delays in prototyping can kill the team’s time to market. Proto Labs solves that problem with delivery times as short as one day.  

Like most engineers, these ideal customers don’t want to talk to a sales person. In response, Proto Labs has developed a web presence that makes them ridiculously easy to deal with. Users submit a 3D CAD model of the part they want made, enter their email address and wait for the quote, which reaches them within hours. 

What most manufacturers don’t get is that, for an engineer, picking up the phone and calling for a quote is a big hurdle. Correction – it’s a huge hurdle. It represents a commitment that most people just don’t want to make.  By contrast, many manufacturers still don’t make their pricing available online.  That’s a mistake.  

Compounding this error, many manufacturers also don’t make extensive use of digital marketing, which is another mistake. Proto Labs realizes the importance of an online marketing presence.

4. Charge a Premium for Your Special Skills

Proto Labs has a gross profit margin of approximately 60 percent and after-tax earnings of almost 18 percent. This is a function of identifying its ideal customer base, delighting them with on-time delivery and earning repeat business.  

Most contract manufacturers develop a pricing model that includes labor, materials and machine time, plus overhead and quoting effort. Sometimes they price in engineering time for jobs that aren’t immediately manufacturable.  Following that model leads to a price that is about the same as everyone else’s. 

In contrast, Proto Labs has become an enormous niche manufacturer. They haven’t reinvented the manufacturing itself so much as creating innovative processes that support manufacturing.

 Not all of these lessons will apply to all manufacturers, but they should provide food for thought. I’m even looking at our publishing business differently now.  

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