One of the major goals at US Reliant is to promote asset ownership, particularly in the USA. While outsourcing is a valuable tool in many circumstances, it should not be the answer every time. I believe frequently manufacturers choose to outsource due to lack of other alternatives. US Reliant’s fractional asset ownership program provides an innovative solution for a company to consider when weighing whether to outsource or purchase manufacturing equipment.

There are so many benefits to fractional ownership of manufacturing assets. One of the biggest advantages is not having to deal with the hassles of ownership including maintenance, operations of the equipment, downtime, facility requirements and more. All of those annoyances are taken care of by US Reliant. What accrues solely to the fractional owner are the financial benefits associated with fractional asset ownership.

In order to demonstrate the financial benefits I will have to get a little technical. First, consider why a company would ever purchase a manufacturing asset. The decision is usually intended to lower cost of production, increase capacity, or gain control of the manufacturing process. Most often, I believe, companies seek to lower cost of production per part and increase net profit. Assuming this to be the case, I will focus on that.

There are two main reasons to outsource. 1) Your company needs someone else to take care of the process, you just want the output. This maybe because you don’t have the expertise or the time. 2) The cost of ownership is too steep to justify the amount of production needed from the asset. An example would be that the machine could produce 30,000 units, but you only need 1,000. Fractional ownership solves both these problems.

Illustrated below are the financial advantages associated with fractional asset ownership.

First, here is the data that provides the assumptions we make for the examples:

Here is a simple profit-and-loss statement to show what profit and cost per unit outsourcing provides:

Here is an example using the same data if the company decided to purchase the whole machine with production capacity of 30,000 units a year:

Comparing the two, it is easy to see why companies favor outsourcing. Many companies don’t have a need for all of the capacity of the machine, therefore, why incur the expenses unless they need the full capacity? This doesn’t mean asset ownership is wrong. It is only detrimental if you don’t use it all. This is why fractional ownership has an important place in manufacturing.

Here is an example of what the P&L looks like when a company only buys the amount of production capacity needed:

Notice that the gross margin increased 47%, net profit increased 44%, and cost per unit decreased $20. Now you may be thinking, “What about the balance sheet?” There was no change on the balance sheet. The only thing that happened was that cash was converted into a long-term asset. Assets didn’t decrease one penny. The value of the company didn’t decrease at all from a balance sheet perspective.

The reason that all this is possible, despite another company managing and hosting your asset, is because you only purchase what you need and you also enjoy economies of scale because the assets are all shared by other owners.

There are also key financial ratios that are instantly enhanced, such as earnings per share ( (Net Income minuspreferred dividends)/shares outstanding) and return-on-equity (Operating Income/Average total assets)). These are key ratios for shareholders and investors.

There are other tax advantages that can be used in this model that I haven’t discussed here such as taking Section 179 depreciation for the full value of the fractional ownership all in one year.

The financial benefits for fractional owners are clear, well established and founded in simple principles. For many companies, fractional asset ownership is a better alternative than outsourcing or full ownership. If you’d like to see how fractional ownership can significantly boost your bottom line, call us and my staff and I will run your company’s numbers for you.

This entry was posted on Monday, September 10th, 2007 at 12:02 pm and is filed under Alex Linde, Rapid Prototyping & Rapid Manufacturing, Repatriating Manufacturing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.