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I’ve written about office overheads in the past. Office expenses often account for an overwhelming percentage of the cost to fulfill small orders. But there’s another wrinkle that recently occurred to me: Office overheads also create structural problems that make it difficult, and sometimes impossible, to grow a manufacturing business.
Here’s how it plays out:
Office overheads incentivize shops to court large, repeat customers.
Large customers create revenue concentration, adding risk and giving customers leverage.
Large customers exercise leverage to put downward pressure on prices and extend payment terms.
Slim margins, poor cash flow, and high bidding costs combine to make it expensive and risky to scale.
Because of this sequence of events, shops often find themselves in a strategic cul-de-sac—extremely busy, falling behind, and yet somehow unable to grow. This circumstance is created not by their competitors, but indirectly by their approach to overhead management. I believe that this condition is endemic in the U.S. manufacturing supply chain. It’s so common, it’s just accepted as reality. But the condition is both self-inflicted and correctable.
The Road to High Revenue Concentration
We all know about the wastes lean manufacturing identifies. But how does office overhead fit into the picture? There isn’t a single waste category that neatly captures office overhead, yet for small one-off jobs, the office can account for greater than 95% of the part cost.
Traditionally, the eight wastes are transport, inventory, motion, waiting, overproduction, overprocessing, defects, and unused skill. These focus fairly exclusively on shop floor operation. That makes sense for a volume manufacturer like Toyota, which first described waste in this way. Office overheads for processing orders are vanishingly small compared to the scale of a car sale, even more so when dealers handle much of the sales overhead. It makes sense that Toyota would neglect office overheads.
But office waste isn’t something that fabricators can ignore. Consider the estimating function. Not only does it require skilled labor, but average bid win rates more than double the effective cost. A bid requiring 15 minutes of labor, paired with a 30% win rate, might cost a fabricator $50 or more per earned purchase order, just for bidding (assumes $35/hour wage and 20% labor overhead for tax and health insurance, and 70% on-task time for the estimator). That excludes any back and forth required to communicate capabilities, material options, and manufacturability issues, and it doesn’t bake in other office overheads like office rental and utilities.
Of course, bidding is just the front of the funnel. To support new work, office processes involve purchasing, inventory receiving and storage, scheduling, ERP data entry for sales orders, work orders, items, BOMs, routes, and travelers. And on order completion, invoicing and receivables take additional attention. All told, a one-off widget that costs $3 in time and materials might reasonably cost nearly $80 just in office overhead. And that’s the shop’s cost. It doesn’t include margin.
Given the high cost of bidding and onboarding new customers, it’s no wonder that most shops triage incoming quote requests. It makes sense to be selective. Fabricators favor customers that are likely to send volume jobs, because high office overheads can be amortized across more parts. Taken to the logical extreme, this creates a business that makes the same parts repeatedly and rarely quotes new jobs.
Focusing on recurring work creates operational efficiency, but it comes with one negative side effect: revenue concentration. If shops favor large customers with repeat volume, they’ll tend to serve fewer customers. In the 2023 FMA Financial Ratios and Operational Benchmarking Survey, 61% of shops reported that half of all sales volume came from six or fewer customers.
We all understand intuitively that having so few customers creates risk due to revenue concentration. Losing a big customer is extremely disruptive when that company represents a double-digit percentage of your revenue. And that gives big customers leverage.
Big customers can demand lower prices, compressing your operating margin. They can also demand extended payment terms, sometimes more than 90 days. If a customer represents 1% of your revenue or less, it’s easy to say no and let the chips fall where they may. When the customer is larger, overall risk rises.
Too Busy to Grow
The reality is that growth requires cash. Equipment and real estate are expensive. It takes time and money to hire and train new people. Inventory can be expensive, and net terms suck cash out of your bank account even as you grow.
Meanwhile, revenue concentration makes leverage even more risky than usual. Sure, you can finance a new machine, but if you stretch and then lose a big customer (or multiple customers in one industry), the consequences can be business-ending.
So, shops often fall into an uncomfortable steady state: They are extremely busy serving their core customers, margins are slim and cash is tight, and expansion is expensive and risky. Some will live in this condition basically indefinitely.
The escape from this cul-de-sac is counterintuitive: Learn to serve the long tail of customers that want lower volumes (even one-offs) and are willing to pay in advance. This flips traditional advice on its head. Instead of triaging small jobs, triage the big ones. Prefer jobs where you can maintain good gross margins, even at the expense of job size. You can still serve volume customers, but you should court new customers who are less price sensitive and less likely to finance their balance sheets at your expense.
Reinventing Fabrication
One California fabricator, Fabworks, recently made this change. Originally called Sessa Manufacturing and Welding, Fabworks is a third-generation family-owned business. It was founded by Fred Sessa 46 years ago as a local fabrication and welding service. Fred’s son Michael took the reins 20 years later. Over time, the company added a few small CNC machines, a CO2 fiber laser, and some press brakes, mainly providing enclosure fabrication and welding services for local Ventura County customers.
But a few years ago, things started to change. Revenue was declining as the fabricator’s book of business slowly left California. In 2023, Jonathan Sessa, Fred’s grandson, finished his degree in mechanical engineering and took over the business so his father could take a step back. I recently talked to Jonathan about his experience.
“As revenue dropped, I saw something was going to have to change,” he remembered. “I could either rebuild our book of work back the same as before or use the open capacity to try something new. I saw the success OSH Cut and others were having in the space and poured my life into learning software to replicate the end-to-end customer experience.”
It took a while, but by 2025, Sessa Manufacturing had been fully rebranded as Fabworks, and most order volume had transitioned to an online-first buying experience with instant prices and online order submission, most paid via credit card. The change was dramatic.
“Before we moved to the online model,” Sessa said, “our average AR outstanding was around 60 days. Most customers were on net 30 terms, even small ones. But many failed to file invoices or would reject parts due to incorrect paperwork and push back dates. Our average lead time was three to four weeks. We also weren’t big enough to get much credit with our service centers, so we often found ourselves paying for material and not seeing payment for around 90 days. It pretty much made growth impossible.
“There are many reasons why Fabworks has grown tremendously in the last 12 months, but moving about 80% of our orders to credit card upfront was a big driver,” Sessa continued. “Now we have cash in hand before we need to pay for material and before we need to pay payroll for a job.
“A lot has changed operationally to make us even more efficient, but before, profit was just a number on a spreadsheet. Now, profit actually hits our bank account, and if we are smart, we can reinvest that quickly into machines, marketing, and staff, and grow our baseline for the next cycle. Healthy cash flow also lets us qualify for significantly better loans and terms. Before, we were always ‘cutting it close’ on cash flow [per our lender], despite healthy long-term financials.”
This improved cash flow was enabled by custom online quoting software that Sessa developed himself. Automating the expensive overhead allowed Fabworks to say yes to the long tail of customers who have long been ignored by shops. Rather than growing on the back of large customers with high leverage and cost sensitivity, Fabworks grows by accepting hundreds of smaller orders from customers who pay in advance.
An Ongoing Process
Transitioning to a high-mix, online-first model isn’t simple. Quoting is perhaps the most wasteful element, but all overheads that make small jobs expensive have to be eliminated. Every business is different, and some product categories don’t lend themselves to automated, instant quoting. That’s fine. Software-assisted quoting can also help reduce overheads, even when a human has to be involved.
Traditional wisdom encourages shops to triage quote requests by ignoring customers that likely won’t convert to high volumes. That advice makes sense on the surface, but it causes high revenue concentration, margin compression, and poor cash flow. Those factors make it difficult and risky to scale.
Manufacturers that learn to serve the long tail instead can create revenue diversity; superior margins; better cash flow; and easier, less-risky growth. Fabworks demonstrates that it’s possible to make the change.
n this episode of the podcast, host Tim Heston is joined by Caleb and Lance Thrailkill of All Metals Fabricating to talk production scheduling, software investments, and growth strategy.
