Don’t Build Factories for Promises

Over the years, I’ve watched companies spend themselves into trouble because they confused optimism with strategy. The conversation starts the same way: A customer says, “If you build a facility closer to us…” or “If you invest in this equipment…” or “If you manufacture locally…” They’ll assure you the business will be there.

It sounds convincing because everyone wants to believe they’re standing at the beginning of a growth curve. The problem is that promises don’t pay for buildings or equipment. Remember, it’s not a sale until you have a check in your hand. And that goes for promises to make purchases. Until you have money, you don’t have anything.

I learned that lesson years ago while working with Petrobras in Brazil. They wanted Robroy to build a manufacturing facility there so we could supply them locally. They made a reasonable argument. Other suppliers were already building factories, they said, and having a local operation would strengthen the relationship and position us for future growth.

I understood their reasoning, but when I looked at our business, I couldn’t justify the investment. We already had enough manufacturing capacity to supply everything they were buying. The only additional expense was freight, and freight was a lot cheaper than building, staffing, and operating another plant in another country.

I told them, “When you give me enough business to justify another factory, I’ll build one. Until then, I’ll gladly pay the freight.”

That discussion didn’t end there. It came up year after year, and every time the answer was the same. They reminded me that competitors were building facilities in Brazil. I reminded them that they hadn’t given me enough orders to require one. About five years later, many of those competitors were shutting those facilities down because the demand everyone promised never materialized. Building capacity ahead of the market looked visionary at the beginning, but it became an expensive burden once reality set in. I couldn’t let myself be sold on the promises of things that “could” happen when I had to look at the things that were happening.

I saw the same kind of thinking from a different angle when I was asked to evaluate a manufacturing company that we had acquired. As I walked through the plant, I noticed expensive equipment sitting idle throughout the facility. Machine after machine wasn’t running, and it didn’t take long to understand why after I reviewed the financial statements. Most of the equipment had been leased. Because the monthly payments looked manageable, management had gradually convinced itself that adding another machine wasn’t a significant decision. They focused on whether they could afford another lease payment instead of asking whether they actually needed the additional capacity.

There’s an old joke that says, “A man visits a small country store, and the store has an entire shelf wall dedicated to containers of table salt. He says to the shopkeeper, ‘Wow, you must sell a lot of salt.’ And the shopkeeper says, ‘No, not really. But the salt salesman? Now, that guy sells a lot of salt.'”

Leasing equipment is an easy trap to fall into because leases make expansion look inexpensive. They reduce the upfront investment, but they don’t eliminate the ongoing cost of owning excess capacity. Every machine has to be maintained. Every square foot has to be heated, insured, and managed. Equipment that isn’t producing anything still consumes cash, and money tied up supporting idle assets can’t be invested where it will actually generate a return.

As I spent more time with that company, it became obvious that they had slowly shifted their attention away from manufacturing and toward acquiring equipment. They genuinely believed that more machines meant more opportunity, but customers don’t buy production capacity; they buy products. Capacity only creates value when demand is there to use it.

That’s why I’ve always believed capacity should follow demand, not anticipation. Manufacturing investments are difficult to reverse once they’re made. When you build the plant, install the equipment, hire the people, and commit to the overhead, those costs remain whether the orders arrive or not. Hoping business will eventually catch up is not much of a strategy. It’s better to play catchup in this case, than it is to try to get ahead. That’s how you tie up capital and inventory, which is extremely difficult to recover from.

Looking back, I’ve never regretted paying freight to serve a customer whose volume didn’t justify another facility. I have seen plenty of companies regret building factories they couldn’t keep busy. Those decisions rarely create an immediate crisis. Instead, they quietly drain cash, reduce flexibility, and force management to spend years supporting investments that never should have been made in the first place. The companies actually outspend themselves and either have to shutter the factory or just shut down completely.

Growth has always been important, but profitable growth is what matters. There’s nothing wrong with expanding when the business supports it. The mistake is expanding because someone promises that one day it will.

I’ve been a manufacturing executive, as well as a sales and marketing professional, for a few decades. Now, I help companies turn around their own business, including pivoting within their industry. If you would like more information, please visit my website and connect with me on Twitter, Facebook, or LinkedIn.

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