Manufacturing Brokers
Ordering custom manufactured parts can be difficult, and we aren't the only ones who have noticed. We set out to make it easier to order sheet metal parts, but other startups have taken a more aggressive, if less focused, approach: brokering.
3D Hubs launched in 2013 to connect people with local shops. As a broker, 3D Hubs makes the connection and takes a cut on each sale. They started with 3D printing, but expanded over time to include other services, adding sheet metal fabrication services in 2019. ProtoLabs purchased 3D Hubs in 2021, ostensibly to overcome recent growth stagnation by offering a network of local shops with a wider range of services.
Xometry also launched in 2013 to provide an online instant quoting platform, and to form a network of shops for manufacturing. Xometry brokers each sale and farms the work out to its network while targeting a 25% margin on each sale. Xometry's strategy is to use its instant quoting engine and convenient access to hosts of services to attract customers, and then to convert those customers to production where there is more money to make.
For startups, approaching manufacturing as a broker and software service provider is attractive for founders and investors alike. Manufacturing is extraordinarily complicated and difficult to scale - it requires depth of expertise, high capital investment, skilled labor, lots of physical space, and a down-to-earth commitment to getting the job done.
A software-based broker theoretically skips a lot of those issues: rapid scale is achieved by tapping into existing shops, capital investments into equipment and property are minimized, and scalability looks more like a software company than a manufacturing operation. Shops are attracted by the promise of making painless connections with customers and filling unused capacity. Meanwhile, the broker makes "easy money" by creating the connection and earning a cut on all future sales.
It's a good idea, but brokers will always struggle to match the efficiency, price, quality, repeatability, and customer experience provided by direct manufacturers who work effectively with their customers.
Customer Experience is King
Many touch-points affect customer experience in manufacturing: price, response time, quality of service, consistency of experience, lead-time, service availability, timely communication, attention to detail, follow-up, and prompt problem resolution. A broker trying to juggle relationships between thousands of customers and hundreds of shops will never be able to nail down the details as effectively as a shop that has optimized to provide an excellent experience from quote to part.
Take customer communication, for example. Making custom parts can be complicated. Often, it's important to obtain customer feedback to figure out the best way to work around a problem. A shop with a customer rep right on the floor can immediately make a phone call and get feedback from the customer. A broker adds an additional, unnecessary layer that slows communication and delays problem resolution.
Price is another major component. Custom manufacturing is extraordinarily competitive and customers tend to be price-sensitive. In fact, sheet metal shops in particular net only around 9% per year, on average. In so competitive a space, is it reasonable to think that a broker could apply a 33% markup and remain competitive? The problem is most acute as volumes increase. Brokers want to take a cut on those massive production jobs, but price-sensitive customers will be motivated to cut out middlemen, both to reduce prices and to develop important relationships with their value chain. Price represents a significant hurdle, and one without an easy solution for brokers.
Efficiency at Scale
Manufacturing scale may also prove to have an impact, affecting both quality and price. Imagine a broker handling $10M / month in volume, spread out among some 100 different shops. For the sake of simplicity, imagine that each shop does a roughly equivalent amount of volume, at $100k / month each. That might represent a respectable volume for a small shop, but each shop will fail to benefit from economies of scale that a larger operation would gain by aggregating all $10M of that volume per month. For a sheet metal shop, that might take the form of significantly lower material prices and reduced waste, lower setup and changeover times, etc.
A large, highly optimized shop will be able to reduce costs far more than smaller operations, resulting in better prices, better margins, or both. Brokers start out with a price disadvantage because of their markup, and remain disadvantaged because they can't benefit from manufacturing economies of scale that large direct competitors can.
Xometry, at least, seems to know this. They've taken great pains to improve their supplier network, offering material sourcing and cash flow services, access to a network of downstream service-providers for finishing, and a community hub and knowledge base. In 2021 they purchased FactoryFour, a software startup supporting manufacturing digitization and automation, to provide shops "tools they need to manage and grow their operations." The strategy seems clear: if Xometry can't directly control its manufacturing network, at least it can provide tools to help its partners improve. This effort is substantial and noteworthy, but in a way they are playing catch-up: all this work might mitigate some, but not all, of the issues intrinsic to a broker manufacturing model.
Finally, brokers will struggle to gain the expertise achieved by direct manufacturers, which will affect quoting accuracy and communication workflow. Sheet metal manufacturing is a prime example. Sheet metal is a unique industry, and one that online brokers have failed to handle properly.
Brokers and Sheet Metal Manufacturing Services
At a recent tradeshow, one broker rep confided that in the last 6 months they've failed to do almost any sheet metal volume. Similarly, Protolabs acquired Rapid to add sheet metal fabrication services in 2017, but growth of their sheet metal service has stagnated since. Protolabs' instant quoting engine doesn't even include sheet metal and requires use of an older tool from Rapid. Meanwhile, Xometry and 3D Hubs do incorporate sheet metal services into their instant quoting platforms, but their prices are astronomically high, with lead-times in some cases extending into weeks for even simple parts.
Brokers' failure to deliver on sheet metal is in part tied to how unique an industry it is. Sheet metal parts are usually ordered in batches, with multiple parts comprising an assembly. But brokers' quoting engines revolve around single-part quoting workflows that just don't work well for sheet metal. Additionally, quoting competitively on sheet metal jobs requires nesting, which is extraordinarily difficult to do on-demand, online. Finally, sheet metal manufacturability is a unique problem, requiring bend simulation, collision checks, fixturing analysis, heat simulation, and so on.
Brokers seem to view sheet metal fabrication as a sort of side-project: worth adding, but not worth optimizing. Sheet metal may not be perceived as a significant value-center, so no real effort is given to quoting competitively. Ironically, brokers' attitude about sheet metal becomes a self-fulfilling prophecy. They bid high to avoid losing money on processes they don't understand, and then fail to grow their sheet metal business. This is a remarkable oversight in an industry worth tens of billions of dollars in the US alone.
Brokers' lack of expertise is perhaps most acute in the sheet metal world, but the same lesson might apply more generally. Brokers might understand manufacturing moderately well, but they may struggle to develop the depth of expertise of a direct manufacturer.
Broker Value-Add
The true value-add of a broker is its simplicity. It's nice for a customer to go to a single source to have anything made, whether 3D printing, sheet metal, CNC machining, or injection molding. Manufacturing brokers are also fixing quoting and ordering workflows that plague direct manufacturers right now, shortening quote and order cycles, and providing an improved ordering experience.
On the other hand, large customers will likely be willing to spend a day or two tracking down a good vendor for its better prices, improved relationship, high responsiveness, and consistency of experience. A broker like Xometry will struggle to remain cost-competitive against direct manufacturers like OSH Cut and ProtoLabs, who can zero in on operations and efficiency to absolutely nail the customer experience, every time. Brokers can try to accomplish the same only indirectly, but it's going to be a tough battle compared to a direct manufacturer that is executing brilliantly on process, value, and quality.
What does this mean for brokers? We think that they'll do fine on short-run and prototype work, but they'll find it difficult to scale. Customer loyalty will be affected by inconsistent experience and high prices, and competitors who offer direct manufacturing services will tend to win bigger jobs and repeat business. To-date, manufacturers' biggest weakness has been poor process, especially as it relates to bidding and operational performance. But as shops modernize and take advantage of new software and automation to improve customer experience, the tech-enabled edge offered by modern brokers will vanish.
In Conclusion
We are in an era where brokers will flourish, but briefly. Wider tech adoption by shops will push brokers out of the picture as customers take advantage of better pricing and improved customer experience.
The alternative is an Amazon-style takeover of manufacturing, where shops struggle to reach customers effectively if they aren't on the big brokerage. Maybe! But custom manufacturing is quite different than consumer retail. "Fulfilled by Amazon" is basically about stuffing pre-made products into boxes and shipping them. Manufacturing is far more complex and nuanced, and nailing consistent, customer-oriented experience is far more difficult.
Only time will tell which direction the industry goes. Manufacturing in the US is currently fragmented, full of small to mid-sized shops with different capabilities, competencies, lead-times, quality, and execution. That fragmentation leads to poor customer experience. As long as that remains true, brokers have a chance. But against large direct manufacturers that can nail down the customer experience and take advantage of economies of scale, brokers face a steep uphill battle. Only a vendor or two in each manufacturing space could be enough to seal the deal.
