A new boatbuilding universe evolvingPosted on Written by Reagan Haynes
In this depressed marine sales environment, manufacturers are making systemic overhauls to the way they build boats. The changes are affecting everything from where boats and engines are built to how they are built and sold. Some of the changes will be permanent, while others will linger long after the economy recovers, many believe.
Dealers could see significant changes in the way they do business, such as greater use of catalogs and Web sites, a trend toward smaller showrooms, and boats with fewer options and pushed-back model years.
“There’s a huge benefit to a new production model, and it’s all about the depths of the decline and the steepness of the rise,” says Stephen Wolpert, vice president of global boat operations for Brunswick Corp., the world’s largest boatbuilder. “When retail demand changes, the more inventory you have in the system, the more drastic the changes.”
When demand drops by one boat, manufacturers should respond by building two fewer boats, says Wolpert. Such a business model bases manufacturing volume on consumer orders rather than dealer orders, and enables the industry to respond more quickly to sharp increases or decreases in demand.
“Once we get the excess inventory out of the system, we’re never going to put it back, or not to the level that it’s at,” Wolpert says.
While manufacturers are dealing in entirely different ways with the sharp falloff in demand, there is one constant: Production is down just about everywhere. Retail sales are off around 50 percent, and a backlog of inventory is forcing dealers to scramble to unload model-year 2008, 2007 and even 2006 boats. Factories have furloughed workers and, in some cases, halted production for the foreseeable future – among them such established brands as Hatteras and Sea Ray.
Increasingly, manufacturers are pushing back rollout dates for 2010 models and trying to build more to order, in a way the boating industry hasn’t seen in decades. The new model might benefit the industry in some ways, such as curtailing the excess inventory dealers have to slough off in tough times. But it also presents challenges to manufacturers who find themselves building more sporadically, at the risk of losing skilled workers and operating at a fraction of capacity during part of the year.
A ‘blank sheet’
The end result could be a totally different approach to manufacturing, according to Thom Dammrich, president of the National Marine Manufacturers Association. “If you could start all over with a blank white sheet of paper, I don’t think there’s a person alive who would design the boating industry the way it was,” says Dammrich. “This recession, or depression in the boating industry, is almost presenting people with a blank white sheet of paper.”
Radical ideas are being explored, says Dammrich, including ditching model years altogether and building other products to fill in the gaps, such as windmill blades and bathtubs. And across the board, people are downsizing.
“Small is powerful at this point,” says Peter Van Lancker, president of Hunt Yachts, a semicustom builder based in Portsmouth, R.I. “People can’t get small fast enough in this industry right now.”
Building to order
Volvo Penta began changing its domestic production system for engine manufacturing from a “make to stock” model to a “make to order” model about five years ago, says Clint Moore, president and CEO of Volvo Penta of the Americas. The changeover was completed about two years ago, spearheaded by “quarterbacks” Bob Apple and Randy Phelps, Moore says. The two have crafted a more efficient model, and Volvo has already seen three major benefits, he says.
First, quality has improved. When manufacturers are making to stock, errors that occur are more likely to get repeated, and faulty products are sometimes pushed into warehouses before they are caught, says Moore. When builders make to order, the errors are more likely to be corrected before the engine gets pushed into inventory.
Second, Volvo Penta used to have millions of dollars tied up in inventory, Moore says. The company used to turn inventory about 14 times a year, and now that has risen to about 200 turns a year. Before the switch, Volvo was inventorying about 2,000 gasoline engines, with an average value of about $4,500. Now the company has much better use of capital, since that inventory has been eliminated, Moore says.
Third, it is far more efficient to make to order, Moore says, because the company now carries only enough raw materials to build what it needs. With the fewest materials possible on hand, productivity “explodes,” he says.
The strategy worked so well in Volvo’s U.S. plants that the company implemented the same model about two years ago in Europe for its diesel engines. That changeover only took about a year because Volvo had learned so much from its domestic conversion.
“The good news was we went through the economic collapse with a very lean make-to-order environment,” Moore says. “I’d hate to have made the change in the midst of the market collapse. For us, the key is that while we’re glad that we did much of what we did when we did it, it’s not enough for the future. Now we need to look at long-term structural changes to the business, and those require us to take new steps in the manufacturing environment.”
Brunswick is making that changeover from dealer order to consumer order by monitoring engine registrations daily, and with monthly snapshots of dealer sales, Wolpert says. “We’re pretty directly connected to the velocity of retail and, of course, the smaller that pipeline, the more connected we will get,” he says.
Brunswick would also like to see more inventory-sharing by dealers, based on customer needs.
“In this industry, market contractions probably go deeper than most, and that’s probably in part because there is so much field inventory,” says Wolpert. “The challenges are maintaining employee morale, maintaining deliveries, maintaining quality, and that’s all about keeping the employees involved and empowered and also measuring that beat of the customer and making sure everyone understands this is not a temporary thing; this is a new way of life.”
One major change builders are looking at is offering fewer options or bundling them differently to reduce building costs and room for error.
Brunswick has been taking excess capacity off its lines, both permanently and temporarily, and consolidating some brands at one plant, Wolpert says. In addition, the company is trying to offer fewer option packages. “I do think that this industry does need to rationalize model options … [and] we need to change the way we present models and options to consumers,” Wolpert says. With the range of options the industry has been offering, it’s hard to have the right materials in the right plant at the right time, he says.
The option limitations probably won’t apply to all segments. Larger yachts, for example, are a likely exception because customers are willing to wait the year or more that it takes to build a custom vessel.
Volvo Penta offered 141 variants on its five different displacements of gasoline engines in the first half of 2009, says Moore. “It was a bad habit that we found ourselves gradually getting into, and it’s got to stop,” he says.
“Over the years … customers got way too spoiled by us offering way too many variants on those displacements,” Moore says. “We believe variants are going to be the enemy in this new world, and we have got to get much more into standardization.”
In July, Volvo began offering only about 65 variants, and it is cutting that to 14 in the next two years.
Benefits of standardizing
Even the yacht world will see more standardization in coming years, Moore predicts.
Volvo’s IPS pod drive system has allowed boatbuilders to streamline ordering and construction. With traditional inboards, builders have to order everything separately – from transmissions to struts to steering systems, Moore says. IPS allows them to fill all those requirements with one invoice. And in the old system, if something goes wrong, there is always finger-pointing. For example, transmission people might say it was the fault of the folks who built the shaft or rudder, and vice versa, Moore says. With IPS, that doesn’t happen.
“It’s been an enormous benefit to boatbuilders, including yacht builders,” Moore says. “So it’s not just in the high-volume market segments where standardization is coming; it’s coming in custom boats as well, and it’s a good thing.”
IPS has certainly caught on in the five years since it was introduced. Volvo Penta just sold its 10,000th unit. “We never dreamt it would ramp up at that kind of pace,” Moore says. “It’s replacing traditional inboards very rapidly.”
Standardization is not a bad word, Moore says. “It’s not like the consumer is going to come in and has to choose between things which he or she might not have otherwise chosen,” he explains. “What we can do is, we can bundle in a standard package that will please 99 percent of boaters. We know what’s going to make the consumer happy; we’ve been doing it for 75 or 100 years. And the quality improves because the builder installs this every day, not every once in a while.”
The model-year issue
Maine-based Sabre Yachts is working on two new models that are variations on existing models, says Bentley Collins, marketing vice president. But next year, there will be two new models released – a Back Cove 30 and a new boat in the mid-40s that Collins didn’t want to elaborate on.
“We don’t see this as a price issue; we think it’s a confidence issue,” says Collins. “In our opinion, bringing out new models is the fastest way to get where we need to be.”
Several brands, including Everglades and Sea Ray, are waiting until September to push out 2010 models. Brunswick would like to permanently implement a fall release for all its brands, Wolpert says. That will help dealers clear inventory through the selling season before putting new models in showrooms.
Many Brunswick brands will offer minimal changes on 2010 models, Wolpert says. Builders that already had products in the works couldn’t make that happen in 2010, but Wolpert thinks they will make less dramatic changes for 2011. But he also believes that trend will be temporary.
“With the amount of inventory out in the pipeline, you don’t want to make drastic changes on the 2010 because that discourages people from buying a 2009,” Wolpert says.
With many pushing back production or shelving major product overhauls until times improve, Dammrich and his dealer counterpart, Marine Retailers Association of America president Phil Keeter, also predict there will be fewer dealer meetings. There will be less in the way of new-product offerings, and the meetings will likely last one day instead of several.
Nordic Tugs’ just-released 2010 model features only minor changes, says Bob Shamek, dealer sales manager for the Washington-based builder. “We’re looking at ways to hold the style of the boat and the quality of the boat, but asking ‘How can we do it in a more cost-effective way so we don’t have to raise prices?’ ” says Shamek. “Other builders I talk to, both nationally and internationally, have a bit of the same philosophy now: ‘We don’t want to take away from the boat, but we’ve added and added and added for years, and not removed.’ The cost was going up faster than the retail market could accept.”
For example, when Nordic Tugs recently brought back its 26-footer, which had been discontinued, it decided to use African mahogany – a durable, stylish wood that is cheaper than traditional teak, says Shamek. The company is also going with a new brand of sanitary system, which is comparable to what had been used, but comes with a more competitive price tag.
“Our model has always been only to build boats when we get an order from the dealer,” Shamek says. “[Production] is no easier to deal with whether you’re building 5,000 boats a year or 50 boats a year. When the market stops buying and production drops from 90 percent to 3 percent or 10 percent or whatever it happens to be, it’s still the same kind of hurt. You still don’t have the same kind of volume to hit your break-even point. I don’t care if you’re Brunswick or Sabre or Chaparral or Nordic Tugs, you keep cutting it back to where the demand is, or you close your doors.”
“There’s almost no manufacturer today that is building boats that they don’t have an order for,” Dammrich says. “I think three to five years ago there were many manufacturers who only built to dealer orders, [but] today I think they’re building to customer orders.”
A year ago, manufacturers experienced increased demand during summer months, but kept production steady from month to month, Dammrich says. During off months, dealers essentially stored the boats for manufacturers until they sold inventory from the previous model year.
“I think it’s going to be several years before we see sales and production levels get back to anything resembling what they were … and I think people today are trying to figure out how they’re going to operate over the next five years,” Dammrich says.
Do we need model years?
In European car dealerships, salesmen take customers back to a table and show them a catalog, Dammrich says, and the customer designs a car to pick up in eight weeks. Some think the boating industry will move in this direction.
One European boat dealer kept inventory low by using his customers’ boats to show prospective buyers.
“The question has even been raised: ‘Do we need model years?’ ” Dammrich says. “One of the big issues today is that there are new 2006s, ’07s and ’08s as well as 2009s in showrooms. If there were no model years, those would be equal in value because it’s all new. It’s pretty radical. Will it happen? I don’t know. I think it’s pretty remote, but it just exemplifies the types of questions people are asking. They’re questioning everything.”
This recession should teach the industry to differentiate between actual and perceived demand, Collins says. “What we [as an industry] have done is, we’ve overestimated demand and put too much inventory in our dealers’ hands too quickly, and made it advantageous to them to buy more inventory,” he says. “But at the end of the day, sell-through has to match production.”
Dammrich says building more on demand might help keep inventory levels lower for dealers, but stopping and starting manufacturing definitely increases costs. “You’ve got an investment in this plant and, if you’re not using it, you’re not earning anything on that investment,” he says.
Work force flexibility
One future challenge might be determining how to remove more workers from the building equation. “The less labor you need, the less that becomes a problem,” Dammrich says.
The challenge now becomes asking skilled workers to come in sporadically to build and hoping they don’t find steady work elsewhere. In an economy that is troubled from the bottom up, that challenge is less prevalent, but if other areas bounce back before boating, it could be increasingly difficult.
“Hopefully the boating industry will recover quickly enough that we can take back those people,” Collins says. In late spring, about 95 percent of Sabre’s crew was still available for work if needed.
Nordic Tugs now has all part-time employees, Shamek says. He says the company is fortunate that Washington State has a Shared Work for Employees program that allows people working at least 20 hours to collect unemployment without job-hunting.
Cutting employees is never easy, even when it’s a question of survival, Dammrich says. “It’s very painful when you have to let somebody go,” he says. “Most of these manufacturers are in small towns, so these are the guys you see at grocery stores and at Little League. It’s very hard to let somebody go because you know it impacts real people.”
Brunswick is developing ways to keep employees happy with the new production model.
With a later model-year release, workers will have more free time during the summer, which should boost morale, Wolpert says. “Changing that model release [timeline], in my opinion, is a key to allowing us to shift production while still maintaining good morale in the work force, and it makes sense for the dealer,” Wolpert says. “I think this is something that we have to face and deal with for the health of the industry going forward.”
Brunswick is also trying to keep an employee’s annual earnings steady, Wolpert says. While the company would have to pay based on hours worked – different from a teacher model – Wolpert hopes to maintain about the same income for workers, if possible.
“We’re not there yet, so I’m giving you a bit of an aspirational vision,” Wolpert says. “We don’t have this all worked out, but we do understand we have to concentrate our production in a six- or seven-month window, and we’re committed to working that out for everyone. It benefits the consumer because the dealer has got incentive to clear his inventory during the selling season, and it benefits the employee because that’s quality time with the family during the summer.”
Volvo Penta contended with those employment challenges in several ways, Moore says. First, everybody in each plant was put on an incentive plan, so when the plant achieved its goals, everybody won. “It’s amazing how those plans motivate people,” Moore says.
In the last couple months, Volvo has cross-trained engine builders at its Lexington, Tenn., plant to be sterndrive builders and vice versa, and given them the title “master builder.” They are the highest-paid workers in the plant, and their cross-training gives the company flexibility by enabling it to assign them where they are most needed.
When the company switched from the make-to-stock to the new make-to-order model, Volvo was increasing its market share and didn’t have to let any employees go, despite a different building schedule. “One of the benefits of having a make-to-order model is that in good times … we did about as much production in the offseason as the in-season, so there was much more stability in those days,” Moore says. “That’s what we think will change in the future – we think we’ll build less offseason, and that’s the big challenge now, to be prepared to ramp up and ramp down in more clever ways than before.”
One strategy for doing that is having a group of temporary workers that would be used to adjust manpower requirements. In this market collapse, Volvo Penta has had to lay off all the temps and some permanent staff, but when things bounce back, Moore hopes to maintain flexibility with temps and keep core workers.
“Floorplan money is tough to get right now,” says Keeter. “It’s not available to that many people, and it’s only available at a higher cost. The dealer can’t buy more product because he can’t get financing. And if he can, he can’t always afford the rates, so he might have to scale back.”
None of Nordic Tugs’ dealers are working with GE now “because they are so expensive,” Shamek says. Instead, they’re either funding themselves, working with local banks or using private investors with capital to loan.
Hunt Yachts relies on both in-house sales and a modest dealer network, so floorplanning isn’t typically an issue, since the company has little field inventory, says Van Lancker, who had just delivered a $2 million 52 in Maryland in early June. “We have our own sales force that supports the dealer network, and everyone gets compensated no matter where the sale comes from, instead of pitting one dealer against another by working for the cash register with commissions,” Van Lancker says. “If you put the cash register in the right place, everyone gets along.”
The floorplan situation could improve somewhat with the Small Business Administration pilot program that gives loan guarantees for credit lines up to $2 million to qualifying dealers. Dealers could borrow against retail inventory, would repay the debt as boats were sold, and could borrow against the line of credit to add new inventory.
The government-guaranteed rates should be more competitive than others, says Don Parkhurst, vice president of marine lending for SunTrust Bank. “This may help other banks get in because the government is backing up 75 percent of those loans,” he says. “It may force GE to price down a little bit, or they may lose some of their balances, so it adds some competition to the playing field that maybe hasn’t been there” since KeyBank and Textron pulled out of marine floorplan lending last year.
Wolpert speculates that it might just prolong the inevitable for some dealers. “The issue becomes as the inventory that you’ve borrowed against gets older, how long are they willing to finance [it] for, and what are the rates once they’ve aged?” Wolpert asks.
GE’s decision to raise rates has been driven by concern that dealers are in trouble if they have too much aged inventory, so the whole floorplan credit crisis, in that sense, is actually just a symptom of having too much inventory in the field.
“Having lenders that perpetuate this aged inventory is just a Band-Aid, I think,” says Wolpert. “We’ve decided not to moan about the lack of wholesale credit; we’re going to deal with the facts because it’s healthier for everybody.”
Taking other work
Some manufacturers are getting innovative in their efforts to keep factories going – for example, contemplating making windmill blades or bathtubs or other composite products to offset low boat demand and maintain operating capacity, say Keeter and Dammrich.
Everglades Boats is asking other manufacturers to consider having their boats built at Everglades if their own overhead is too high. In the meantime, the company is exploring any option to take advantage of its 110,000-square-foot facility and labor force, says Stephen Dougherty, who co-founded the company with his father, Bob. Everglades has 35 to 40 dealers throughout the country, as well as some abroad, and builds 13 models from 21 to 35 feet.
Roxanne and Kenny Willmer have been operating Strike Yachts, a small custom operation in Florida, for 17 years. “For the little guy who’s used to building 10 boats a year instead of four boats a year, the overhead was killing us,” says Roxanne Willmer.
So the couple sold their Broward County facility and bought 10 acres of land in Perry, Fla., just south of Tallahassee, that includes a 23,000-square-foot former aluminum fabrication facility.
They decided that with all their space, they would offer to store molds for other builders at a low cost – unheard-of in Florida, she says – and custom-build some or all of the boat as orders come in. That way, companies could theoretically stay in business through the tough time, but reduce their overhead, while giving Strike a boost in revenue, she says. So far, she says, several builders have expressed an interest, and one has already shipped its mold to Perry.
“We build high-end custom boats, so they wouldn’t be sending the mold to ABC company who doesn’t know how to build custom boats,” she says. “There would be a fixed contract price, and it could be customized to any level. We could do fiberglass only and send the boat back to them so they can do their own custom rigging, or we could do the rigging and no motors, or whatever.”
Should you build in-house or outsource? The answer to that depends on whom you ask.
Nordic Tugs, a relatively small-volume manufacturer, builds about 95 percent of the boat in-house, outsourcing only doors, windows and metal work. The fiberglass and cabinetry is all done on the premises, Shamek says.
“There are pros and cons to both,” he says. “If you’re not building a lot, if you’ve got limited production and you’re not custom, a lot of times it’s easier to outsource. We’ve continued to keep most things inside, and that makes it easier for us in lot of ways because we can react faster if we get some change on orders.”
Some manufacturers maintain that keeping production in-house can help ease costs for just that reason – because there is more control over the process. Van Lancker, who has also run engineering for such builders as Boston Whaler and Chris-Craft, says Hunt largely outsources the building of its semicustom boats.
Because he has built boats in-house with others in the past, Van Lancker says he has the experience to outsource successfully, maintaining quality, control and flexibility. “I’m doing a really customized 36 right now that’s a twin jet, teak transom … one like I’ve never built before,” he says. “It’s all custom. You have to have the people and the process in place to do that. It involves change orders and capability.”
Done right, outsourcing keeps costs low and steady, Van Lancker says, as long as you go with a good vendor.
“A lot of it is knowing who to pick, and a lot of people don’t know that because they don’t build the boats themselves,” Van Lancker says. “I build them myself.”
It also helps that Van Lancker directly employs only about half the people involved in building Hunt yachts. “If we built in-house, we would have 50 more people to be responsible for, pay for, get tools for, have regulations for, have lights for,” Van Lancker says. “And I don’t have to worry if Harry was sick today and can’t get the job done, so it’s simplified. Will more production go that way? I don’t know.”
Brunswick has been doing global sourcing for a long time and focusing on cost reduction, and the economy isn’t changing that, says Wolpert. “The amount of outsourcing does vary from brand to brand, and outsourcing doesn’t necessarily give us the flexibility we need,” Wolpert says. “The more links in the supply chain, the less flexibility you tend to have. We tend to outsource item by item, with an eye on cost and quality and delivery.”
Sometimes Brunswick will end up using in-house labor forces to keep people employed, but those are temporary situations, Wolpert says. “The whole sourcing thing needs to be integrating strategy, not a knee-jerk reaction to the economic environment,” Wolpert says. “The way we tend to evaluate at Brunswick is we ask ‘What are core competencies in manufacturing?’ And that’s what we insource.”
Many agree that however production shakes out, most builders will have a different look on the far side of the recession. “I have no doubt that good will come out of this,” Dammrich says. “[That's] easy to say to the survivors, but for those who didn’t survive, that’s a tough pill to swallow. But I think that the manufacturers are not only looking at, What will be the model for producing boats in the future? But also, What should be the model for distribution in the future?”
This article originally appeared in the August 2009 issue.
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