High turnover and full order books are not the same thing as commercial resilience. Some of the most active engineering companies are operating with structural vulnerabilities that busy schedules make easy to overlook and hard to address.
By Richard Stinson, Founder, Brookstone Creative Ltd | Leicestershire | 9 minute read
High revenue and full production schedules can conceal significant commercial vulnerability in engineering companies. The three most common vulnerabilities are customer concentration, where a small number of customers represents a dangerously high proportion of revenue; margin erosion, where revenue growth is not accompanied by equivalent profit improvement; and pipeline weakness, where the current order book is strong but the forward-looking commercial development activity that would sustain it is absent. Each of these is easier to address when the business is busy than when it is not.
There is a particular type of engineering company director who is hardest to reach with a commercial development conversation.
They are busy. The order book is full. The machines are running. The team is at capacity. Revenue is at its highest level. There is no obvious burning platform, no immediate crisis to respond to, no external pressure that would make the director receptive to a conversation about commercial strategy.
They are also, in many cases, carrying more commercial risk than they realise.
The busy engineering company has, by definition, less management bandwidth to think about commercial development than the quieter one. The very success that fills the order book also fills every waking hour with operational demands. The forward-looking commercial questions that need attention get deferred because the current demands seem more urgent. And the vulnerabilities that exist within the current commercial structure grow quietly, invisible behind the reassuring noise of a full production schedule.
The customer concentration risk
Customer concentration is most comfortable when the concentrated customer is performing well. It is most dangerous at exactly that moment, because the dependency is deepest and the warning signs are absent.
The most common and most dangerous commercial vulnerability in engineering companies is customer concentration.
It develops naturally and innocuously. A good relationship with a significant customer produces growing volumes. The customer is easy to work with, payments are reliable, the work is interesting. More of the production capacity is allocated to their programmes. Revenue from that customer grows as a proportion of total revenue. The relationship deepens.
And then something changes. The customer reorganises their supply chain. A programme ends. The customer is acquired and the new parent has existing preferred suppliers. A key contact leaves and is replaced by someone with different preferences and different supplier relationships. None of these events is unusual in industrial supply chains. All of them are outside the engineering company’s control.
The company that has allowed one customer to represent 40% or 50% of revenue has created a structural vulnerability that cannot be addressed quickly. Replacing that volume from other sources takes time, and the time required is measured in years for significant programme work, not months.
The time to manage concentration risk is when the business is full, when there is enough commercial capacity to develop new relationships deliberately rather than urgently, and when the loss of the concentrated customer would be a manageable problem rather than an existential one.
The margin erosion problem
Revenue growth that does not translate into equivalent profit improvement is a second vulnerability that busy order books can conceal.
The engineering company growing at 15% per year in revenue terms while margins remain flat or compress is working harder for the same commercial return. The additional revenue is buying additional capacity, additional management attention, additional operational complexity, without delivering a proportionate improvement in the financial position.
Margin erosion in engineering companies comes from several directions simultaneously. Increased material costs that are not fully passed through in pricing. Customers who have successfully negotiated price reductions over successive contract renewals. Work accepted at thin margins to fill capacity. The gradual drift of product mix towards lower-margin applications.
Each of these pressures is individually manageable. Collectively, over several years, they can result in a company that is significantly larger than it was but not significantly more profitable, and that has therefore increased its operational risk without improving its financial resilience.
The busy director who measures business health primarily in revenue and order book terms may not notice this drift until the margin position has deteriorated significantly. The quarterly review that focuses on order intake, on-time delivery and customer satisfaction rarely surfaces margin trends by customer, by product type, or by period in a way that makes the drift visible.
The pipeline problem
The third vulnerability is the one most directly addressed by commercial development: the forward-looking pipeline.
The current order book tells you what the business will be doing in the next few months. The pipeline tells you what it will be doing in the next year or two. In engineering companies with long programme cycles, the distinction is commercially significant.
A company with a strong order book and a thin pipeline is burning fuel without having refuelled. The current busyness is real. The future busyness is not yet secured. If commercial development activity is not happening now, at a pace and with a focus that would replace current volumes as they naturally wind down, the company will encounter a quieter period that could have been avoided.
The irony is that building pipeline is hardest to prioritise when the business is busiest. Every hour that commercial development takes is an hour that could be spent on the current demands. The discipline required to invest in pipeline when the current situation seems stable is the discipline that distinguishes engineering companies that grow sustainably from those that cycle between busy and quiet.
Questions manufacturing directors ask about commercial systems
What are the main commercial vulnerabilities in growing engineering companies?
The main commercial vulnerabilities in growing engineering companies are customer concentration, where a small number of customers represents a high proportion of revenue; margin erosion, where revenue growth is not matched by equivalent profit improvement; pipeline weakness, where the forward-looking commercial development that would sustain current volumes is insufficient; and over-reliance on passive commercial development through referral and relationship networks that are not extending to new buyer segments. Each vulnerability is easier to address during periods of strong commercial performance than during periods of commercial difficulty.
How should engineering companies address customer concentration risk?
Engineering companies address customer concentration risk by deliberately building commercial development activity targeting sectors and customers that are independent of the concentrated relationship. This means identifying target accounts outside the current customer base, building visibility in the channels those buyers use for supplier research, and investing in the sustained activity that builds new relationships over the 12 to 24 month timelines that serious programme work requires. The time to do this work is when the business is performing well and commercial bandwidth exists, not when the concentration risk has crystallised into an actual loss.
The practical starting point is to set a target concentration limit, a maximum percentage of revenue from any single customer, and assess how far the current position is from that limit. For companies where the limit is already exceeded, the strategic priority is clear. For companies approaching the limit, the priority is preventing it from being exceeded. Brookstone Creative helps engineering companies build the visibility and commercial development programmes that create new customer relationships and reduce structural dependency on existing ones.
Assess your commercial resilience, not just your order book
Brookstone Creative works with engineering and manufacturing companies to identify and address commercial vulnerabilities before they become commercial crises. Based in Leicestershire, working with engineering and industrial companies nationally.
Engineering Marketing. Built by Engineers.
About the author
Richard Stinson
Founder, Brookstone Creative Ltd | Leicestershire
Richard built his career across engineering and industrial sales, starting as a toolmaker and working through CNC machining, CAD/CAM engineering, technical design, project management and technical sales management across aerospace, automotive, fabrication, cutting tools and specialist manufacturing. He founded Brookstone Creative in Leicestershire to give engineering and manufacturing companies a marketing partner built from genuine sector experience.
