To say Lonny Thiessen's company didn't get into high gear right away is to put things mildly. In fact, it took Western Manufacturing Ltd. about a year to land its first customer, and even then it was small beer by the standards of Canada's oilpatch.
Blame the timing. Thiessen, who was 22 at the time, launched his oilfield tank manufacturing firm in October 2008— right in the teeth of a nasty contraction in the energy sector. The Grande Prairie, Alta.-based company won just a single modest contract during its first year. But the slump also helped the struggling start up by forcing some major players out of its niche, leaving a big hole. When the energy industry came roaring back, says Thiessen, Western's president and CEO, "the business blew wide open."
Over the next two years, Western's revenue grew from less than $100,000 to $32.8 million. This sensational increase lands the firm atop the 2012 PROFIT HOT 50 ranking of Canada's Top New Growth Companies with the second-highest growth rate in the list's 13-year history: 32,714%.
Hiring a welder is like attending some brutal auction sale," says Thiessen. "It's crazy tough
If you're tempted to chalk up Western's mind-boggling growth to little more than being an oilpatch supplier during exceptionally good times, think again. By introducing a subcontractor-centric business model to steel fabrication in the oil and gas sector, Thiessen has found a way to give customers what they want—and when they want it—without great risk to his business. He also has addressed a chronic challenge in his highly cyclical niche: a shortage of skilled labour during boom times. Above all, that means welders.
"I can hire office staff, draftsmen and project managers—no problem," says the mature-beyond-his-years Thiessen. "But hiring a welder is like attending some brutal auction sale. It's crazy tough."
Grande Prairie, which is one of the main growth centres in the Alberta energy industry, has a transient population and wage inflation that have yielded a culture of low employee loyalty. Figuring out how to get oilfield tanks made without fighting a wage war with competitors has been one of Western's secrets to success—and a key to the company's long-term prospects.
You can sum up this strategy in four words: dial up, dial down. In this approach, one that firms in boom/bust, cyclical or low-margin sectors might do well to adopt, substantial outsourcing allows you to scale your operations in line with client demand.
Western, which recently changed its name from West Fab Manufacturing Ltd. to avoid confusion with another firm, employs fewer than 25 workers in-house. These include project managers—a group Thiessen calls the "centre of the company"— who meet with clients to determine their needs, provide specs to engineers, draftsmen and procurement staff, and break the fabrication process into small chunks. The company then outsources these chunks to fabrication shops across Western Canada—all of them too small to bid on their own on contracts from the likes of energy giants Encana Corp. and Canadian Natural Resources Ltd. By paying per project rather than per hour, Western avoids the cost overruns that plague the energy business. And although many other oilpatch suppliers use subcontractors to fill short-term spikes in orders, Western has embraced this practice as a long-term solution, says Thiessen: "Our model lets us play in the big game without taking on a lot of overhead."
Thiessen comes by his financial conservatism honestly. The oldest of seven children, he started working at his father Roland's steel-fabrication company at the age of 12. By the time his father sold the business in 2005, Thiessen was a licensed welder and assistant general manager. "My father taught me to be careful with capital expenditures and never to put everything on the line," he says. Over the years, Thiessen and his father watched many competitors thrive during the good times, only to be sunk by high overhead during the inevitable busts.
Thiessen has kept a tight rein on his own costs. He launched Western with just $1,000 of his own money, securing the rest of his financing from large customer deposits on orders. And the bank line of credit that Thiessen has arranged remains untouched. "I was never interested in making lots of revenue for little profit," he says, "so I didn't build my business that way."
The company takes a strategic approach to outsourcing. For instance, it will use the same subcontractor whenever it needs a given type of work done. That subcontractor then builds up the specialized skills needed in order to do that type of work and becomes more efficient as it repeats tasks. The subcontractor also has an incentive to invest in specialized equipment so it can do jobs more quickly—at no additional capital cost to Western.
Thiessen says that his model allows Western to deliver products at a price similar to that of the competition, of equal or better quality and—most important— much faster. As well, his subcontractors, by specializing and learning to turn around projects quickly, become more efficient and profitable. "We use our entrepreneurial drive to fuel theirs," says Thiessen. What's more, a quick-pay system with net 15-day terms keeps subcontractors loyal.
Of course, a few headaches have come with hypergrowth. In the early days, for example, Western sometimes struggled with quality control. "It was hard to have a quality inspector on a [subcontractor's] jobsite all the time," says Thiessen.
He used to handle such quality-control issues on a case-by-case basis. But in recent months, Thiessen has begun to focus on "stabilizing the systems." His company recently developed a quality-control program designed to ensure that subcontractors stay on track in doing quality work without it seeming as if Western inspectors are breathing down their necks. "We're no longer on-site inspecting the products," says Thiessen. "Instead, we're inspecting their quality-control process."
In 2011, Thiessen made another key move designed to provide an advantage in the years ahead. Last October, he leased a 55,000-square-foot factory, the company's first, which is run by subcontracted workers. The plant allows Western to construct 3,000-barrel tanks that dwarf the 400-barrel models his subcontractors' shops can handle.
Has success led Thiessen to abandon his cautious approach to capital expenditures? On the contrary, he says: "It was an investment we needed to make."
Clients are commissioning the huge new tanks for projects with lead times of three to four years. Thiessen undertook this bold expansion precisely in order to cushion Western against the risks attendant to his industry. When the next downturn starts sinking players in his sector, he's counting on the continuing revenue stream from these long-term projects to keep his own company afloat.