Bucking the Trend: Offering Greater Value Fuels Growth

Terry L. Moshier, REO Inc.

The year 2009 was a particularly difficult one for most of the optics industry, characterized by declining revenues and layoffs. But it wasn’t all bleak: !%REO%! posted a 28 percent gain in sales, and the company has shown a compound annual growth rate of more than 16 percent over the past six years. We are proud of achieving well over $30 million in revenue in 2009. I’d like to share the reasons why we have grown because I believe that our approaches could be adopted by other businesses looking to expand in the current uncertain financial climate.

Founded in 1993, REO manufactures precision thin-film coatings, optics and optomechanical assemblies. Early in the company’s history, we decided to focus on producing high-quality superpolished optical surfaces and thin-film coatings, and today we still concentrate exclusively on servicing high-volume OEMs that demand excellent performance. Our primary customers are manufacturers of defense and aerospace systems, laser systems, semiconductor tools, medical systems, life sciences instrumentation and telecom equipment. As is typical in this industry, REO is a privately held company; however, we manage our business and reporting in a public company manner, applying discipline and complete adherence to accounting principles.

One obvious way for any company to increase its sales is to expand the market accessible to it. In our case, that has meant adding coating, fabrication and assembly capabilities so that we can produce a much wider range of products. In the past two years, REO has completed the acquisition and integration of Coherent’s Auburn Optics manufacturing operation, which has broadened our potential and taken us into some entirely new areas. In particular, it has brought us equipment and expertise in the fabrication – including diamond turning – of a wide range of infrared materials (such as Ge, ZnSe and ZnS). We have added several coating chambers, increasing our production capacity and further extending our infrared and ultraviolet business. We also gained diverse laser sources that enable us to perform detailed metrology at many wavelengths.

REO also has focused on developing strategic supplier agreements that increase income and establish partnerships with recognized industry-leading companies. Our customer base consists of OEMs and major manufacturing companies, so simply supplying a product that performs as specified at a competitive price is not enough. Our customers’ products may be critically dependent on a component we supply, so they need to know that we’ll meet their requirements if volumes increase and that we’ll provide the necessary technical support if problems arise. Having agreements with well-known companies gives us an implicit and reassuring endorsement that makes it easier to develop other relationships and that opens the door to a great deal of collaborative innovation, helping us maintain our technology leadership and competitive edge.

Above, REO has expanded its coating capabilities to increase volume capacity and to meet a wider range of performance and cost requirements. The company now has 38 coating chambers that use ion beam sputtering, ion-assisted deposition and traditional electron beam evaporative methods.

It’s important to remember that value to customer extends beyond just the product itself. Specifically, REO maintains a large staff of engineers, and the services that the team delivers help us to avoid competing with other vendors solely on price. For example, recently our engineering group, working with a customer who was buying a doublet from us, helped refine the design and turn it into a lower-cost singlet. Although our gross revenue was actually reduced, the cost reduction of the overall system created a much higher-value proposition to the end user, enabling us to maintain significant market share as a first-choice supplier in a competitive area.

Another way for companies that start out as component producers to expand revenue is to move up the value chain by supplying more complex products, assemblies and engineering services. This is a particularly effective approach for an OEM supplier such as REO. It’s easier and more cost-effective for us to sell more, or higher-value, products to established customers than it is to find and close business with completely new ones. To this end, we’ve added to our capabilities for fabricating mechanical parts and for engineering and producing optomechanical assemblies.

Even though we emphasize higher value, we are always looking at creatively lowering cost. For example, the traditional labor-intensive method for producing ultraprecision assemblies involves fabricating lens elements with tight centration tolerances and assembling them in a machined housing. Instead of traditional shim-and-glue techniques, we have developed an assembly system that uses a laser to measure the position of the lens with reference to its housing and a mechanical actuator to adjust the component’s position. The most important benefit of this approach is that it reduces the need to hold tight mechanical tolerances for the housing and optics, particularly lens centration, by two orders of magnitude to levels that are easily and quickly reached in normal fabrication processes. The end result is equal assembly performance for a competitive price.

Many optical component manufacturers and coating vendors are feeling tremendous price pressure, especially in the face of low-cost imported products. Focusing solely on shaving off the last penny to come in with the lowest bid is a game that is difficult to win and one that REO doesn’t need to play. Instead, we’ve found that by offering a combination of engineering expertise and highest quality in value-added products to our targeted customer base, we can succeed and thrive, even under difficult market conditions.

Meet the author

Terry L. Moshier is CEO and chairman of REO Inc. in Boulder, Colo.; e-mail: terrym@reoinc.com.