A bridge over troubled water.

A good friend of mine spends quite a bit of time at his lake house in Indiana. While he and his wife constantly seem to be renovating and improving the house and grounds, the lake itself always has been a worry-free source of enjoyment for them both. Until now, that is. Recently, a lake-improvement project significantly lowered the water level, and with his shoreline now exposed, my friend has learned that he has a serious erosion problem--one that must be tended to right away if he is to avoid much bigger trouble down the road.

My friend's situation is an apt metaphor for the metalcasting industry these days. Many of the executives I speak with regularly tell me they have been contentedly making money for several months now, are considering new investments in facilities or equipment, and generally scoff at the notion that their companies continue to be in real trouble--trouble which lies hidden just below the surface of what appears to be calm, smooth water.

It always has mystified me how so many metalcasting CEOs convince themselves that "all is well" when demand is up. It similarly has mystified me how these same CEOs passively wait for their companies to make money when demand rises and just as passively watch profitability disappear when demand falls. Likewise with capacity, these CEOs invest and expand when they have cash and wish they hadn't when the slowdown comes. These bad habits and others like them, rooted in decades and sometimes centuries of poor management practice, are the "real trouble" of which I write.

The fact of the matter is all casting firms should be profitable all the time, regardless (within reasonable limits) of what demand happens to be. Specifically, these firms should be earning a minimum of 10% pre-tax profit all the time, regardless (again within limits) of what demand happens to be. And while there are many things CEOs can and must do to make this level of profitability happen each and every month and year, three stand out in nay mind today.

3 Ways to Profit

First and foremost, stop waiting. Management is not a spectator sport, and consistently superior profitability will not come to those who wait, but to CEOs who aggressively and often boldly act to get it. For example, throw out customers and jobs that don't fit or are a constant source of quality or productivity problems. In other words, make job, account and business profitability--not sales or production volume--the key driver of management decision making and action taking.

Second, price for profit, and get there by understanding standard and actual job costs and the profitability of every casting in your facility. Knowing job costs allows CEOs to understand job margins and job profit contribution and hands CEOs the ticket to a level of profitability their companies likely have never experienced.

Pricing for profit requires execution and action. It means, for example, that casting firms should never price a product below an aggressive target margin. It means pricing to maintain that aggressive target margin and not to just "get the job" or "keep the job." Pricing for profit means immediately raising the price of a poor performing job, regardless of whatever fear management has of losing the job or the customer. Pricing for profit also means eliminating any job that cannot be delivered profitably, whether because of quality, productivity or pricing issues. In short, pricing for profit means keeping the profitable jobs and letting the others go.

Third, stop expanding, especially for non-automotive shops. Also, put aside the preoccupation with new equipment and the notion that new technology is required for success (i.e., consistent superior profitability) and that one or two or three or 10 times depreciation needs to be invested back into the plant every year.

In the metalcasting business, as with all mature industries, superior profitability over time only can be achieved in an environment of finite capacity. In other words, if firms keep adding capacity, they will continue to need growth to pay for that capacity. Since our business is not growing but shrinking, forced growth means metalcasters will continue to cannibalize market share, deflate prices and kill profitability. Learning to decouple volume from profitability is key here. By and large, casting firms that insist on continually investing in P&E and expanding capacity never will be in a position to achieve superior profitability, as they will continually be plagued by excess capacity and the perceived need to compromise on margins to "fill the foundry."

Crossing the Bridge

Without a change in owners' attitudes toward profit and management's decision-making habits, metalcasters are fated to a forever continuation of the minimally profitable boom-and-bust lifestyle many have led to date. While the thought of change may be disquieting, and though the concepts discussed in this column may seem counter-intuitive, I'm here to tell you that they work and that the foundry business can be a gold mine for those CEOs who manage well.

Dan Marcus, TDC Consulting Inc., Amherst, Wisconsin