Can your foundry become import proof? (CEO Journal).

According to a recently completed survey of prominent, trend-setting OEMs, most procurement managers and staff consider most castings to be nothing more than "dumb metal."

They believe that castings--and bar stock and forgings--can be purchased from anywhere in the world, quality levels are equal among potential sources and that only lead times and price really distinguish suppliers. In other words, most of these OEMs consider castings to be commodities.

But wait! What about everything that our industry has done to educate customers about the virtues of the casting process and the highly engineered nature of our products? What about all of the distinguished lectures that have been given on the subject? Wasn't anyone listening?

The hard truth is that we have been talking to ourselves all these years. We did not take our customers seriously when they told us, in both their words and deeds, that what we think and believe doesn't really matter. Market conditions, not product design or manufacturing process, dictates whether a product is a commodity. Just look at computers, personal and otherwise. So, let's take the hit, admit that most castings are commodities, and move on.

The Value-Added Advantage

If we do that, the key issues that will drive your business in the future become crystal clear. First, CEOs must figure out if their products are indeed "dumb metal" commodities or if they fall into the second category of metal castings--value-added parts. According to our survey, value-added parts are either very difficult to produce (i.e., complex coring, unique metallurgy, pressure containing, etc.) or are very large and are purchased in very low, irregular volumes. They also may require high collaboration in the design process and are speed-delivery-cycle time intensive.

Value added castings are the heart and sole of what traditional jobbing foundries used to be all about, before so many organizations became enamored with volume, margin enhancement took a back seat to revenue growth and the value of a business as an ongoing concern became irrelevant next to the value of its stock. For the time being, value-added castings are relatively import proof.

If your company's product line is 100% value-added parts, and all of your customers have just modernized their domestic machining operations, then you are safe, at least for a while. But few, if any, foundries are that lucky.

That brings us to the second issue for CEOs to consider: commodity castings--which comprise at least a part of most foundries' product lines--will be sourced offshore in the near future because OEMs actively seek out sources in countries with inherent low-cost manufacturing advantages. Our survey indicates that around half of all prominent OEMs have already moved their "dumb metal" or commodity parts offshore, and that the other half are very nearly ready to do so. Surely, your customers won't be too far behind.

Commodity vs. Value Added

The third key issue for foundry CEOs is if your management team should act to protect its commodity castings business by significantly lowering costs and prices or if it should act instead to expand the company's value-added castings business. This is an either/or question for most foundries, as a company can't do both within the same facility.

When foundry management teams get to this point in the analysis, several strategic "protections" against imports open up. For example their company's can:

* shift product mix away from labor intensive parts and invest in improving labor productivity so that it can compete equally on cost and price (but only with large revenue bases);

* focus domestic operations on value-added parts and establish low-cost, usually offshore, operations either through direct investment or joint venture;

* abandon commodity parts altogether and focus domestic operations exclusively on value-added parts.

All three of these strategies are currently being tried out by North American foundry companies. Whether or not they will be successful is another story, one that is being explored right now via a new, forward-looking, multi-subscriber jobbing foundry industry study.

A disciplined approach to decision-making and, more importantly, to decision implementation has never been more important. In this time of great change, foundries, and especially their CEOs and management teams, must change too. As foundry closings continue at record rates, the potentially fatal alternative is obvious.