Cost Remains Key to Success.

This time of year (regardless of market conditions, costs and competitive realities) many in our industry feel the urge to raise prices. They can't help themselves--the urge just comes upon them; it's the result of our industry's longstanding and destructive dependence on annual price increases. As a hopeful antidote, I've waged a personal crusade to help foundry CEOs and other executives break this bad habit. My first "shot across the bow" appeared back in 1987, and I've rarely missed opportunities to take other shots since then.

Legitimate Price Increases

This particular column arises from two recent happenings, the first of which is that three different clients approached me for advice on all-too-familiar pricing-related issues. One wanted to know if there were any "new markets" where his company could charge substantially more for its normal products. Another client wanted my opinion on the advisability of limiting his company's annual price increase to smaller accounts. The third wanted to understand how and if his company could pass along higher energy costs to customers.

For those of you who are new to the game, I'll give you the correct answers to those questions. First, there are no markets at all (much less new markets) where castings can be sold at a substantial premium or even much above the prevailing market price. All casting product markets are highly competitive, and all casting customers are demanding on price; accept these prices. Second, annual price increases are a bad idea no matter how they are structured. Prices should be raised only selectively when, for example, a specific job remains unprofitable despite all possible efforts to lower scrap and other manufacturing costs or when suppliers raise costs to the foundry significantly.

That brings us to client number three, who is currently dealing with rapidly increasing energy costs. This foundry is the only one here with a legitimate reason for increasing prices, but we've suggested that some rules should be followed in doing so. First, the company should do it right away, so that customers can link the increase to what we are all hearing in the news. Second, the company should pass on only this specific cost increase and should not piggyback other increases at the same time. Third, the company should be up-front with its intention to give the increase back when energy costs come down again. This is an approach much like the ubiquitous metal surcharge which, by the way, should have all but disappeared over the past few years due to declining scrap prices.

The Cost of Connectivity

The second recent happening that gave rise to this column was readers' response to the previous installment of CEO Journal entitled "The New Economy," December, 2000. That response tells me in yet another way that the industry is forgetting the central role of cost in business success. Specifically, responses indicate that readers have gotten the point about e-commerce, but most have not yet grasped the far more critical point about connectivity and cost. That is, that the Internet is being used increasingly to restructure organizations and processes, and that it will in-turn enable and drive dramatic reductions in foundry lead times, costs and prices.

Which is to say, once again, that cost (not price) continues to be your business' key to success. Given the new found power and potential of the Internet, the risk CEOs take when they merely pay lip service to this fundamental truth is greater than ever.

Therefore, as I have written many times before, foundry managers must not expect much help from price increases. In fact, price hikes often do more harm than good by alienating customers and opening the door to hungrier competitors. The annual price increase should be abolished and, in this way, lay to rest our dependence on that outdated ritual. Instead, CEOs should insist that "cost" be the center of employee attention at all times and that quantum reductions in lead times, costs and prices be a primary goal over the next 3-5 years.

When cost is the business' focal point, important results will come in both the short and longer term. In the short term, monitoring and managing (such as lowering) costs is the surest way to bring continuous and simultaneous improvement to customer satisfaction and foundry profitability. Over the long term, innovative management of the cost side of the business is the only way to beat the competition, satisfy owners' demand for meaningful profit growth, and provide a sustainable base of employment for workers and the community. That goes double in the Internet age.

In today's competitive arena, and when it comes to the battle between price and cost, the sword turns out to be far mightier than the pen. You see, when CEOs sign that letter alerting customers of a price increase, they not only unleash all of the potentially negative forces mentioned earlier, they also send a strong and counterproductive signal to the foundry's workforce that says management believes customers are ultimately responsible for the foundry's business success. Instead, by brandishing a cost-slashing sword and identifying cost as the business' number one internal priority, CEOs send the message that the foundry can and will act to control its destiny and its future success rather than passively hope that the latest price increase will stick.