Do we produce castings or $$$$?

Our industry (as a whole) analyzes its productivity in terms of casting tonnage. Whether it is ton/hr. melt rates, man hours/ton efficiencies or casting tonnage shipped, the focus for production is on how much we produce instead of how profitable the production was. The same phenomenon often occurs in sales as we quote our castings as commodities based on price/lb. as opposed to price per casting.

WHY?

I have been told it is the easiest way to track production. But I am telling you that it has to stop because it does us more harm than good.

Recent studies revealed that the average profit margin (as a percent of sales) for metalcasters in 2004 was 2.4%. How does a typical casting firm survive at that level? The answer is that it doesn't. Today's metalcasters must begin to offer products and services that are more profitable.

The first step is to ensure you have a true understanding of your firm's costs throughout production. What are your dollars/hr. related to manual grinding operations? How much does it cost you to produce that 5-lb coldbox core for the gray iron pump housing? Although it seems rudimentary, metalcasters must have a handle on every cost factor in the plant to determine a baseline for profitability.

Second, metalcasters must increase the value on their products and services, and this begins with quoting.

Pricing castings on a dollar/lb. basis is a function of the tonnage metric used to measure plant efficiency and productivity. The problem is that your customer also views your product in dollars per lb. as a commodity. Are your castings commodities or are they engineered components? Commodities are purchased on price while engineered components are purchased on the value they bring to the party.

This difference was proven on my recent walk through a large OEM's assembly operations. The OEM was looking for ways to reduce costs, and it thought a large opportunity existed in the conversion of some of its steel fabrications to cast components. As the walk through proved, the OEM's fabrication labor costs on certain parts would cover the cost of casting production. But these conversions would require engineering assistance from a casting firm to design and manufacture.

I asked the OEM, "What is this conversion work worth to you?" The answer: "Long-term supply contracts with the supplier if they can lower our costs and ease our inventory."

But these opportunities only are available to metalcasters that see their operations, not as shippers of metal, but as problem solvers for their customers. When you add engineering value to your castings, they no longer are commodities. They are engineered cast components that demand unique pricing.

Metalcasters often bring up the issue of liability if they are involved in the design of a cast component that fails. They also argue that these customers will take the redesigned component and source it to a competing firm in the U.S. or abroad. The third stumbling block is the added personnel required to facilitate these redesign projects.

While these are all valid obstacles, they shouldn't matter. Does your metalcasting operation want to wait for orders and ship metal out the door for $0.50/lb. and a 2.4% profit (as we always have), or does it want to sell engineered cast components where you control the price and profit per casting?

You don't think I am being realistic? The reality is that I have talked with enough jobbing firms producing engineered castings and enough end-users buying engineered components to know that a premium is paid for this service because it is so rarely offered.

The new year is here, and it is time to turn over a new leaf. As an industry, can we take a step forward and sell engineered components instead of "dumb" metal? I hope so.

Alfred T. Spada, Editor-in-Chief

If you have any comments about this editorial or any other item that appears in MODERN CASTING, email me at [e-mail].