Domestic business: what are our operational costs? More than 100 metalcasting facilities, representing $2.81 billion in sales, participated in the confidential AFS/NADCA Metalcasting Operational Cost Survey. The survey results are broken down here as a benchmarking tool.

In a time when the difference between profitability and loss is razor-thin, attention to detail on operational costs is too important to ignore. During the summer, AFS and the North American Die Casting Assn. (NADCA) commissioned the 2005 Metalcasting Operational Cost Study to provide benchmark data relating to a metalcasting facility's expenses as a percentage of sales. Benchmarking tools, such as this study, provide a picture of the gap that may exist between your company and the top performers in the industry. Awareness of what's achievable is the first step in growing your profit margin.

The recent study is the third AFS has commissioned (others were conducted in 2001 and 2003). The surveys are conducted by Sapolsky Research Inc., Tallahassee, Fla., a firm experienced in metal industry cost surveys. In June, AFS and NADCA mailed the two-page surveys to U.S. metalcasting operations to complete based on their most recent fiscal year.

By August, 106 companies replied with their completed surveys, which were confidentially processed and tabulated by the researcher. Customized reports for each participating company also were completed. The sales of the responding companies amounted to $2.81 billion and covered 17,294 employees.

The metalcasting operational cost survey is broken into four categories--sales range, employment range, main metal cast and main casting process--and covers aluminum, iron and steel; sand, permanent mold, investment and die casting; four sales ranges; and four employment ranges.

Results from this survey provide metalcasters with a view of industry costs and help identify areas where improvement is needed and attainable.

Results

Table 1 shows a macrolevel report of the operational cost breakdown by percent of sales for all companies that responded to the survey. This year's survey revealed an average profit of 2.4% of sales, up from 1.81% in the 2003 survey. The average sales per employee was $162,281, compared to $128,242 in 2003. The results for each table column are described below:

All companies--These figures depict the average costs as a percentage of sales of all the companies that gave data for a specific category. If only 99 companies responded to one expense category, for example, then the average was found for those 99 respondents.

Companies with profit and loss--This set of data shows the respective cost figures for metalcasting firms that were profitable and unprofitable. Sixty-eight (64%) companies reported a profit while the remaining 38 (36%) participants reported a loss.

Lowest to highest average costs--The last three columns in the table separates the participants into three groups of "goals to shoot for." The number of respondents for each cost category was divided into thirds and placed in the low, middle or high expense ratio section. All the companies' results for each section then were averaged, with the better performances listed under the low expense ratio column.

For example, the average labor costs for the lowest third are 12.63% of sales, meaning the firms with the best labor cost performance spent an average of 12.63% of their sales on labor. This would be considered the "goal to shoot for." Using these columns, companies can determine if they fall into the best-, middle- or bottom-performing group for each category.

Profit or Loss

Although the average profit as a percentage of sales for all companies was 2.4%, the 68 profitable companies averaged a 7.44% profit. The 38 unprofitable companies averaged a 6.63% loss.

In terms of metal cast, companies casting iron proved most profitable, with an average profit of 4.83% of sales. Permanent mold facilities showed the greatest profit by casting process with an average of 6.85%. Diecasting facilities, however, logged an average loss of 3.3% of sales.

The sales group with the greatest profit (6.35%) represented companies with sales between $10-25 million. Both groups that represented companies with sales more than $25 million, however, showed slight losses (less than 1%). Responding firms with 51-100 employees proved most profitable in the employment range category with profits tallying 6.1% of sales.

Factory, Shipping and Labor

Factory, shipping and labor costs take up the largest chunk of sales in a metalcasting operation, and a company's amount of expenses in this area can determine whether that firm will be profitable at the end of the year. The responding companies averaged factory and shipping expenses amounting to 78.82% of sales, but companies with a profit averaged expenses totaling 74.73% of sales. In contrast, unprofitable companies had factory and shipping expenses reaching 86.08% of sales.

In terms of metal cast, steel companies averaged the highest factory, shipping and labor costs with expenses totaling 82% of sales, though they still averaged an overall profit, partly due to lower officers' salaries.

Diecasting companies spent an average of 83.4% of their sales on factory and shipping, leading to an average loss of 1.37%. In contrast, permanent mold facilities spent close to 76% on factory and shipping and amassed an average profit of 6.85%.

By employment range, the smallest companies spent the least percentage of sales (74.37%) on factory, shipping and labor, while the largest (and least profitable) firms' factory and shipping expenses ran 10% higher.

Sales and Administration

The difference in sales and administrative costs is 2.06% between profitable and unprofitable firms. Metalcasting operations using the permanent mold process tallied the lowest sales and administrative expenses at 11.54%. In terms of metal, both steel and aluminum casting facilities spent an average of 12.6% of sales on sales and administrative expenses.

For More Information

Complete survey results are available in a new 45-page publication through AFS. Visit www.afsinc.org/estore for more information.

AFS-NADCA 2003 Operational Cost Survey--"Survey Results Reveal 'Razor-Thin' Cost Picture," M. Lessiter and D. Twarog, MODERN CASTING, July 2003, p. 30-32.

"Executive Memorandum--Benchmarking Your Foundry's Financial Performance, "A. Lefco, W. Lefco and D. Barnhard, MODERN CASTING, July 2001, p. 36-38.

What is the Cost of U.S. Metalcasting?

This article is Part 2 in a three-part series. Part 1 of the series was published in the October issue of MODERN CASTING and Part 3 will appear in the December issue.

Part 1: Domestic Competitiveness: Investigating U.S. Casting Costs--Data revealed by the U.S. ITC Section 332 study details how U.S. metalcasting operations fared from 1999-2003.

Part 2: Domestic Business: What is Our Cost of Operation?--A recent metalcasting operational cost survey breaks down production and business expenses for the U.S. industry. Wages, benefits and executive compensation are detailed in an article discussing two recent surveys.

Part 3: Global Competitiveness: Identifying Our Challenges--This article reviews data collected regarding the metalcasting industries of India, China, Brazil, Taiwan, Korea, Japan, Mexico and Canada in the Section 332 study and analyzes potential remedies to global competition. Also, the annual world census of casting production will be detailed.

Operational Cost Changes: 2003 vs. 2005

Following are some of the changes (as a percentage of sales) seen in comparing the averages from this year's survey vs. the survey completed in 2003.

Reductions as a Percent of Sales

Factory, shipping and labor---labor, supervisor/factory office, fringe-shop, customer returns, maintenance, rent.

Sales and administrative--sales salaries, fringe-sales, miscellaneous, office salaries, fringe-office, office operation, professional services, interest expense.

Other--depreciation, officer salary/execution compensation.

Increases as a Percent of Sales

Factory, shipping and labor--raw materials, manufacturing supplies, utilities, shipping, miscellaneous.

Sales and administrative--administrative, insurance, taxes and licenses, dues and subscriptions, bad debts charged off, miscellaneous.

Tips to Use the Survey

Benchmarking tools, such as the Operational Cost Study, enable companies to see what results are attainable within their industry. But knowing what is attainable is only the first step. Following are a few tips outlining how to use the comparative survey information.

* Remember, this is a snapshot of the industry based on the respondents to the survey. The report in this article is the average of all responding firms, but the full survey is broken down even further to allow companies to compare costs against other companies with the same sales range, employment range, casting process or main metal cast.

* Keep in mind when making correlations that a wide variation exists in casting sales price on a per pound basis. This can explain some of the differences seen between the metal groups.

* Let a fresh eye look at the survey report. Different perspectives are valuable, so give several people on your management team the opportunity to review the data.

* Don't forget your own company's business plan. Perhaps your firm is consciously spending higher-than average costs in a given area, such as advertising or maintenance, for specific reasons.

* Sometimes percentage points don't paint a picture as vividly as dollar sign will. Converting the percentages to dollars might help highlight which individual categories are the most deserving of your attention. For example, a $15 million casting operation with costs 2.5% higher than its peers, is spending $375,000 more.

* Once you have identified key areas that are lagging behind, begin hypothesizing on why your company's costs are exceeding others. Then seek out and evaluate the best practices that will help bring your firm back in line with others.

Table 1. Operational Cost Breakdown by Percent of Sales

Expense                                All       Companies    Companies
                                    companies    w/profit      w/loss
                                     average

Factory/Shipping
Labor                                 20.32        19.12        22.47
Supervisor/factory office              4.46         4.48         4.43
Fringe--shop                           6.93         6.34         8.01
Raw materials                         24.29        23.19        26.27
Manufacturing supplies                 6.80         6.51         7.31
Utilities total                        6.02         5.58         6.79
Customer returns                       1.40         1.28         1.64
Maintenance                            3.19         2.89         3.71
Rent                                   2.06         1.73         2.61
Shipping                               1.10         1.08         1.13
Misc.                                  5.28         5.69         4.58
Subtotal                              78.82        74.75        86.08

Sales
Sales salaries                         1.71         1.58         1.95
Fringe--sales                          0.39         0.37         0.43
Advertising                            0.28         0.27         0.31
Misc.                                  0.90         1.08         0.64
Subtotal                               2.68         2.80         2.50

General/Administrative
Office salaries                        2.54         2.52         2.56
Fringe--office                         1.12         1.09         1.18
Office operation                       0.83         0.80         0.87
Insurance                              1.67         1.72         1.58
Professional services                  0.73         0.63         0.91
Taxes & licenses                       0.88         0.88         0.89
Dues/subscriptions                     0.15         0.15         0.14
Bad debt charged off                   0.47         0.38         0.57
Interest expense                       1.40         1.47         1.30
Misc.                                  1.73         1.03         2.96
Subtotal                              10.10         9.25        11.61

Other Expenses
Depreciation                           3.92         3.42         4.86
Officer salary/comp.                   3.73         4.00         3.21
Subtotal                               6.35         6.17         6.68
Total costs                           97.60        92.56       106.63
Total sales                          100.00       100.00       100.00

Profit or Loss
Profit before taxes                    2.40         7.44         N/A
Loss                                   N/A          N/A         -6.63
Profit or loss                         2.40         7.44        -6.63
Average sales/employee ($)           162,281      168,775      150,345
Accounts receivable (% of sales)      15.72        14.75        17.51

Expense                                   Lowest to highest
                                            average costs

                                    Lowest     Middle     Highest

Factory/Shipping
Labor                                12.73      19.72      28.30
Supervisor/factory office             2.04       4.02       7.26
Fringe--shop                          3.14       6.82      10.82
Raw materials                        15.04      23.07      34.47
Manufacturing supplies                2.59       5.32      12.37
Utilities total                       4.03       5.71       8.24
Customer returns                      0.37       1.20       2.58
Maintenance                           1.67       2.82       5.04
Rent                                  0.10       0.90       5.12
Shipping                              0.24       0.78       2.23
Misc.                                 0.47       2.43      12.92
Subtotal                             66.62      79.50      90.01

Sales
Sales salaries                        0.55       1.39       3.14
Fringe--sales                         0.13       0.36       0.68
Advertising                           0.02       0.10       0.71
Misc.                                 0.11       0.39       2.18
Subtotal                              0.71       2.22       5.05

General/Administrative
Office salaries                       1.01       2.21       4.40
Fringe--office                        0.35       0.77       2.25
Office operation                      0.26       0.65       1.54
Insurance                             0.28       0.81       3.85
Professional services                 0.12       0.45       2.04
Taxes & licenses                      0.12       0.45       2.04
Dues/subscriptions                    0.02       0.08       0.33
Bad debt charged off                  0.02       0.20       1.17
Interest expense                      0.12       0.80       3.28
Misc.                                 0.09       0.53       4.50
Subtotal                              4.96       8.98      16.18

Other Expenses
Depreciation                          1.36       3.19       7.13
Officer salary/comp.                  1.18       2.91       7.01
Subtotal                              2.56       5.46      10.93
Total costs                          87.81      97.74     106.99
Total sales                         100.00     100.00     100.00

Profit or Loss
Profit before taxes                  12.00       2.10       N/A
Loss                                  N/A        N/A       -7.18
Profit or loss                       12.00       2.10      -7.18
Average sales/employee ($)          282,506    120,202    84,134
Accounts receivable (% of sales)      9.08      14.19      23.65

Profitable Ventures

Some groups of metalcasting firms responding
to the operational cost study proved more
to the profitable than others. Following are the profits
as a percentage of sales for a few of those groups.

Firms with $10-25
million in sales     6.35%

Firms 51-100
employees            6.1%

Permanent mold
facilities           6.85%

Iron casting
facilities           4.83%

Average of all
companies            2.4%

This chart depicts the average expenses and profit
among responding metalcasting facilities as a
percentage of net sales.

                            All Companies

Labor                           20.32
Other Factory/Shipping          58.50
Sales                            2.68
Gen'l & Admin.                  10.10
Depreciation                     3.92
Officers' Salaries               3.73
Profit/Loss Before Taxes         2.40

Note: Table made from bar graph.

Average Profit Margin as a Percent of Net
Sales for 2001, 2003 and 2005 Surveys.

2001    4.60
2003    1.81
2005    2.40

Note: Table made from bar graph.