Impact your bottom line with a computer-based economic model.

You can use an economic modeling program to identify the variables that offer the best opportunities for cost savings in your foundry.

In today's fast-paced, competitive market, it is critical for you to know every component of your casting costs and how those components relate to each other throughout your operation. Unfortunately, foundrymen often make castings without knowing their material, manufacturing and overhead costs or how these costs affect profitability. A 1% change in a critical cost variable can make the difference between profit and loss.

Once you win that coveted title of "long-term supplier," it becomes harder to pass increasing costs on to your valued customers. You must find a way to cut costs without raising prices if you expect to keep the business you've worked so hard to gain. An economic model offers an excellent tool for putting things into perspective and identifying which variables can help you cut costs. Based on side-by-side comparisons of key variables, you can evaluate opportunities to reduce costs. Once you know these variables, you can add as much as 2-4% to your bottom line.

Improved cost information also can lead to better overall strategic decision making as well as greater short- and long-term profitability. An economic model can help you to:

* calculate mixed sand costs for molding or individual core production;

* determine hours required to meet production schedules, given machine cycle time, downtime and scrap percentages;

* realize immediate return based on input values and database calculations;

* quantify the relationship of a product or process change in the coreroom, molding area or melt department to the cleaning room in terms of throughput, material costs or energy savings;

* use calculations based on casting scrap, yield, pigging and overpour, to evaluate melted tons, alloy material or melting energy costs.

By entering information into an economic model, you can evaluate statistics for a number of inter-related parameters that are part of your production, using the results to implement an effective cost-reduction program.

Computer-based economic modeling will undoubtedly have a significant impact on the competitiveness and profitability of foundries in the future. Currently, in cooperation with various U.S. foundry operations, an economic modeling program which is meant to allow foundrymen to quickly evaluate a large number of variables in each of the five foundry "cost centers" is under development. This computer-based program is used as an example throughout this article to illustrate how you can use similar computer-based economic simulations to lower your costs and tighten your production variables.

A computer-based economic model can identify your cost-critical variables by dividing your operation into cost centers. A cost center is defined functionally or departmentally at points where you can assign costs to specific units and measure an increase or decrease in productivity.

There are five major foundry cost centers:

* Coremaking - ore production and assembly;

* Molding - mold production, assembly and core placement;

* Melting - charge makeup, melting and pouring;

* Cleaning - shakeout, degating, rough grinding and machining;

* Finishing - inspecting, welding, machining and polishing, heat treating, painting and shipping.

It's important for an economic model to describe and quantify how these cost centers function with respect to each other and how their costs can be assigned to the final product. A casting that is scrapped in the cleaning room has undoubtedly resulted from problems in one or more of the first three cost centers. The financial loss incurred from a scrapped casting is more than just the value of poured metal. It may include the cost of a core assembly, a mold, a large quantity of metal, labor and materials. The specific problem can be identified through defect analysis and corrected at the point of origin, but it's important to note that each cost center generates its own direct and indirect costs.

The computer-based program merges two economic concepts, activity-based costing (ABC) and a variable cost association known as total cost in use (TCU).

Activity-based Costing

ABC, which is meant to improve management focus, can identify, quantify and reveal unexpected areas that affect bottom line profit or loss.

About 30 years ago, industries began to use the term "activity" to describe work that results in assignable cost. ABC defines all costs as variable costs, meaning that all costs have an element of control.

Using the concept of ABC, the computer-based program works to assign resource costs to a particular casting operation or manufacturing product.

However, the true benefit of ABC is its usefulness as a decision-making tool - management can make decisions from a more-informed perspective. From this new perspective, managers can focus their attention and resources on improving the activities that will have the most significant, positive effect on cost improvement and, consequently, on bottom line.

Total Cost in Use

TCU is a method of measuring the influence of single variables in the overall casting process in terms of capital, operating cost, productivity, labor, handling and materials. For every change in a production variable, there is an expected tangible reflection in the cost element. TCU, when combined with ABC, can identify individual elements or sectors in a manufacturing process that determine the value of a variable entering into the casting system, determining immediately its contribution as an added cost or enhancement.

To illustrate TCU and its relationship to ABC, consider a hypothetical breakdown of costs in both a typical high production operation and a low-production jobbing foundry [ILLUSTRATION FOR FIGURE 1 OMITTED]. In the well-managed operation, the cost is concentrated in the required metal, followed by coremaking, molding, cleaning and finishing costs. These are significantly higher than labor, energy and overhead costs. Conversely, in jobbing foundries, the costs reflect overhead and a high labor cost per ton of castings produced.

Depending on the detail of the costing structure, the computer-based program can evaluate as many as 300 variables that affect how these pieces shape up the bottom line. Many variables, such as cycle times, clay or binder percentages in sand, cost per pound of an alloying element and core scrap, are not considered to have a major effect on production and are, therefore, often discounted. However, these discounted variables might contribute to a major production variable such as machine downtime, higher energy consumption, casting or core scrap, or some intermittent process problem.

TCU plays an important role in mutually inclusive events that change with the swing of production. This model uses the TCU concept to help explain the distribution of costs as they relate to each cost center.

By focusing on the five major cost centers, cost models create an associative relational calculation to control variables that determine their value. For example, the cost of a core package is the total of the individual costs of resin, sand, additives, labor and machine productivity, overhead and individual core scrap. If either the core or the mold is bad, a scrap casting is produced. Thus, scrap at this point generates a cost that must be factored into the price of subsequent saleable castings.

Value Engineering Tools

The computer-based economic model serves as a value engineering (VE) tool, which applies production knowledge to control cost variables.

The VE tool has been created and refined through input with experts in the field. It depends on industry-supplied information that is based on geographical area, labor environments, foundry capacity and type of production. This field data is compiled by type and placed in a system database, where it can be used to replace the value for an unknown entry field. This database includes averaged labor incentives, production data and product specification matrices used in comparing various processes and products.

This particular VE tool breaks down each individual cost center and the important variable costs associated with that center. The variable costs are then, through relational calculations, subtotaled for a particular casting and totaled for each center. You can enter either your true costs, hypothetical variables or industry standard numbers supplied by the supported database.

The best application for a cost engineering tool is tracking and compiling total costs. This tool can be used to evaluate variables that provide a clearer understanding to the immediate and long-term benefit of a process or product change. Further, simulation tools must segregate economic process modules based on the recognized cost centers and calculate actual costs. As with any knowledge-based system, the larger the base of process and product understanding, the greater the accuracy in determining each variable's cost impact.

Building a Model That Works

Think of the economic model as a pyramid of information in which each block ties a specific cost to a particular operation. At the beginning of the economic analysis, you can specify a customer and department for future reference as well as processes in each of the cost centers. Because the model is associative, meaning it must know "how many" and "how much," only core production and molding can be analyzed as stand-alone cost centers. You cannot analyze your melting, cleaning and finishing operations without first specifying values for the computer-based program's molding section. This follows the normal chain of events, as a casting cannot be produced without a mold and castings cannot be cleaned without first being produced.

This VE model incorporates variables for each of the cost center processes:

* Molding Systems - green sand, nobake, coldbox, shell and permanent mold;

* Coremaking Systems - coldbox, heat-cured, shell and nobake;

* Melting Systems - electric arc, cupola, induction and crucible furnaces;

* Cleaning Systems - shakeout, degating, grinding/chipping and blasting;

* Finishing Systems - welding, heat treating, machining, painting and nondestructive testing (NDT).

To develop the molding and coremaking models, the computer-based program uses information entered on its first screen. This includes the number of required saleable castings and some estimate of internal and external casting scrap. This also gives the computer-based program a reference number to begin its "Total Castings Required to Meet Production" model.

After you have selected the cost centers for the model, you can specify which critical parameters to include such as only molding or only coremaking.

Molding

The model first works to develop the database for molding, asking you for process and product parameters. For example, if green sand molding is selected, the number of molds is simply calculated through castings per mold, mold scrap and the previously determined number of castings required. Moving to the next area, the computer-based program organizes the information to help you more accurately determine the origin of the costs, as the inputs and associated calculated costs are shown relative to each other on the screen. As more information is entered, results from the calculations are immediately displayed. After the molding section is complete, you are prompted to move into the coremaking section.

Coremaking

The section on coremaking enables you to select from four different core processes, each with its own set of process and product variables and subtotal costs. You are prompted to input the specific process and core description for each core in the assembly. At present, there is a five core limit.

As you complete this section, you can begin to see the calculated cost based on the input for consumables prices, scrap percentages, cycle times, productivity, waste, labor and machine burden. It is important to remember that the database is relational - containing mutually inclusive and exclusive costing events that will impact other totals throughout the rest of the model.

Melting

The melting cost center becomes a critical area for cost generation when scrap rates are high. Melting operations also contain process parameters for a number of different processes. Melting costs are based on the calculations from within the molding section.

Cleaning

A foundry can be judged by the success or failure of its cleaning room. Low-cost cleaning processes mirror performance throughout the foundry. Advanced products or new processes employed in the coremaking, molding and melt production areas improve operations and are the key to continuous improvement. Increasing the number of castings processed per hour, for instance, or eliminating a repeat shot application can play a significant role in lowering cleaning costs. This model component associates the cost elements of shakeout, degating, grinding and chipping, blasting and other closely related operations and then incorporates them into the total cost and cost per saleable casting.

The fact that cleaning is generally very labor-intensive and is a substantial contributor to lost time accidents makes it an important focus area. However, costs in the cleaning area are low when other cost centers perform well.

Finishing

This model segment incorporates the various costs of preparing the casting for shipment and sale. In this cost center model, you can determine the total cost of each step from heat treating to packaging, and you can see how your operation would be affected if you eliminated welding or other forms of casting repair. By improving performance and solving problems in the preceding cost centers, you can minimize expensive inspection processes and other remedial steps such as additional X-ray inspection in the coreroom, molding area or melt department.

The Complete Model

Once the initial cost model is complete, you can view the individual subtotals, which include:

* total hours required for production of each component;

* actual cores produced per shift;

* total pounds of coating required per core or core assembly;

* total pounds of aggregate required for core production.

Additionally, the complete cost analysis includes:

* total manufacturing cost;

* labor cost;

* material cost;

* total cost per saleable casting.

If you are interested in viewing the results of a minor change presented in a side-by-side comparison format, you may reproduce all the information into a second sheet that can be modified using the same computer entries as the original analysis or alternative choices. Then, the totals may be calculated and presented in sequential order.

The influence of a major process modification can be explored by running comparisons to see how changing the molding process from green sand to coldbox, changing core processes, or even reducing the number of cores changes the cost of the casting.

Finally, you also may begin with a completely new model, which can be regarded as a comparison analysis to previously developed scenarios or it can stand alone.

The computer-based economic model also has a variety of screen views and outputs. It can illustrate costs as pie charts or it can be used to understand individual core costs, cleaning costs or the final price of an entire casting.

RELATED ARTICLE: The Economic Model in Action

Using hypothetical values and actual production data, the VE program determines the economic outcome of possible solutions to a typical foundry production problem.

For example, a subsurface pinhole porosity defect intermittently occurs in a gray iron engine block and accounts for 0.2% of the total 0.4% castings rejected by the machine shop of the engine plant. The defect is a frustrating problem because of its subsurface nature, which means that it cannot be detected until after final machining and inspection.

This means a lost sale for both the foundry and its customer. Besides the loss of goodwill, the foundry must subsequently replace the scrap casting. The machining plant also has lost money in machining, handling and, of course, shipping costs. Both parties now fall behind delivery schedules.

Since the defect has been identified as gas trapped in the cope, it is proposed (for illustration purposes) that the resin level used to make the cores in the block package be reduced by 0.1% to eliminate the 0.2% scrap attributed to cope porosity. The computer-based economic tool evaluates the effect on bottom line cost and production materials for implementing this remedy.

This example focuses on molding and coremaking operations to keep the model simple. The results are convincing enough without extending deeper into the cost parameters of labor, overhead and machine burden. The concentration is on improving yield by reducing the external scrap at the customer.

Table 1. Sample Readout

                                             Actual Change to

               Binder %                         1.3%        1.2%
               Casting Scrap                    0.4%        0.2%

Case Study Effect:

Total Cost Per Casting:                       $40.09      $39.66
Castings Required to Meet Production:         18,292      18,255
Molds Required to Meet Production:              9333        9314
Shifts Required:                                36.8        36.7
Total Hours Required for Production:           294.1       293.6
Total Landfill Cost for Materials:           $13,894     $12,730
Tons of Sand Used in Molding:                 32,272      32,207
Total Sand Cost for Molding:                $309,810    $309,189
Total BInder Cost for Molding:              $232,357    $231,892
Total Pounds of Water for Molding:           116,179     115,946
Total Cores Required to Meet Production:      19,255      19,216
Total Hours Required for Core Production:      445.5       444.6
Total Landfill Cost for Cores:                $2,488      $2,296
Tons of Sand Used for Cores:                   2,570       2,564
Total Sand Cost for Cores:                   $48,703     $48,605
Mixed Sand Cost/Ton:                          $54.13      $51.44
Total Binder Cost for Cores:                 $77,497     $71,392
Pounds of Total Resin Used:                   66,822      61,558
Pounds of Catalyst Used:                        2205        2031
Total Catalyst Cost:                          $3,341      $3,078
Scrubber Recycling Cost:                      $7,938      $7,313
Total Pounds of Coating Required:            196,396     196,003
Total Cost for Coating:                       43,462     $43,375

The model used in this example allows you to create an operational scenario of building cause and effect relationships using variables, scrap rates, material costs, energy consumption and man/machine burden, which by themselves, are just numbers. While working to reduce external scrap at the customer, you can see other cost-reduction opportunities from the output of the model. The readout would be used to make defined decisions that would impact the foundry performance and, ultimately, lower production costs.

As the variables become more focused, cost reduction becomes achievable and process and product variability becomes easier to identify. This leads to better overall strategic decision making and, in turn, greater profitability for the long-term competitive foundry operation.

RELATED ARTICLE: Avoid Costing, Pricing Traps

Raising a customer's price, no matter how much it is justified, is always an unpleasant experience. Buyers are evaluated on a casting's purchase price - not a foundry's cost pressures. They simply want a zero-defect casting at an increasingly lower cost, with better quality and delivery.

Most foundries try to improve profitability by only focusing on lower production costs. This is necessary, but the other half of the picture is price management. The addition of an effective costing and pricing management system will add 2-4% to the bottom line of the typical foundry. Following are several typical costing and pricing "traps." (See also "Are You Costing Yourself out of Profitability," modern casting, p.44, August, 1994, and "Pricing for Profits," modern casting, p.34, September, 1994.)

Costing Traps

1. "Don't be Concerned with the Cost Since the Market Sets the Price"-You must know your real costs to determine if you can make a profit at the "market price." Without accurate costs, you can't make an intelligent pricing decision or devise a cost-reduction program.

2. Failure to Periodically Validate Standard Cost Model Variables - Often, the cost model parameters, such as labor and overhead rates, are set and then forgotten. If there is a discrepancy between the actual rates and cost model rates, they should be reviewed and adjusted.

3. Failure To Change Incorrect Item Cost Data - Many people think that correcting the item or production data will raise casting cost. They fail to realize that the cost is already there; adjusting the data merely recognizes the cost.

4. Failure to Re-cost and Review All Items Periodically - Re-cost all items at least monthly. An accurate cost may indicate which items should be given priority in a cost-reduction program.

5. Failure to Track Production Cost Variances - Compare the total standard cost of the castings shipped to the total actual cost of producing them. This should include variances in labor, coreroom and total production.

Pricing Traps

1. No Quantifying System - As part of your price-monitoring system, you should calculate a minimum target price and compare it to the actual price, utilize several target prices, determine how much profit you have been losing and for how long, determine the impact of price adjustments, and track price adjustment activity.

2. Failure to Have an Active Interim Price Adjustment System - Be sure to verify customer provided parts data and adjust accordingly. Also, if there is an active system to update part cost data, such as production rates, some parts will fall below the target minimum price each month as all items are re-costed. This should trigger a price review that may result in a justified interim or "spot" price adjustment on loss items.

3. Failure to Approve All Parts Quoted Below Target Margin Price - If you sell a casting below the minimum target price, the deviation should be management-approved. Simple approval forms signed by the general manager, sales manager and operations manager can document the reason for selling at the lower price and verify that the decision is mutually agreed upon.

4. Selling Some Parts Below Target Margin Since "It Can be Made Up Later" - It takes a very sophisticated system to make this work. This pricing philosophy allows you to turn a blind eye to each part below minimum target price.

5. Failure to Give Customers Price Options - If you must raise the price of a low-margin item, give several options to your customer. For example, one new price may be based on current tooling while another lower price may be based on the investment in new tooling. Also, ask the customer for a casting design modification if it will help reduce cost.