Innovation trumps price.

Over the years, I've advised foundrymen that the most important elements in their customers' supplier-selection process are quality, price, delivery, price, service, price, and, of course, price. But in the April 1999 issue of CEO Journal (p. 96), I concluded that the tide had turned and price was on its way out as customers' singular, or at least dominant, focus. But if that main focus is going to be something other than price, what will it be?

To answer that question about the future, we must look to the past for insight and think about times when price was not the dominant purchasing criterion. This has been the case more often than you might think. For example, in the late 1970s, demand was at an all-time high, and capacity was short. During that time, foundries could charge pretty much what they wanted. It was a seller's market, and production, not price, was the dominant factor.

In the early 1980s, all that changed. We went from a situation of high demand and low relative capacity to low demand and high relative capacity; the industry was transformed from a seller's market to a buyer's market almost overnight. In that environment, price once again became the dominant supplier-selection criterion, and intense price pressure (among other things) forced weaker foundries out of business, beginning the natural economic process of forcing the industry toward a balance between supply and demand.

By the mid-1980s, another switch had occurred. This time, quality and partnering were the buzzwords on nearly everyone's lips, and price, once again, took a back seat. Foundries that made investments in quality were given the opportunity to become "partners." Customers sought suppliers who could provide them with a real competitive advantage by offering high-quality products and high-level partner-type service.

Innovation Means Advantage

If we look at these examples from the not-too-distant past and think about what's happened between the mid-1980s and now, we see that one fact explains much about what our customers consider important. That fact is innovation. In other words, foundry innovations that translate into real competitive advantages for customers create an environment where price is secondary and profit potential is highest.

In the 1970s, foundries that could ship castings to their customers more or less on time gave those customers a marketable competitive advantage and were thereby able to make their prices stick. In the 1980s, innovations in quality and service accomplished the same things. Here, too, innovations provided casting users with obvious competitive advantages and took the pressure off price, margins and foundry profitability.

Unfortunately, the metalcasting industry has been short on customer-oriented innovations since the mid-1980s. Thus, despite all our investments in new equipment, customers have had no reason whatsoever to focus on anything other than price. In fact all our "efficiency"-type investments have exacerbated the problem. It still amazes me to find so many prominent (and not so prominent) foundries that still don't get it when it comes to the fundamental quality and service principles established more than 10 years ago. Worse yet is that these foundries are the biggest offenders when it comes to competing on price; they, not just their customers, are a significant part of the problem.

Shaping Expectations

Metalcasters are their own worst enemies when it comes to price. As an industry, we've given our customers wrong expectations and have, in too many cases, turned the world's most complex manufacturing process and the highly engineered products that come from it into commodities. Innovation in business impacts everything from the attitudes of old stick-in-the-mud purchasing agents to what up-and-coming youngsters hear from their business school professors. Thus, innovation not only shapes what and how customers buy today, but also what tomorrow's purchasing agents believe when they receive their MBAs. This is precisely the situation in which our industry found itself as the 1990s began, and, just now, we are emerging from this low point for at least two reasons.

First, metalcasters have gotten better at telling their customers that there is more to cost than price. Some foundries, in fact, have developed innovative ways of actually proving this fact to their customers. Second, some metalcasters have begun to innovate again, and this reality brings us around to the question posed at the beginning of this column: if not price, then what?

The answer to that question, in our view, is reengineering manufacturing and support systems, such as sales, engineering, accounting and MIS, to produce much lower quality costs and much shorter turnaround times. Interrelated innovations at the management and human resources levels - not in facilities and equipment - are producing more robust plant and front office systems, more consistent product quality, lower defect rates, reduced cycle times and, most important, higher foundry profits and marketable competitive advantages for their customers.

After a recent board of directors meeting, one of the principal owners of a large iron foundry said to me that she "didn't realize foundries were supposed to make money." Yes, foundries are supposed to make money - good money (EBIT of at least 15%). But it will take innovations like the ones mentioned here to do it, and it will take a strong will by CEOs to abandon long-held beliefs and make those possible. Hey CEOs, it's time to gore those sacred cows and get down to the real business of metalcasting - innovating to make more money, not more castings.