Know your customer ... revealing OEM sourcing strategies.

Inside This Story:

* OEMs explain their reasoning for taking castings and other manufacturing materials overseas, such as reduced cost and the ability to infiltrate foreign markets.

As the ride at Disney World is so fond of saying. "it's a small world after all." Most of today's major Original Equipment Manufacturers (OEM) would agree.

Technology has allowed people from every corner of the globe to communicate with each other and transfer information in a fast and easy way, with this has come the onset of globalization, where a manufacturer's target customer is no longer defined geographically and expansion across the world is not only possible, but achievable. This is as evident in the foundry industry as anywhere.

With customers taking more and more cast component production to developing foreign nations in order to lower their manufacturing and ultimately end product cost, North American foundries have been forced to re-evaluate their business strategy to gear it to global competition. To analyze the situation and prepare a plan of action, North American foundries must understand the reasons that casting buyers have elected to find suppliers outside of the U.S. While cost is definately a major factor, it is not the only one.

MODERN CASTING sat down with three representatives from major casting buyer OEMs--Caterpillar Inc., General Motors Corp. and International Truck and Engine Corp.--to talk a bout their reasons behind foreign sourcing so that metalcasters can begin to understand their customers.

The Great Conspiracy 

Many foundries wonder why customers are taking "their" castings overseas. In some cases, it has just as much to do with global strategy than with price difference on individual parts Global sourcing is happening all throughout manufacturing, and for large OEMs, foundries are just one link in a very long chain.

"When you sit in amongst foundry executives, they tend to feel that there is a conspiracy against their industry," said Gary Bevilacqua, cast metals operation manager at Caterpillar, Inc. "OEMs are trying to find all different kinds of low cost material--not just castings."

Going overseas not only allows an OEM to produce a part at a lower cost, mainly due to lower labor costs and government restrictions, but it also allows the firm to get a foothold in a completely new foreign market. According Dennis Kross, senior manager at General Motors Corp., the North American and Western European markets are battles for market share, with only minimal opportunity for growth. Therefore, in order to get bigger, companies need to look at other evolving markets.

"Only 12% of the global population enjoys the benefits of vehicle ownership," said Kross. "Thailand's market alone has grown 35% each year since 2000. China's passenger car production will reach 2 million vehicles this year, almost doubling that of 2002. Our need to be a part of that growth represents the 'new opportunity' for vehicle manufacturers."

"Globalization makes the pie a lot bigger," said Bevilacqua. "We try to get the best of both worlds by grouping together foreign plants' demand to provide leverage at a specific supplier. In the past, we found cases where the same part was procured from four or five different places in the world."

Setting up a plant in a developing country can be the first step in building manufacturing relations with a new community, leading to local jobs and an economic boost. "While we have yet to enter overseas markets, it could be a large opportunity for us," said Tom Akers, director of purchasing for the engine group at International Truck and Engine Corp. "If we do, already having a supply base present will help us a great deal."

Of course, the economic benefits that the community achieves when a plant is built in a developing country can lead to later profit for the OEM. "By creating jobs you create income, and if they have more disposable income, then they may choose to spend their money on your product, and that creates market growth and opportunity" said Kross.

The Quality Question

If you asked most U.S. metalcasters if foreign foundries could deliver castings with the same quality standards, there would probably be a resounding "no." According to the OEM purchasers, that's not necessarily the case.

"If you go into developing countries you will find that a lot of their systems are not up-to-date. For instance, a greater percentage of foundries in the U.S. are of a high standard," said Bevilacqua. "While that percentage is lower in Asia, there are still quality foundries available. You can find foundries in foreign markets that are leaders in the industry, and in some cases, better than most foundries in the U.S."

According to Akers, OEMs need to sift through the Bottom-feeders to find the gem manufacturers in developing foreign countries. "We won't do business with a foundry that can't meet the same quality standards as foundries in the U.S. We send representatives to every foundry that we are considering doing business with to ensure that they meet stringent quality standards."

These standards often begin with traditional ISO certification. "We send our people into the facilities to assess and document the internal operations of the foundry," said Kross. "We not only have to understand their capabilities, but we need to ensure that they have the controls in place to produce quality products."

If a foreign foundry does not meet the expected level of quality, then there can be significant problems down the line. "Due to the amount of time that will take place between when we order the pan and when we finally ser it, we need to make sure that the foundry is a capable producer before any metal is poured," said Akers.

In order to combat the lack of production experience, Kross says that many Asian foundries exhibit a manufacturing flexibility that is rarely seen in the U.S. "Because these foundries have more flexible systems, they can accept lower volumes and variants while remaining competitive; as opposed to a high-volume 'one product fits all' approach."

The Leadtime Concern

If there's one area where OEMs continue Lo experience problems with foreign low test casting suppliers, it's that there is ah extremely long leadtime in ordering.

This is not always related to distance and material handling issues. One major hurdle that OEMs have clear is the language and cultural barriers that can exist. "Both parties need to adjust to overcome these inherent cultural differences," said Kross.

However, Kross says, several Asian firms demonstrate a willingness to adapt to case the transition. "A large number of people in China speak English," Kross said. "There are very few people in our organization that can speak Chinese. This can present a problem in transmitting information and communicating our expectations."

Internal safety and quality verifications also can cause long leadtimes. "Once we've made a decision to move forward on a component with a foreign supplier, there will be approximately six to eight months before we actually see a casting due to the strict approvals that we have to go through in house," said Akers. "There's a lot of complex work in making sure that we're still taking out the cost that we expect after all the ancillary concerns."

According to Bevilacqua, there's always going to be a problem with taking a fast-developing part overseas. "Between the pipeline inventory, the difficulty in making quick engineering changes and the logistics of handling the components with foreign sourcing, if you're trying to serve a North American plant, a U.S. foundry has a logistical advantage."