Outsourcing Casting Cleaning & Finishing: A Cost-Effective Solution.

By examining the benefits and pitfalls of outsourcing cleaning and finishing, this article may help determine if this service makes sense to consider for your foundry.

With unemployment in the U.S. at its lowest point in history, many American industries have turned to outsourcing some of their tasks and responsibilities, thus avoiding the need to hire additional help or retrain current employees. Some of these companies have enjoyed cost savings, expanded knowledge, increased efficiencies and a number of other benefits that would not have resulted by utilizing their current employees.

Outsourcing can be as simple as attaching a postage stamp or as complex as a lengthy, long-term written contract. Outsourcing is about saving time, gaining expertise and borrowing technology. It's about reacting quickly to changing markets in order to save money. It's about strategic planning and profitability. It's about breaking through organizational structures and focusing on business. It's about profits, satisfying customers and employees. Outsourcing occurs anytime an organization elects to utilize outside, independent workers to conduct work-related tasks. In all cases, the successful outsourcing experience is reliant upon a mutually beneficial relationship between supplier and customer, and a well-thought-out plan.

Like all modern industries, some in the foundry industry have explored outsourcing as a business practice. Some casting-specific functions that have been outsourced are coremaking, machining, freighting, painting, heat treating and casting cleaning, among others.

This article will focus on the outsourcing of casting cleaning functions, its pros and cons, and some key considerations. It also will discuss outsourcing opportunities available to today's foundries in making well-educated decisions about whether or not outsourcing casting cleaning is the solution for them.

Why Outsource?

The cleaning of castings is the single largest expense, in both time and money, that foundries face because of the labor costs associated with it. By its nature, casting cleaning is labor-intensive and, thus, cost-sensitive. Although many technological advancements have increased foundry productivity over the years, casting cleaning still is largely a matter of strong backs performing the work.

In terms of outsourcing, no particular parts are more suited than others, although high-volume production parts often generate more cost savings and greater outsourcer satisfaction.

Cost--A number of reasons may exist for foundries to investigate the outsourcing of casting cleaning services. Chief among these is cost. Direct labor carries with it indirect labor costs, such as workers' compensation (typically quite high for foundries), training costs, health insurance and other benefits. These normally are higher in the foundry industry as opposed to others because of the high turnover rate in the cleaning room. Foundries historically have viewed cleaning room assignments as entry-level positions. Often, because of the physical nature involved in chipping and grinding castings, employees will opt out of the cleaning room as other positions become available.

Time Constraints/Scheduling--Scheduling needs and time constraints also are a reason to investigate the outsource solution. Often the cleaning of castings is viewed as a "bottleneck" to the foundry process and schedule attainment. A common complaint among foundries is that they often have molding capacity but lack the manpower needed to clean castings and are not able to responsibly sell that open capacity to potential customers. In many cases, outsourcing of foundry cleaning operations will help to speed up ontime delivery to the end-user.

For example, an outsourcer may need to deliver castings to a moving machining line as opposed to the foundry shutting that line down while the casting is being cleaned. A situation such as this has resulted in a foundry saving $175,000/hr.

Resource Reallocation--Sometimes the ability to free up floor space or other resources such as machinery, equipment and personnel may instigate the need for outsourcing. Also, some foundries that are strapped for space and do not have the capital to expand can find outsourcing as a solution. Can reduction of cleaning room resources (floor space, equipment, personnel) allow for greater capacity and profitability?

By outsourcing cleaning and finishing, foundries might reduce the capital and maintenance needs for machinery, including:

* shotblast equipment;

* stand, hand and swing grinders;

* air and manual hammers;

* welding tools;

* material handling equipment such as hoists, fork lifts and pallet movers/lifters;

* moving conveyor processing stations;

* stationary work station.

Focus on Core Business--By allowing an outsourcer to take over any work task, the outsourcing organization creates an opportunity for the foundry to better focus its resources and attention on its core business. By outsourcing the same functions, foundries can elect to better concentrate their time, efforts and capital toward the profitable aspect of their business--producing and selling more castings.

Reduce Hassle/Responsibility-- Most of the hassle and responsibility associated with producing a high-quality casting belongs to the foundry. Once outsourcing relationships are developed, a buyer/seller relationship is created. By the very nature of this relationship, all responsibilities are shifted directly on the shoulders of the outsourcer to provide a quality product/service in a timely manner or risk failure of payment and the loss of future business opportunities.

Another responsibility the foundry sometimes can pass on responsibility for is shipping. In some situations, rather than returning the casting to the foundry, the outsourcer forwards the casting to either another processor (machining, painting, etc.) or to the casting end-user.

Increase Service to Customer-- Improvements in service are possible by identifying weaknesses within an organization and outsourcing these areas to companies that are better suited to perform these functions. By streamlining these functions, the company can eliminate such weaknesses. In any outsourcing function, firms typically specialize, usually providing a better product and/or service than what traditionally has been a secondary function of another company. Consistency of application, procedure and low error ratios are reflective of the specialist's drive for detail. Assignments often are completed in less time than those delegated internally because outsourcing eliminates dealing with the everyday business-related and/or core competency issues. Processes typically are streamlined by outsourcing firms in an effort to cut costs, reduce errors and improve efficiencies. Organizations that use outsourcing have experienced high levels of staffing flexibility with the ability to obtain workers on an as-needed basis.

Negative Effects of Outsourcing

Outsourcing of any function, if not carefully strategized, can have a multitude of negative effects. The outsourcing relationship is dependent upon the outsourcer and servicing organization understanding the other's needs and goals. In addition to this understanding, some kind of performance measure must be developed to track the progress of the outsourcing agreement towards these needs and goals. A failure to do so most likely will result in dissatisfaction and ultimately lead to a failed outsourcing relationship. Following are some of the most commonly mentioned problems associated with casting cleaning outsourcing.

Costs are Too Difficult to Judge--Many foundries have never found a need to separate the costs associated with casting cleaning from other production costs. The amount of overhead that must be allocated to individual functions also is tough to determine. Administrative costs can be difficult to divide among foundry processes. If a foundry cannot accurately judge what its current costs associated with casting cleaning are, then how is it to know if it would be reducing costs on the outside? Being able to measure all costs, including reclaim, internal and external scrap, labor and overhead is essential information required before developing a relationship with an outsourcing provider.

Unsatisfactory Handling of Complaints--Many foundries feel that their needs as they relate to quality and schedule attainment are not being addressed as they should be. Some foundry employees involved in casting cleaning outsourcing expressed a frustration with being caught in the middle," between the casting cleaning facility and the end-user. Even if an outsourcing foundry has a goal of saving hard dollar costs in the outsourcing relationship and is doing so, what about the possible costs associated with handling increased quality and delivery problems?

Loss of Control Over Services Performed--The nature of outsourcing work is to allow organizations to concentrate on core competencies while transferring employee costs and liabilities to a third party. With this transfer also comes the transfer of control over the services being performed. While this seems to be a simple concept, those who feel that if they want something done right, they need to do it themselves, or at least have significant input, can see it as a negative.

Other concerns or negative effects mentioned in regards to outsourcing of the casting cleaning work tasks are:

* lack of outsourcer knowledge of end-user specification changes, shipping preferences, delivery and quality issue contacts, etc.;

* employee turnover and related problems associated with training new employees and the outsourcer;

* the perception by foundry workers that outsourcing threatens their jobs;

* product confidentiality.

Almost all of these concerns and problems can be solved or greatly reduced by developing a strong, communication-based and mutually beneficial relationship between the foundry and the outsourcer organization.

Outsourcing Strategies

The decision to outsource a given work task is dependent upon a number of criteria. The following tips were derived from informal interviews with foundry service personnel as well as individuals with backgrounds as diverse as temporary staffing and banking.

Identify your Organization's Reasons for Outsourcing First--Most successful outsourcing relationships begin with a well-thought-out plan. Included in this plan are reasons why your organization would consider outsourcing.

Determine Goals, Skills and Experience Required--Contact those in your organization who will be responsible for the success of your organization's outsourcing venture. Their input on what goals, skills and experience required of the outsourcer will help to determine which organizations, if any, are qualified partners. How will your organization grade its suppliers? Will your outsourcers be included in developing these measurable criteria? Developing such scorecards to measure outsource performance only will enhance your long-term relationships with your outsourcer and your customers.

Consider Other Requirements Such as Federal Contracting, ISO/QS Requirements and Internal Labor Issues--Many customers require that supplier foundries have ISO or QS certifications in order to supply castings to their organizations. If cleaning is outsourced, will the same requirement be made of the outsourcer or can it simply be viewed as an extension of the foundry and audited as such? Organizations also must be particularly sensitive to the human side of outsourcing. Perceived threats or feelings of insecurity, wage differentials, reluctance to share information, reduction in hours worked or overtime pay for regular employees, and lack of incentives for the outsourcer's employees all set the stage for teamwork failure.

Analyze Short- and Long-Term Costs--Regardless of other goals that your organization might have for outsourcing if short-and long-term costs are not included, chances for overall success are slim. When analyzing costs, try to be all-inclusive. Will freight issues be a large part of the cost? Is it possible to have other value-added services performed at the outsourcer such as finish blasting, paint or machining? What is the logistical layout and how can it be manipulated for least cost?

Check the Product or Service Regularly--Look for ways to make the services tangible by requiring reports, charts, correspondence and inventory updates. Outsourcing organizations should perform audits and maintain open lines of communication. Ultimately, outsourcing works better for the companies that help their suppliers achieve common goals.

Insist that your Outsourcer Adjust to your Needs, Just as your Organization Adjusts to the Needs of its Customers--All successful businesses that do not currently face direct competition soon will. Like every smart customer, you must insist that you get your money's worth. Constant process and product improvement are the goals. These goals are achievable at an economical price but require both the vendor and supplier to be flexible and able to accept change as markets change.

Labor Issues--In today's global market economy, organizations are rushing to outsourcing opportunities that will reduce costs and add value. Smaller suppliers now can offer faster, flexible options and are willing to compete with each other for market share. Historically, labor has resisted this movement by standing their ground on wage cuts and outsourcers. Before developing outsourcing relationships, management needs to weigh the long-term cost benefits of outsourcing against any negative internal labor issues caused by moving work to an outside supplier.

Communicate, Communicate, Communicate--The relationship that you embark on with your chosen outsourcer is as important a business relationship as they get. In order for the outsourcing arrangement to be successful, it is important that both parties are aware of all necessary information. Foundries who outsource say that quality concerns, product or process changes, schedule requirements (or changes), customer feedback and overall satisfaction with the outsourcing relationship are a few of the items that need to receive communication attention regularly.

Cost Savings in Outsourcing

The hypothetical model below is based on rough estimates for a large, high-production facility. Although the dollar amounts will vary from foundry to foundry depending on the type of castings being poured, the information will assist in the thought process for performing your own cost analysis of casting cleaning and finishing and in determining the viability of outsourcing that function of your foundry operations.

The labor cost shown in the model does not include employee benefits, retirement benefits, workers' compensation insurance or any other indirect labor costs. Nor does it include shotblast operations as the subject facility operates them within its foundry.

Processes being performed include chipping, grinding, welding and salvage repair work, stand grinder operations, quality audit, and packaging for shipment. Freight cost also is an important factor to consider but depends on the location of the service provider relative to the foundry and the next receiving point of the casting. For example, if a foundry in Detroit is shipping castings to New York to be cleaned and then to Indianapolis, freight is a huge issue. However, if the same foundry in Detroit is shipping castings to Chicago to be cleaned on their way to Indianapolis, it makes more sense.

The labor cost below includes maintenance, supervisors, department heads, fork truck drivers, quality personnel, direct labor, clerical personnel, and janitorial personnel. The department is not self-sufficient for hiring, purchasing, large maintenance projects or payroll functions and relies on corporate office staff for that purpose.

From the model data it is determined that ABC Foundry processed a total of 71,200 tons for the model year calculated on operating 48 weeks/yr at a total cost of $5,938,938 or $84.13/ton.

ABC Foundry                                    Model Yearly Costs
Chipping supplies
(grinding burrs, stones, chisels, etc.)            $467,139
Safety supplies
(eye protection, gloves and aprons only)            128,043
Welding supplies                                     36,960
Direct labor (chippers & grinders)                3,803,936
Labor (welding)                                      96,136
Labor (quality)                                     362,576
Labor (fork truck operators)                        146,784
Labor (maintenance)                                 118,517
Freight expense (inbound freight on materials)        9,112
Fork truck expense (leased equipment)                56,233
Maintenance and repair (services bought
& materials used in the repair of equipment)        144,406
Misc. supplies (clerical items)                      68,716
Utilities (allocated to the cleaning
department by accounting)                            99,408
Management costs (clerical, department
heads, supervisors, etc.)                           451,972
Total Department Costs                           $5,989,938

This graph illustrates the potential total direct and indirect cost savings associated with outsourcing and incloudes freight costs, maintenance costs, direct and indirect labor cost, and total departmental expenses. As a large foundry, Foundry ABC's cost savings are represented in the graph by the maximum cost savings (31.3%)

                            Savings Percentage
               Min. Max. Avg.
Small/Job Shop  3.4 11.8  8.7
Plant Size     12   21.4 16.1
Large          14.5 31.3 23.7