Rethinking capacity management.

Prior to the early 1980s, metalcasting was a growth in dustry. CEOs and their management teams could invest in additional capacity and expect that aggressive pricing and market growth would quickly fill the foundry up. In turn, this new volume would generate additional profit dollars (despite diminished margins) and everyone would agree that the investment was a success.

Not so today. Metalcasting is a solidly mature industry, and CEOs must make decisions with that reality firmly in mind. Specifically, capacity management decisions are one of the most important areas in which the industry's conventional wisdom needs to change. For example:

* Maturity, by definition, means no real growth. Therefore, it is illogical to seek growth (in capacity and/or sales volume) in such an environment.

* In maturity, superior financial results are only attainable in circumstances of finite capacity. They are endlessly elusive for firms that over invest in capacity expansion and/or plant modernization.

* For the vast majority of foundries, improvements to facilities and equipment become expensive luxuries in maturity. It is incorrect to assume that such investments are essential for success, or that a prescribed amount must be invested each year.

* Given the above, serious investment analyses, including the creation of realistic sales development plans and pro forma financial statements, are essential prerequisites for investment decisions.

* In maturity, "reinvesting in the company" takes on a different meaning than it has in the past. The investment emphasis shifts from equipment to people, from volume to value (margins), from shop floor to the office (new management approaches and white-collar productivity), and from capacity expansion and growth to capacity management for superior financial performance.

Effectiveness Over Efficiency

Foundries in the higher volume segments of the industry (specifically automotive) depend upon the latest technology and the scale economies it can provide for their margins and competitive advantages. However, beyond this relatively small number of industry leaders, foundry capacity management needs to be about effectiveness rather than efficiency, and about margin enhancement (cost reduction) rather than capacity and volume growth.

Managing capacity for effectiveness means that each foundry's business plan and competitive strategy should drive the scope and nature of its capital investments. The goal of such investments is to get better at something that is specifically identified in the business plan, such as reducing cycle times to offer shorter lead times. In fact, while each department, operation and piece of equipment in the foundry should be as efficient as possible, achieving that goal must be secondary to achieving the marketing and customer-oriented goals set forth in the company's business plan.

When this happens, there is no "required" annual capital budget. Instead, investment is looked at strategically and resources allocated only where appropriate. Similar investments are made to achieve specific strategic objectives, and management does not give in to the temptation to replace worn out equipment and "increase capacity while we're at it."

Unfortunately for many foundries, the opposite always has been the case. Across the industry and throughout its history, foundry CEOs have been possessed with the urge to spend money on new equipment and additional capacity, always with painful consequences for their sales staffs and often with disastrous consequences for their companies' bottom lines.

Taking Out the Cost

Managing capacity for effectiveness also can mean using capital to Lake cost out of the operation and doing so without weakening the company's competitive strategy or adding significant amounts of new capacity. One example of this is a steel foundry that recently accomplished this feat. It spent a good deal of money to eliminate a very costly, labor intensive part of its operation and, at the same time, improve its competitiveness without increasing overall capacity. In this case, the cost savings are paying for the investment and will continue to contribute to the bottom line long after the investment is paid off. Because additional capacity was not added, utilization remained high, pricing remained steady, sales remained focused and the bottom line remained strong.

Finally, there is another way to safely invest in significant new capacity. When CEOs invest in their people with advanced manufacturing management programs and the training, education, employee empowerment, team building and increases in productivity that comes with it. Such investments can produce huge capacity increases without having to buy any new equipment, and also can generate quantum improvements in cost, quality and cycle times. And all this will happen without locking the company in the deadly mature industry cash trap.

Dan Marcus

TDC Consulting, Inc., Amherst, Wisconsin