Survey results reveal 'razor-thin' cost picture: AFS-NADCA 2003 Confidential Operational Cost Survey. (Executive Memorandum).

In order to arm metalcasting managers with better data on which to manage their business decisionmaking, AFS and NADCA teamed to commission the Confidential Metalcasting Operational Cost Survey in 2003.

As was the case with the 2001 AFS survey, the 2003 project was handled by Sapolsky Research, Inc., Tallahassee, Florida, a firm experienced in metal industry cost surveys. In March, AFS and NADCA mailed the two-page surveys to top management at U.S. metalcasting operations to complete based on their most recent fiscal year. By May, a total of 126 usable surveys were received by the researcher for confidential processing, tabulation and customized reporting. The sales of the responding companies amounted to $2.05 billion and covered 16,074 employees.

The survey results includes aluminum, iron, steel, copper base and zinc metalcasters and covers the sand, die, permanent mold and investment casting processes. The breakdown of respondents in terms of net sales was: up to $10 million (74%), $10-25 million (33%), $25-50 million (12%) and $50-plus million (7%).

This article provides metalcasters with a bird's-eye view of industry costs to help operations identify areas in which improvement is needed.

Results

Table 1 shows a macrolevel report for the cost categories examined in the survey. Highlights of the data show that the average profit as a percentage of net sales was 1.81%, and that the average sales per employee amounted to $128,242. The table columns are described below:

All Companies Averages--These figures show the average costs as a percentage of sales for all participating metalcasters.

Companies with Profit & Loss-- This set of data shows the respective cost figures for foundries that were both profitable and unprofitable. About 38% of respondents reported a loss in the period for which the data was supplied.

Lowest-to-Highest Average Costs--This set of columns can be used as benchmarks, as each of the participants for every category are ranked in order from the lowest to highest costs as a percentage of sales. If all 126 respondents reported in a given cost category, the distribution was divided into thirds (42 companies) and averaged for each. For example, the average for the lowest third on labor costs was 15.18%, meaning that the 46 firms with the best labor cost performance spent an average of 15.18% of their sales on labor. This column would be considered the "goal to shoot for." This set of columns helps determine if an operation falls into the best-, middle- or bottom-performing group in each category.

Additional information is provided in the full survey results publication offered by AFS and NADCA. Broad highlights are provided in the sections below.

Profit or Loss

Copper-base operations enjoyed the greatest average margin at 3.53% of sales, followed by steel (3.38%) and aluminum (3.13%). According to the survey, the average iron operation lost an average of 1.69% of net sales during the period reported.

In terms of process employed, the permanent mold operations and high-pressure diecasters fared best, at 7.15% and 3.17%, respectively, followed by sandcasters at 1.03% of sales. Investment casters lost 0.15% during the period reported.

Overall, the average profit of the top one-third operations in the survey was 11.09% of sales. Meanwhile, the average loss of the worst one-third operations was 7.21% of sales.

Factory/Shipping

As seen from Table 1, there is a sizable difference (10%) in the factory/shipping costs as a percent of sales between the profitable and unprofitable casting operations. This is where the battle for profitability is won or lost.

In terms of metals cast, iron had the highest factory and shipping costs, at 79.06% of sales, respectively. Mean-while, copper-base operations were the lowest at 74.89%. Iron operations also had the highest labor costs as a percent of sales at 23.16%. The lowest labor totals were reported by aluminum, at 21.60% of sales.

In regard to raw materials, aluminum operations had the highest costs at 25.03% of sales. Iron operations had the lowest at 17.24% of sales.

Process-wise, diecasting had the highest factory/shipping costs at 80.04%, while permanent mold operations saw the lowest at 74.54% of sales.

The highest labor costs were seen among investment casters at 23.86% of sales, while diecasters registered the lowest at 20.03%.

Meanwhile, in raw materials, diecasters had the highest costs as a percentage of sales at 27.99%, with the lowest costs seen among sandcasting operations.

SG&A

The difference in sales, general and administrative (SG&A) costs (broken out separately in Table 1) as a percent of sales is 1.25% between profitable and unprofitable firms.

Copper-base operations had the highest sales, general and administrative expenses at 15.75%, while aluminum had the lowest at 11.79% of sales.

From the process perspective, the highest SG&A costs were seen among investment casters at 15.27%. Diecasters registered the lowest as a percent of sales at 10.71%. MC

This chart depicts the average expenses and profit among responding
foundries as a percentage of net sales

                             All     Up to $10  $10-$25  $25-$50
                          Companies   Million   Million  Million

Labor                       22.21      23.72     20.12    20.33
Other Factorty/Shipping     55.53      52.75     56.85    63.91
Sales                        2.90       3.26      2.87     1.52
Gen'l & Admin.              10.54      11.88      9.86     5.86
Depreciation                 4.17       3.97      4.64     3.89
Officer's Salaries           3.94       4.92      2.82     1.66
Profit/Loss Before Taxes     1.81       0.80      3.79     3.10

                          Over $50
                          Million

Labor                      19.33
Other Factorty/Shipping    63.83
Sales                       1.83
Gen'l & Admin.              8.78
Depreciation                4.49
Officer's Salaries          1.47
Profit/Loss Before Taxes    0.90

Note: Table made from bar graph

Average Profit Margin as a Percent of Net Sales (2001 Survey vs. 2003
Survey)


2001  4.60
2003  1.81

Note: Table made from bar graph

Table 1

Operational Cost Breakdown By Percent of Sales--All Respondents

Expense                           All Companies     Companies With
                                     Average      Profit    Loss



Factory/Shipping

Labor                                  22.21       21.31    23.69
Supervisory/Factory Office              5.46        4.89     6.31
Fringe-Shop                             7.44        5.91     9.71
Raw Materials                          21.76       22.25    20.97
Manufacturing Supplies                  5.86        5.67     6.18
Utilities                               5.28        4.82     6.03
Customer Returns                        1.87        1.74     2.04
Maintenance                             3.63        3.67     3.58
Rent                                    2.12        2.06     2.23
Shipping                                0.86        0.78     0.98
Miscellaneous Factory                   4.42        4.13     4.85
Subtotal                               77.74       73.86    84.05

Sales

Sales Salaries                          2.06        2.06     2.23
Fringe-Sales                            0.52        0.55     0.48
Advertising/Promotion                   0.26        0.27     0.26
Miscellaneous Sales                     1.00        0.90     1.10
Subtotal                                2.90        2.74     3.15

General/Administrative

Office Salaries                         3.11        3.38     2.66
Fringe--Officers/Office                 1.20        1.12     1.33
Office Operation                        1.10        1.11     1.08
Insurance                               1.28        1.26     1.32
Professional Services                   0.88        0.77     1.04
Taxes/Licenses                          0.81        0.79     0.84
Dues/Subscriptions                      0.13        0.14     0.12
Bad Debt Charged Off                    0.30        0.26     0.36
Interest Expense                        1.91        1.76     2.10
Miscellaneous G & A                     1.15        1.06     1.29
Subtotal                               10.54       10.22    11.07

Other Expenses

Depreciation                            4.17        3.65     4.99
Officer Salary/Comp.                    3.94        4.08     3.75
Subtotal                                7.29        6.73     8.19
Total Costs                            98.19       93.15   106.39
Total Sales                           100.00      100.00   100.00

Profit or Loss

Profit Before Taxes                     1.81        6.85        -
Loss                                       -           -    -6.39
Profit or Loss                          1.81        6.85    -6.39
Avg. Sales/Employee                  128,242     149,925   94,676
Accounts Receivable (% of Sales)       14.59       14.90    14.07

Expense                                  Lowest to Highest
                                           Average Costs

                                   Lowest     Middle   Highest

Factory/Shipping

Labor                               15.18      22.07     29.38
Supervisory/Factory Office           2.57       4.94      8.87
Fringe-Shop                          3.55       7.03     11.65
Raw Materials                       11.88      20.51     32.90
Manufacturing Supplies               2.25       5.03     10.21
Utilities                            3.25       4.92      7.68
Customer Returns                     0.46       1.55      3.55
Maintenance                          1.62       3.11      6.12
Rent                                 0.17       1.24      4.95
Shipping                             0.22       0.70      1.64
Miscellaneous Factory                0.66       2.32     10.16
Subtotal                            66.78      78.64     87.80

Sales

Sales Salaries                       0.60       1.80      3.72
Fringe-Sales                         0.13       0.33      1.06
Advertising/Promotion                0.02       0.11      0.65
Miscellaneous Sales                  0.16       0.53      2.28
Subtotal                             0.75       2.68      5.27

General/Administrative

Office Salaries                      1.15       2.43      5.75
Fringe-Officers/Office               0.35       0.89      2.35
Office Operation                     0.32       0.80      2.15
Insurance                            0.31       0.82      2.73
Professional Services                0.21       0.64      1.76
Taxes/Licenses                       0.17       0.61      1.66
Dues/Subscriptions                   0.03       0.10      0.27
Bad Debt Charged Off                 0.04       0.22      0.63
Interest Expense                     0.18       1.16      4.33
Miscellaneous G & A                  0.09       0.61      2.70
Subtotal                             5.39       9.76     16.36

Other Expenses

Depreciation                         1.90       3.77      6.78
Officer Salary/Comp.                 1.46       3.27      7.09
Subtotal                             3.64       6.58     11.56
Total Costs                         88.91      98.46    107.21
Total Sales                        100.00     100.00    100.00

Profit or Loss

Profit Before Taxes                 11.09       1.54         -
Loss                                    -          -     -7.21
Profit or Loss                      11.09       1.54     -7.21
Avg. Sales/Employee               215,628    100,854    68,245
Accounts Receivable (% of Sales)     8.81      13.31     21.47

NOTE: Subtotal percentages don't necessarily add up as not all companies
reported every cost category. All averages are based on the number of
companies reporting in any given category. For example, 68 of the
respondents reported "Rent," and the averages shown reflect only those
firms reporting, otherwise figures would be lower than they should be
and thus misleading for true comparisons.

Complete survey results are available in a new 54-page publication available through AFS & NADCA. Seep. 18 for more information.

For More Information

AFS 2001 Confidential Operational Cost Survey-- Results Show 'Snapshot' of Casting Industry Cost Structure, D. Barnhard and M.J. Lessiter, MODERN CASTING, April 2002 (p. 44-46).

"Executive Memorandum--Benchmarking Your Foundry's Financial Performance, "Allen and William Lefko, Dwight Barnhard, MODERN CASTING, July 2001 (p. 36-38).

"Manufacturing PulseMark: Benchmarks for U.S. Manufacturing Productivity (2000 edition)," National Assn. of Manufacturers fwww.nam.org), Washington, DC.

RELATED ARTICLE: Operational Cost Changes: 2001 vs. 2003

Following are some of the changes (as a percent of net sales) that was seen in comparing the average categories in this year's survey vs. the one mailed in the fall of 2001.

Reductions as a Percent of Sales

Factory/Shipping: labor, utilities, shipping, miscellaneous; SG&A: sales salaries, office salaries, fringe--officers/office, taxes/licenses, dues/subscriptions, bad debt charged off, interest expense and miscellaneous, Other: depreciation and officer salary/compensation.

Increases as a Percent of Sales

Factory/Shipping: supervisory/factory office, fringe--shop, raw materials/manufacturing supplies; customer returns, maintenance and rent. SG&A: Fringe--sales; miscellaneous, office operation, insurance and professional services.

Tips of Using the Operational Cost Survey Data

The International Benchmarking Clearinghouse defines benchmarking as "the practice of being humble enough to admit that someone else is better at something, and being wise enough to learn how to match and even surpass them at it."

Knowing what's achievable is an important first step of the process. Activities such as the Operational Cost Survey can provide a picture of the gap that may exist between an individual casting operation and the top performers.

Following are a few brief tips for how to use such comparative survey information.

* Remember that this is a snapshot based on the respondents to the survey. The report in this article is the average of all companies. Additional detailed reports on metals cast, sales volume, process used and employee size may be found in the full report.

* When making correlations, remember that a wide variation exists in casting sales price on a per pound basis. This can explain some of the differences seen between the metal groups.

* For best results, see that several people on your management team review the data. Different perspectives are important, and each person will see things differently.

* Keep in mind that there may be conscious reasons for higher-than-average costs in a given area. For example, maintenance costs (proper care of equipment) or advertising/promotion (seeking new markets or niche development) are two such categories in which a firm may deliberately spend more than its peers.

* While the percentages are useful, some metalcasters correlate the data by assigning dollars. As an example, if $15 million casting operation finds that its costs is 2.5% higher than its peers, this variance from the industry norm equates to $375,000. Looking at the individual categories in this light will highlight those most deserving of your attention.

* Once you know the areas that your firm may be lacking, you should hypothesize what could cause your costs to exceed others. This in turn will lead to seeking out and evaluating best practices and can put you on the path toward implementing plans to bring your firm back in line with others.