Uncontrolled growth.

Metalcasting firms can find themselves in serious financial trouble for all kinds of reasons, but two root causes are most common: too little business and too much business. The first is typically caused by a significant decline in sales or an equally dramatic (and poorly planned for) increase in capacity. While extremely vexing for all concerned, this situation is easy to understand and, as a result, relatively straightforward to fix.

The latter root cause arises when demand booms, overtime increases, and CEOs cannot bring themselves to say "enough." Coming to grips with such circumstances is very difficult for most metalcasting executives, largely because they tend to see any kind of growth as a good thing. However, growth will change from a good thing to a bad thing when costs spiral out of control and positive bottom line results become elusive. Many metalcasting firms experience this very predicament today.

When faced with this scenario, management teams need to recognize first and foremost that they have strayed from the primary bedrock principle of metalcasting management--casting firms are in business to make money, not castings. In other words, when facilities are operating flat out, management tends to be preoccupied with production and takes its collective eye off the profit-making ball. Moreover, most metalcasting managers simply do not appreciate that costs always begin to rise faster than revenues as full capacity is approached.

Increasing amounts of overtime is the key indicator, and primary cause, of the kind of financial crisis associated with uncontrolled growth. Simply put, castings are priced and costed based on straight time pay, and (for most metalcasting firms) when overtime hours hit a threshold between 5-10% of total hours, it becomes darn near impossible for most prices to support the increased labor costs incurred to produce them. In other words, overtime eats up the profit margin that was built into the casting price.

Attempts to add capacity and boost production also can backfire in the uncontrolled growth scenario, which typically plays out like this: The normal work week gets extended to 45 or 50 hours, and significant numbers of new employees are hired to boost capacity and/or acid or fill out second and even third shifts. When this happens, unrecoverable quality costs and productivity-killing equipment down time inevitably spiral up right along with overtime costs, and as a result, this adds unsupportable costs directly to the operation. Also, costs are added indirectly as increased scrap and decreased equipment uptime creates the perceived need for even more overtime to replace scrap and "make up the lost production."

Cost is not the only culprit in the uncontrolled growth scenario; price is too. By this I mean that the impact of inadequate pricing is disproportionately large and damaging in these circumstances. This reality has both backward-looking and forward-looking facets. Looking back, margins on jobs that were priced poorly to begin with are the first to succumb to the increased costs associated with uncontrolled growth. Combine such a shift from "barely positive margin" to "clearly negative margin" with a significant increase in demand, and one clearly can see how increased volume can chase profitability right out of the business--and fast.

Looking forward, most metalcasting managers still remain extremely reluctant to raise prices for fear of upsetting customers and even losing the now-clearly-unprofitable work. We as an industry must overcome this fear, and doing so begins by recognizing, yet again, that we are in business to make money, not castings. Remember, all castings and customers must stand on their own profit-wise.

So how can CEOs manage their way out of the financially binding uncontrolled growth causes? First, get the work week back to 40 hours. This entails a fairly large-scale reshuffling of the production schedule and significant extension of leadtimes. And yes, this likely will mean losing some work (though typically a lot less work will be lost than feared).

Downsizing the cost side of things is to upsize the price side. Margin losers need to be turned into margin winners, marginal players need to be moved as far into the black as possible, and even those at acceptable margin levels should be tweaked upward to take advantage of tight capacity and increased demand. This is a big part of what market pricing is all about.

While it's true that some customers will threaten to pull their work, few, if any, will actually follow through on those threats. And those who do will be doing the casting facility a favor by opening up room in the production schedule for more profitable work and by taking their share of the profit drain with them. In fact, those customers that refuse to do their part to keep their casting suppliers strong and financially sound deserve to be sent packing and deserve the quality and service problems that go along with buying cheap. And when all of the nail biting and second guessing is over, metalcasting CEOs will find that their businesses are better off--often much better off--without them.

Dan Marcus, TDC Consulting Inc., Amherst, Wisconsin