Wake up and smell the globalization. (CEO Journal).

Globalization is here, right now. Globalization has changed everything.

While these statements are true, they are without specific meaning for the foundry business. So here are a few thoughts to consider.

Globalization has made almost everything a commodity, not just castings. Among the many reasons for this, one of the most important is the glut of worldwide capacity. As every economics student knows, when capacity (i.e., supply) far outstrips demand (as has been the case in our industry for at least 18 months), prices fall, weak businesses fail and productive capacity is otherwise "shaken out" of the system until demand and supply are in relative balance. Hopefully, demand increases will kick in to mitigate the capacity carnage.

And that brings us to the concepts embodied in the words "worldwide." One of the most important changes globalization has brought is that "global sourcing" has barged beyond the talking stage into the realm of firm reality. This is not a temporary exchange rate issue or some fad that will reverse itself (as in the past) when OEMs discover all the hassles and quality costs associated with offshore procurement. This is a permanent change in the way our customers do business.

Global Sourcing

Two examples should prove this point. First, in a survey of OEM purchasing managers TDG recently conducted for a foundry client, respondents were asked to tell us which foundries will he the "winners" three years from now. Almost 75% of them named a foundry located not in North America, but in Europe, Asia or South America.

Second, something struck me as I spent a few hours at the headquarters of the world's largest non-automotive consumer of metal castings. On the one hand, this OEM has created an internal consulting staff of foundry engineers who travel the world helping their designated "suppliers of the future" meet world class quality standards. This marks a trend--OEMs are selecting countries where the fundamental long-term cost structure appears to be most favorable and then investing in local casting suppliers to boost their ability into world-class performance levels.

On the other hand, I noticed during my visit that what used to be a vast central purchasing complex is now nothing but a vast empty space. Like elsewhere in our cookie cutter world of "global procurement" and "commodity management," this OEM also has reorganized its purchasing function to take better advantage of offshore and electronic procurement.

The Internet-based purchasing revolution is already over, and the Internet won. Industry Week magazine recently predicted that the value of e-procurement transactions will reach $3 trillion by 2003, and that direct materials (like castings) are poised for dramatic e-procurement increases in the next couple of years. But looking closely at how business is shaping up, the story behind this story is a lot different than it may first appear.

That's because one key to e-procurement's rise is the fact that the procurement process reengineering necessary to structure for e-procurement is cutting huge chunks of cost out of the purchasing task. Let me say this again in another way. Our customers are moving to e-procurement even if the price of the castings they buy stays the same. Simply, reorganizing around the Internet and purchasing electronically saves them huge chunks of money by eliminating paperwork, transaction time and people.

We've always talked about a future without sales people and purchasing agents. That future has arrived, and once Microsoft launches its "e-procurement system for the masses," e-procurement will be your reality too.

Acting Aggressively

So what is the foundry CEO to do? First and foremost, he must act aggressively to deal with the worldwide capacity glut and resulting price deflation. As you've often read in this column, your foundry cannot control market prices, it can only hope to control its costs. With that in mind, business plans and CEO action must focus on dramatically reducing costs-on the order of 30%--in the next 12 months. Simply put, you won't be able to hold on to your customers for long, much less grow, if you're still charging last year's market prices. If you try to match this year's market prices--or next year's--without shrinking your cost structure through the same techniques our customers are using (process reengineering, smarter purchasing, et al, you will lose more than customers.

Second, jump on the e-procurement bandwagon now. I'm not talking about how you sell castings, but about how you buy all of the products and services your company needs to make and market castings. Ask yourself these questions: "What role is the internet playing in my business today?;" "How do we communicate with our suppliers?;" "How do we measure white collar productivity?;" and, most importantly, "How can we get rid of all the paper in my company's offices?."

Answering these questions will open new doors, and new worlds of essential cost reduction for your company.