Competing in the 1990s; no longer business as usual.
In 1979 nearly 20 million tons of castings were produced and sold in the United States. At the same time, total industry capacity was nearly 30 million tons. Almost 5000 foundries were in operation, with employment hovering around 350,000.
In 1989, with many foundries operating at or near capacity, things are looking up, right? The industry is healthy again, right? You be the judge.
This year, only 12 million tons of castings will be sold. Industry capacity has fallen below 20 million tons and it continues to fall. Today, there are fewer than 3500 foundries left, employing fewer than 250,000 people.
There also are other signs that all is not as it once was. For example, how many foundries can you name that have surrendered to Chapter 11 recently--while they were running flat out? And how is it that while many foundries are running two or three shifts, study after study shows that as an industry profitability has never been lower, and that there is still more than 20% excess capacity?
Yes, all is not as it once was or should be. And things will likely get worse for many of us as the fallout from change in our customer markets comes home to roost with a vengeance.
The bottom line in all this is that the world around us has changed and that many of us are still out of step. But why? And what can we do about it? Answering these questions is what this article is all about.
The key to understanding the current situation confronting U.S. foundries is to recognize the structural changes that have occurred in our customer markets. Michael Porter, in his classic book Competitive Strategy, said it best when he wrote:
"Growth tends to mask strategic errors and allows most, if not all, companies in an industry to survive and even prosper financially. Strategic sloppiness is generally exposed by industry maturity--that is, when growth slows or when customer markets shrink. Maturity forces companies to confront, often for the first time, the need for strategic discipline and strategic change. It becomes a matter of survival."
This quote describes perfectly what has happened to the foundry industry since its peak in 1979. In short, the seemingly endless expansion of our customer markets abruptly reversed direction in the early 1980s. And as our customers fell into the deepest recession in U.S. history, we were pulled with them. The ultimate result: a shrinkage of the North American market for foundry products by some 40%.
What caused the fall? And what has come in its aftermath? Understanding these two issues is central to our understanding of what we now must do to cope with the changes that have occurred.
Offshore Competition--It was during the last half of the 1970s that "the invasion" of low-cost, high-quality products produced offshore really took hold of the U.S. economy. Between 1975 and 1980, the U.S. balance of trade flip-flopped from surplus to deficit. By 1985, we were more than $100 billion in the red.
The tide of imports hit the foundry industry where it hurt the most as automobiles, machine tools and heavy equipment poured in. And as we well know, these competitors never went away.
Hyperinflation--In January 1979, gold was selling ofr $397 an ounce. By year's end, it was selling for $524 an ounce. Inflation was exceeding 12% annually, with the prime rate peaking at an impressive 15.75% in November 1979. And who can forget that oil prices jumped to a record $40 a barrel around midyear?
Along with oil and gold, the cost of every aspect of doing business--from health care to wages and salaries to raw materials--was out of control in 1979. What made matters really bad, however, was that suppliers could no longer, as a matter of course, pass on these cost increases to their customers. Why? Because "the invasion" (more on this below) had begun and costs had to be slashed--not passed through.
Hyperinflation II--The Cure--In 1980, Ronald Reagan ran for president with a two-issue campaign: to free the hostages in Iran and to break the back of the hyperinflation that was ruining the economy. In hindsight, solving the hostage crisis turned out to be the easy part.
Reagan, indeed, broke the back of inflation and cut taxes, too. But that one-two punch was too much for U.S. manufacturing. By 1982, Reaganomics had sent us careening off in a direction 180 degrees opposite that of the 1970s--from hyperinflation into a depression-scale recession.
Marketing--In November 1983, Business Week magazine announced in its cover story the arrival of marketing as "the new priority" for business management. The battle cry was sounded: Serve the needs of well-defined customer segments, not the needs of your own operations.
At this low point in the history of U.S. manufacturing, our customers could no longer afford to buy what they wanted. They were forced to buy only what they needed. The invasion of imports had given our customers a rallying cry: We need a high-quality product at a low price.
Now with such products a reality, our customers expect the ideal "high quality at low cost" product from us because their customers expect it from them. So we slash our costs, or we sacrifice our margins, and fool ourselves into believing that by doing so we are being marketing oriented.
The Nature of Change--On top of all this, during the 1970s and 1980s, the nature of change itself was altered. After decades of uncanny stability and growth, change and uncertainty suddenly became part of daily life. Today, our futures seem so much more vulnerable, with the prospect of change (recession, high inflation, and/or unfavorable shifts in exchange rates) always on the horizon.
Change--or the ever-present prospect of it--is now an issue all managers must deal with on a day-to-day basis. We in the foundry industry are no exception. We must prepare to do battle with change. We must plan to change, guard against unfavorable change and be flexible enough to exploit favorable change.
So what is the legacy of these five fundamental and profound changes? It surely is, in part, the downsizing of our industry's customer markets and, in turn, the downsizing of our own industry and our expectations for growth. But as we ever-so-slowly emerge from the doldrums of the early 1980s, it is abundantly clear that a more far-reaching legacy has been left to us. It is this:
What it takes to be a successful competitor in the foundry industry is far different from what it used to be.
We must now look beyond our products and our processes to find new ways of making money. We must realize that a new way of going business is required to survive and thrive in the foundry industry of the 1990s. In the past, only the strongest survived. In the future, only the smartest will survive.
So what must we do to cope with the changes of the 1980s? How do we get "in step" with our customers? What does it take to be a successful competitor in the new foundry industry? What does it mean to be among the smartest?
I offer five suggestions.
Surely, all of us have heard that one can't "be all things to all people." Certainly, we all agree that it would be foolish for our companies to even try. So why have so few of us made any attempt to actually do something about it?
In the immortal words of Nancy Reagan, "Just say no."
Say no to unprofitable and marginally profitable work. Say no to those customers and markets in which your foundry has no bona fide competitive advantage. Say no to those customers who are too costly to serve. Say no to adding capacity automatically every time sales increase. (In fact, consider shutting down less profitable capacity for good!)
The key concept here is focus, or niche marketing. It simply means concentrating all our efforts and resources on customers and markets in which our foundries have a genuine competitive advantage. It means downsizing capacity and expectations for future growth in sales volume to target these niches. It means operating on the philosophy that profitable is better than bigger.
Three key details are strongly implied in this suggestion. First is tht we know what our costs are--and know them cold. Sophisticated cost analysis is one of the key competitive essentials in a mature industry--and is one none of us can afford to overlook. No more hemming and hawing about not knowing exactly how to define or allocate costs. If we're unable to do it, let's hire someone who can.
The second key assumption hinted at here is that cash, not sales volume, is the bottom line. It remains a mystery why so many in our industry feel that they are in business to "keep the shop full"--to make sales rather than to make money.
The final assumption here is that each foundry has or can create an unquestionable competitive advantage in one or more market niches. We must if there is any hope for profitable survival. And we must if there is to be any market for us to actually "focus" on once we get rid of our marginal business and capacity.
My second suggestion is to forsake quality as a competitive weapon. No, I'm not crazy. The fact is, in a mature industry like ours, quality is no longer a competitive weapon. It is a given.
Now, I am not saying that quality is unimportant. And i am not saying that quality improvements have gone away. On the contrary, quality requirements and the need to be a certified supplier have never been greater or more important.
What I am saying is that quality no longer differentiates between casting producers. Every one of us is now expected to produce more than 97% good castings. Every one of us is expected to chart our performance and progress through statistical controls. Every one of us is expected to do all of these things just o play the game.
Winning the game--achieving a genuine competitive advantage--means competing on cost or on services.
Compete on Cost
"Give me a blueprint and I'll see if I can beat your current supplier's price." This quote is not what I am talking about. It is an example of competing on price, which has been and continues to be the ruin of many a good foundry. I am talking about the strategic direction of competing successfully on cost--which means being the low-cost competitor in a specific market or niche.
The key to success here is that, when selecting cost as a basis for achieving a competitive edge, a foundry must not attempt to sell castings which it cannot produce and bring to market at a cost lower than that of its competitors. This is a liberating philosophy, assuming, of course, that one has the courage and foresight to achieve the low-cost position.
When a company competes on the basis of cost, nearly unlimited opportunities arise automatically for strengthening its competitive edge. Reducing inventories, increasing worker productivity, more efficiently procuring raw materials, increasing the efficiency of material movement in the plant--all of these actions and many others will lower costs, and therefore offer an opportunity for higher margins.
Think of competing based on cost this way: Without a cost advantage, building sales volume is self-defeating because it exposes the business to less and less attractive buyers.
Compete on Services
Competing on cost is a way of gaining a competitive edge by removing costs from our operations and thereby increasing our margins without raising prices. Competing on services means just the opposite. It means adding value to our products and, thereby justifying a significantly higher price and an increase in our margins.
The idea of value added services has been around for quite awhile. In fact, Tom Peters, author of In Search of Excellence, said:
"American manufacturers must stop thinking of themselves only in terms of their products and processes. Manufacturers must realize that they are in service businesses, only one aspect of which is actually producing a product."
Interestingly, our customers have been pushing us in this direction for years. Remember a few years ago when most of our larger customers operated their own foundries? Remember the first time a customer asked for a fully machined casting? Remember when blanket orders were the rule and JIT and MRP were merely letters of the alphabet?
Just as there is virtually an infinite variety of ways to gain a competitive edge (meaning increased margins) by decreasing costs, there also is a nearly infinite variety of ways to add value to accomplish the same goal.
To put it simply, adding value is the only positive reason for raising prices and for increasing the margin that we can expect from each sale. Some creative ways for doing this include: warehousing finished castings to smooth the production schedule (a cost-cutting tool) and assure fast order turnaround; providing casting design services; assembling cast components; training your customer's employees on how best to machine the castings you provide; and training your customer's design engineers on the advantages of the casting process and how to specify castings.
Think of competing on services this way: Now tht product quality is all but standardized in our industry, virtually the only profit-making (i.e., nonprice cutting) method for differentiating one foundry from its competitors is in the array of services it provides.
A Marketing Force
Quick. Name your company's top five competitors.
Unless I miss my guess, most of you named five foundries, right? If that's true, our industry is missing the boat. If that's true, we are overlooking the single biggest opportunity for increased sales and profits available in the domestic market for castings.
The fact is that our toughest competitor is not a foundry. It is the industry that produces steel fabrications.
Why? According to recent studies, there are three reasons. First, design engineers know all about steel but they don't know much about iron or aluminum. Second, design engineers know all about "bending metal" they they don't know much about the casting process. Third, our customers most likely have an in-house fabricating plant, but they do not know how much it actually costs them to produce the weldments with which we compete.
The bottom line here is that overcoming these three obstacles is the key to real growth potential (as the bar charts on page 35 illustrate, ACMA estimates that if castings steal 20% of the fabrications market, we can increase the size of our entire industry by almost 50%). It also is the key to some of the most profitable work that a foundry can ever hope to get.
My final suggestion is that to overcome these obstacles, we must educate our customers' engineers and management alike about their costs and the advantages of the casting process. To do that, we must employ an intelligent, enlightened and technically sophisticated sales force--a marketing force.
There is simply no other way to speak the engineer's language, much less convert him from a weldment to a casting. If we can convert him, it will be because he has become convinced that a casting will meet his needs and save him money. If that happens, the potential for profits is enormous.
An independent rep cannot and will not take the time and make the investment needed to convert an engineer. Most reps do not know nearly enough about castings or the casting process to educate anyone, much less a design engineer. A rep, all the textbooks tell us, cannot sell a highly sophisticated and highly engineered product.
In short, only a highly trained direct sales engineer can unlock the key to casting conversion. In effect, we must spend money today on a better sales force if we hope to tap this highest of all potential growth opportunities in the years to come.
When in Rome
The cliche, "When in Rome, do as the Romans do," is nearly a perfect allegory for today's foundry industry. In our case, however, "Rome" has recently been fundamentally and forever changed by unprecedented macroeconomic upheaval. The new "Romans" are from Japan.
The Japanese automakers and machine tool builders and construction equipment manufacturers have set an unbelievably high standard with which our customers are to compete. Our customers have now set the very same sky-high standards for us.
The essense of this standard is that it takes on many forms. It is high quality at low cost. It is constant change and uncertainty. It is focused niche marketing. It is strategic discipline in competing based on cost and services rather than product quality. It is dealing with new competitive forces in a mature industry.
No matter what it means, one thing is for certain: The new standard demands change. It requires that foundry managers be more selective, more sophisticated, more flexible and more proactive. Without these virtues, the unwitting foundry could find itself seriously behind in adapting to the industry's new competitive environment.
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|Date:||Nov 1, 1989|
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