Success Strategies for Job Shops
A veteran casting buyer lends his view on cultivating a business that can weather any economic storm.
Sergey Ershov, D.Eng., MBA, Siemens Ag Energy Sector, Power Generation Division, Duisburg, Germany
(Click here to see the story as it appears in July's Modern Casting.)
Metalcasting is a tough business. Price pressure from customers and competitors, rising labor costs, quality problems and lack of qualified personnel pose challenges for executives. Daily work must not distract them from the main task: long-term survival and growth. After years in a metalcasting plant and then as a casting buyer on the global market, I have observed six main criteria that are vital to the long-term success of a job shop.
1. Serve different market segments and diversify your customer base.
Successful metalcasters serve different markets and have a wide range of customers. Over the years, these companies have conquered new market segments. At the same time, they did not drop old customers just because it was possible to earn more money in new markets.
Often, jobbing metalcasting facilities are overexposed to one certain market. For instance, if 70% of sales go to different customers in the same field, then it might become dangerous when that segment drops. Should this market stagnate for longer than expected, banks may cut credit lines and the metalcaster will go bankrupt.
An example for such a sales strategy occurred in Europe from 2006 to 2008. There was an overconcentration in the market for large ductile iron castings for wind turbines. Large iron casting providers took bank loans to expand their capacity based on expectations that market growth in this segment would last forever. Huge overcapacities were built. Several metalcasters signed capacity agreements with customers guaranteeing a certain sales volume until 2013. Back in 2008, it seemed like a very long time. Today, these agreements have expired, the bank loan is not yet fully paid back and the market for heavy iron castings is still down. Of course, these newly built shops will not disappear, they will only change owners, but it is not a positive situation for owners, employees or casting buyers.
At that same time, many customers acting in markets such as conventional heavy machine building or energy equipment faced serious troubles because of the bottleneck on the supply side. Former suppliers reduced their share, explaining it as a change of strategy toward concentrating on producing components for wind turbines. So, casting buyers served by these metalcasters were forced to establish a new supplier base. When the market for wind turbines dropped, the situation changed dramatically, but it was too late. Casting buyers continued to buy from the suppliers who supported them in difficult times and did not come back to old vendors.
Interestingly enough, family-owned metalcasting businesses in the third or fourth generation were more disciplined in that market situation than businesses owned by several stakeholders or financial investors. They had already survived multiple recessions and had a main strategy to ensure sustainability of the business. Metalcasting facilities run by financial investors are looking first at maximization of returns at all cost.
Such manufacturing booms will come again, but in different markets. Now there is a growing bubble in the market for some steel components.
Preferably, the share of sales for one market segment will not exceed 25%. One customer must not represent more than 10% of total sales; otherwise the dependency on this customer can be too strong. Some metalcasters’ strategy has become to lean the customer base and reduce the number of customers to 10-20 companies, using lower sales cost as an argument. This might work well for large automotive foundries, but it is not a good strategy for midsize and small jobbing foundries. It is relatively easy to get rid of a customer, but it is difficult to acquire a new one. Some successful jobbing metalcasters in Europe have more than 200 customers, some of which are small and buy only several parts per year. Interestingly, even in the deepest recession, they still buy this small amount of parts, whereas big customers drastically reduce order volumes.
A metalcasting CEO must possess an iron discipline not to be seduced by fast money in new markets. Growth and expansion, yes, but in a careful, well thought after way.
2. Produce well-balanced product mix and never lose contact to market reality.
Successful metalcasters readily take new challenges and are willing to take new products into their manufacturing program, despite the high risk of scrap with new parts. As a result, such companies learn to produce more complicated parts and improve their market position.
In many cases, metalcasters decline to take new, complicated parts into their manufacturing program, even if such parts would fit their capabilities perfectly. It is a risk to try something new, and where a spirit of entrepreneurship is lacking, I’ve been told, “You know, we don´t want to manufacture this part. We want to have fun with our castings.” Next time, this vendor will not even get an inquiry for a new product and a long-term buyer will end the business relationship with the vendor. The reason is simple: a strategic supplier must be able to support its customer in the development of new products. If a supplier does not want to do so, then it is not the right partner.
Another problem in many metalcasting companies is overestimating the complexity of parts being cast. This is often nourished by middle management on the shop floor. They might think technical problems overcome in development cannot be defeated in other facilities. This conceit misleads management, and sales also starts thinking the facility is a single source for this type of product. This is a big mistake. Good casting buyers will never allow for a long-term dependency on a single-source supplier. He or she will investigate the market and finally find a second source. Even if in the first year a new supplier cannot deliver 50% of the needed volume, it will be able to deliver more with every month of production, in many cases at a lower cost than the main supplier. Whereas the first metalcaster relaxed and did not improve its manufacturing process, the second learned to do it at lower cost and more efficiently, right from the start.
Concentration only on complex parts and neglecting parts without any special requirements also is a mistake. A good mix in tonnage is about 60% complex castings with big share of labor (for example, NDT testing, machining, etc.) and 40% simple parts without any special requirements.
3. Know your production costs.
The difference between a good casting supplier and an average one often is knowledge of the exact production costs of individual components. Regular comparison of quotes from different facilities shows that many have a vague idea about their production costs.
In facilities that are managed in a professional way, every new product undergoes a recalculation based on real production hours and cost after manufacturing one or two batches. Many metalcasters don’t do this extremely important step, which is vital to accurate cost estimates in the future.
A good control department is vital. An experienced controller pinpoints the main production problems and shows potential for productivity improvements.
4. Permanently optimize processes in the shop.
It is simple. There are three main factors responsible for the success of a jobbing facility: delivery performance, quality and price. The majority of metalcasting job shops in Western Europe and the U.S. cannot compete on price, so they must be good in terms of quality and delivery performance. Higher price can be accepted only if parts are delivered on time with the right quality. Poor delivery performance results from poorly managed processes and a lack of production discipline in the shop.
Today, a machine building company in Europe can secure an order from a customer only when it can offer better delivery times than its competitors. For the buyer, it means castings must be delivered precisely at a confirmed delivery date. If the metalcaster doesn’t realize how late delivery of castings impacts its customer, it incurs penalty costs.
For example, a machine builder needed three different heavy bearing casings for one compressor manufactured from steel alloys by a hand molding process. The buyer ordered 30 bearing casings for 10 compressors, and the metalcaster delivered 27 just in time and the remainder two weeks later. Its on-time delivery performance was 90%, but the customer delivered three compressors two weeks late. As a result, its on-time delivery performance to the end-user was only 70%. Such a situation can become costly for the casting buyer’s company. The end-user, such as a steel mill or air separation plant, buys a new compressor train once every 20 or 30 years. It is not really thinking about a long-term strategic relationship with a machine building company, so it will charge a penalty. Penalties from final customers can easily reach hundreds of thousands of dollars, far exceeding the value of late-arriving steel castings.
An experienced casting buyer can see how processes are organized in a metalcasting facility. If there are too many castings at some work stations, a dirty work shop or no clear identification tags on parts, poor delivery performance can be expected. In many cases, when this situation is addressed by management, the casting buyer hears that other facilities are just as bad as this one.
Successful jobbing metalcasters, especially in hand molding, have identified this problem and started to implement lean manufacturing. They have shifted from push to pull manufacturing and reduced lead times by 30%. Manufacturing discipline also has improved significantly.
Interestingly, for a casting buyer, it can backfire in some cases: despite total improvement of delivery performance, in some cases the buyer might ask the metalcaster to deliver two or three weeks earlier than previously planned. The metalcaster might refuse to do so, as it would endanger deliveries to other customers. The casting buyer might not be happy in this moment, but in general he or she is much more satisfied with this particular supplier than with other competitors on the market.
5. It is all about sales!
Two similar metalcasting facilities have the same production lines and equipment, they manufacture castings on the same quality level and they have similar delivery performance. One company is successful and growing, whereas the other earns just enough money to survive. The reason is often simple: the successful metalcaster has better sales personnel.
A good floor shop engineer is not automatically a good sales person. In many metalcasting facilities, sales departments are staffed with good metalcasting engineers who are bad sales people. In some cases, it is worsened by arrogance inadvertently shown to the buyer. That personality profile is not suitable to the job. Of course they know their facility and products, and they are good specialists, but the casting buyer has purchasing orders that are vital to the business.
Successful metalcasting sales personnel must know their customers’ needs and be able to answer these questions:
How many products (machinery, tools, etc.) does my customer manufacture per year? How big is my market share at the customer?
For how many parts is my company a single source? Why? What is the customer doing to avoid his dependency?
Who are my competitors?
What are their strengths and weaknesses?
What are potential substitutes? Can my cast parts be substituted by welded structures? In case the answer is yes, then what can be the price of such a welded structure and what are delivery times? (In recent years, a clear trend toward welded structure substitutes of castings, especially for project business, has occurred where the demand can be only one or two castings per project and delivery time can be long enough. Also, tooling costs can lead to the increase of total cost of parts.) Does my customer work on substitution of cast parts?
What do I offer my customers to bind them better to my company? Do we develop products together? Who is my contact in the customer’s design department? Do I regularly invite customers to workshops about new developments?
What is the level of my price offers? Do I call the customer after submission of offers and ask him/her if my offers are competitive? (In about 60% of cases I’ve observed, the sales department of the metalcaster submits an offer and does not ask later about its competitiveness. This is a waste of resources, as the offer stage already costs money and not asking about further steps is akin to throwing money out of a window.)
An honest communication policy toward customers is vital to the success of the metalcasting job shop. Nothing makes a buyer angrier than receiving an email one or two days before a confirmed delivery date stating the castings will come later, as if it was not known or foreseen in the metalcasting facility a couple of weeks before.
6. Train and educate your people.
German or Austrian metalcasters are supported with an educational system for personnel. After school, a young person starts an apprenticeship with a manufacturer, works and studies for three years, then becomes a regular employee. Such a system leads to high quality standards and productivity. This is especially important for hand molding metalcasters, where it is impossible to produce high-quality products with a poorly trained workforce. If the system of vocational education is not strong, metalcasters need to train and educate their workers. High retention of personnel is equally important.
Long-term business success for a jobbing metalcaster requires diversification of markets and the customer base, optimization of the product mix, a well established controlling system, process optimization, careful personnel selection for the sales department and workforce education. Every metalcaster undertakes activities in these areas, in one form or another, but in most cases these are only punctual, non-systematic actions. The key to success is a permanent self-analysis and sustainable improvement steps. In the casting business, huge leaps are impossible; we need to meticulously improve every area, every process and never stop asking self-critical questions to avoid coziness and overconfidence.