CEO Journal
Combine Volume and Value for Maximum Profit
Dan Marcus, TDC Consulting Inc., Amherst, Wisconsin
over time, and there are two leading schools of thought about the best path to that goal. According to the first, the best path to profitability is by way of filling, even over-filling, the foundry. Others believe instead that the surest path to profitability goes through pric- ing for superior profit margins. The tension between these schools
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of thought is one reason why we need CEOs, and why we need CEOs who are neither operations-oriented nor marketing-oriented, but profit-oriented. The profit-oriented CEO knows well and lives by what famed management consultant Peter Drucker wrote decades ago: while volume or value can often bring profitability, the CEO’s mission of maximizing profitability over time can only be achieved through the optimal combination of volume and value. This bedrock management principle
has profound implications for CEOs. For example, when thinking about the top line, the key is better revenue, not more revenue. In other words, metalcasters need to zero-in on the set of “compatible” castings the foundry should produce and take a pass on the castings it could produce. While even the naysayers agree that
a product mix filled with higher margin work is better than one full of low or no margin parts, they claim not to believe that enough higher margin work exists, even in normal economic conditions, to fill their particular foundries. Really? First of all, the global market for metal castings remains stable and huge, and the North American market is among the biggest on earth. As a result, no single U.S. metalcasting conglomerate owns much more than 3% domestic market share, and even the 50 largest U.S. metalcasting companies, taken to-
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etalcasters are in business to make money, not to make castings. Specifi- cally, we are in business to maximize profitability
gether, account for only half the market total. Given that ours is among the most highly fragmented of all industries, it is unreasonable to suggest there isn’t enough strongly profitable work out there to fill up the typical foundry. Second, the great majority of cast-
As cash becomes available, CEOs need to create better capacity, not more capacity.
ings always have had strong margin potential, and metalcasters need only improve their pricing to unlock that potential. The pricing tactics outlined in the August CEO Journal (“Time to Rethink Pricing,” p. 41), along with a strong backbone, can help turn the great majority of castings already in production into high margin work and your company into a strongly and consistently profitable one. And for the small number of parts that are beyond such help, the answer is simple: replace them. As we climb out of the recession,
CEOs need to take a hard look at their product mix and begin to move beyond the fiction that filling the foundry is their prime directive, that all revenue is good revenue, and that foundries actually need some higher volume, minimal margin jobs in their product mix to fill their capacity and absorb fixed cost. Sure, this work does absorb fixed cost, but it also wastes valuable capacity that could be used for work that is profitable, even highly profitable, in its own right. It also adds cost by contributing to destructive, chronic overtime and acute problems that are nearly impossible to quantify, including premature equipment failure, low morale, avoidable accidents and injuries, unnecessary quality mishaps, and deteriorating customer service
and satisfaction. So, as the economy improves, metalcasters need to move resolutely away from “more revenue” and toward the higher margins only “compatible revenue” can support. The same is true for capacity. As cash
becomes available, CEOs need to create better capacity, not more capacity. In other words, they need to focus on real- izing the full profit-making potential of the capacity that already exists. Doing otherwise leads deeper into the ma- ture industry cash trap where, despite rosy job margin and net-present-value predictions, expansions and capacity- boosting productivity improvements inevitably fail to generate the bottom line return needed to justify their cost. Moreover, expanding capacity inflames an insidious itch for more sales—too often the wrong sales—to keep the foundry full. Both phenomena tend to feed upon themselves until the metal- caster ends up with a higher top line, a lower or non-existent bottom line, a diminished ability to generate cash, a crushing debt load and a financial disaster waiting to happen. Instead of productivity improve-
ment or capacity expansion, a volume- oriented capital investment strategy should be married to a value-oriented marketing strategy and together should be aimed at creating a more perfect match between marketplace needs, product mix and foundry capabili- ties. As that match improves, synergy between marketing and operations grows exponentially and drives out cost, multiplies opportunities to cre- ate profit, and generates real cash and bottom line returns. It is this synergy, and all that goes into it and flows from it, that is the elemental driver of long- term profit maximization, and as such is the CEO’s prime directive.
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Keep the conversation going. Reach the author at
tdcmetal@wi-net.com to com- ment on this or any CEO Journal column or to suggest topics for future columns.
MODERN CASTING / October 2010
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