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Compatible castings create focus and enable the company to achieve the best quality, lowest costs and highest levels of customer satisfaction.


bring in compatible parts and manufac- turing achieves high quality, low cost and strong productivity with these parts, profit maximization will occur. Compatibility makes profit maximi-


zation possible, and an advanced man- agement approach enables metalcasters to make good on that opportunity. Such an approach explicitly acknowl- edges the primacy of profitability, as well as the reality that metalcasters cannot produce or grow their way to profit maximization but must instead manage their way there. Specifically, the approach is rooted in advanced management strategies that include compatibility and focus, and utilizes advanced manufacturing, marketing and other tactics that are strongly syn- ergistic with these strategic principles. A robust business performance man-


agement system is at the heart of the advanced management approach. Many metalcasters have long attempted to exert some control over business performance through the use of ineffectual and often counterproductive budgets and variance analyses, but the advanced management approach demands more than these tools. Rather than trying to figure out what happened long after the month has closed, as budgeting does, the ad- vanced approach includes a proactive, predictive, real time operational and financial target-setting system, which can impose the operational and finan- cial control required to support large and sustainable improvements in plant performance and company profitability. In contrast to budgeting, such a system enables management to control business performance and frees it (to the greatest extent possible) from the vagaries of demand and the tyranny of the top line. Profit-oriented leadership is another


essential facet of the advanced manage- ment approach and dictates that CEOs can be neither production-oriented nor sales-oriented but absorbed full-time in directing and coordinating the busi-


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ness for profit making. The CEO should embrace the goal of profit maximization over time and understand that a strategy rooted in manufacturing and marketing focus, rather than capacity expansion and sales growth, is the right path forward. In other words, the profit-oriented leader fully appreciates that profitability only can be maximized in an environment of finite capacity and sets the direction for focus, compatibility, capital conservation and superior profitability. Compatibility and focus at the stra-


tegic level, plus the tactics inherent in the advanced management approach, combine to create synergy throughout a business, especially between the manu- facturing and marketing functions. That synergy results in a cascading series of positive effects on plant performance, cost, customer satisfaction and mar- keting success and ultimately creates a multiplier effect which can boost profitability from the industry norm (2-5% pre-tax when demand is up) to 10, 12 and even 15% pre-tax virtually all of the time. The interconnectedness of compatibility-driven strategies and advanced management tactics makes profit maximization possible and opens the door for profit-oriented pricing.


Tactics of Profit-Oriented Pricing Profit-oriented pricing is a central


tactical element within the advanced management approach, but a metal- caster’s ability to use it to maximum effect depends on the prerequisites compatibility, focus, improved plant


performance and customer satisfac- tion. These work together to drive manufacturing effectiveness, improve customer satisfaction, maximize pric- ing flexibility, open the door to profit- oriented pricing and enable the astute metalcaster to combine “best cost” with “best price.” Profit-oriented pricing begins with a


clear definition of compatible castings. When considering compatibility, met- alcasters should look at their existing part populations to develop a work- able definition. The parts that flow smoothly, create few (if any) problems and earn solid profits—and the parts similar to them—are compatible. Com- patibility is expressed in terms of the five attributes customers use to value castings, including: • Casting complexity—the more com- plex the coring and/or casting geom- etry, the greater the perceived value; this is the strongest rule and accounts for the greatest value premium.


• Volume—the lower the volume, the higher the value.


• Alloy—the higher the alloy content, the greater the value.


• Order complexity—as the number of value-adding steps in the order increases, so does its value in the marketplace.


• Size—the larger the part, the greater the value; this is the weakest rule and ac- counts for the smallest value premium. In considering the above, metalcast-


ers must not confuse cost with value. While costs change as each of the attributes listed above increases, an additional and increasing increment of value beyond that increased cost is created at the same time. It is this extra value component, the value premium, which profit-oriented pricing is aimed at quantifying and capturing. Profit-oriented pricing is also market


pricing, which means metalcasters must abandon cost-plus pricing and reconsider their costs and cost sys- tems if they hope to stay on the path


Metalcasters must abandon cost-plus pricing and reconsider their costs and cost systems if they hope to stay on the path to profit maximization over time.


MODERN CASTING / January 2011


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