CEO Journal Winning Ugly Dan Marcus, TDC Consulting Inc., Amherst, Wisconsin
latest equipment required for lowest cost production? Mustn’t we be invest- ing at least twice our depreciation just to keep up? Shouldn’t we be trying to take expensive and unpredictable labor out of the production process? Isn’t new equipment really cool? While the answers to each of these discrete questions may be debatable, one thing is undeniable: with few exceptions, equipment has little to do with how profitable metalcasting businesses can and should be. Metalcasters whose strategy is to be
S
the absolute low cost producer are the exception to this general rule. These scale-oriented production shops must seek at all times and in all ways to minimize cost and increase capacity and utilization so that turnover can transform razor thin job margins into acceptable bottom line company profitability. In these businesses, equipment definitely does matter, but it is not all that matters. For even in these efficiency-driven busi- nesses, equipment can only produce castings, while it is superior manage- ment that produces superior profits. For the 95-plus percent of metal-
casters out there that cannot hope to succeed by competing on cost, profit making is all but entirely about superior management, and all too often poor decisions about the perceived need for capital investments are a root cause of their inability to earn superior results. One such case I cite often is that of a rust belt iron foundry that spent extrava- gantly on a new furnace so it could also produce steel castings. Not only did the investment shackle the company to a debt load it couldn’t bear, but the expanded product mix the investment made possible also created such chaos within the office, plant and customer base that the whole business began to suffer, and minimal profitability turned
50
ome of the oldest, ugliest foundries are to be found in our industry’s most profitable metalcasting businesses. But how can this be? Isn’t the
quickly into recurring losses. As is too often the case in our industry, this man- agement team tried to cure its profit- ability problems with more production and compounded its error by adding huge amounts of debt as well as new and anti-synergistic capacity. So, good management drives supe-
rior profitability over time, but what exactly does “good management” mean? Many things, but foremost among them is a single-minded focus on compatible castings—those parts the company should be producing because they fit perfectly with current manufacturing capabilities. Compatibility gives rise to another one of those undeniable management truths: that no advanced manufacturing or quality management approach will be able to create manufacturing success or generate meaningful operational improvements if the marketing depart- ment sells the wrong products. For example, no one would argue
that a high volume aluminum diecaster should attempt to produce 50,000-lb. boat anchors in order to grow rev- enues or increase profitability. The operation couldn’t possibly succeed no matter what or how hard it tried, and merely trying would likely precipitate a business disaster. But it’s equally true that, for every increment a metalcaster moves away from a part population that is purely compatible, it is setting itself up for eventual bottom line trouble, not of the sudden and catastrophic kind but by something akin to profitability death by a thousand cuts. Like the marketing organization that
moves the product mix too far from its compatible sweet spot is sowing the seeds of manufacturing and business failure, the operational organization that forgets the tenets of manufactur- ing strategy also sows the seeds of its own failure. A glaring example of this common occurrence is that of an iron
Equipment has little to do with how profitable metalcasters can be.
foundry that produced small parts, in prototype quantities, in one of the ugliest foundries I have ever seen. It was so ugly—and so profitable—that a well-known business magazine wrote a feature story about it. But trouble arose when the owners decided to invest all that profit in new automatic molding equipment and in so doing violated the first rule of manufacturing strategy: that flexibility and efficiency are mutu- ally exclusive, and a manufacturing opera- tion that attempts to do both will succeed at neither. The bottom line for
this metalcaster was that its marketing approach and profit generating success were rooted in manufacturing flexibil- ity—in its ability to make just about any small iron casting, in any alloy, in any quantity, and deliver it in just about any timeframe customers wanted. Much of this capability went out the window when the new molding lines came in, as such machines are designed for longer production runs of a much less diverse product mix. This fundamental strategic contradiction put an end to the company’s ability to generate superior profitability and also hamstrung its ability to support its long-established business model. Our industry is replete with well-
known examples of businesses that fail because they try to cure a management problem—chronic low profitability— with new equipment, debt and more production. But instead of walking this unfortunately well-worn path to nowhere, CEOs should consider the road less travelled, the reality that management rather than equipment produces superior profits, and the virtues of winning ugly.
MC
Keep the conversation going. Reach the author at
tdcmetal@wi-net.com to comment on this or any CEO Jour- nal column or to suggest topics for future columns.
MODERN CASTING / February 2011
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76