Today, most segments of the met-
alcasting industry remain decidedly mature, as they have since around 1980, while some have more recently tipped into decline. Traditional ROI and other financial analytics were developed in the 19th century when America’s industrial economy was young and prospects for growth appeared to be limitless. Growth does much to mask bad management decisions, and the absence of growth in our industry has illuminated ROI as an unsound deci- sion making tool. Simply put, investing for growth is folly in a zero-growth environment, and regardless of wishful thinking disguised as financial analysis, the only thing such investments guar- antee in today’s world is increased debt. Moreover, debt- and capacity-
driven top line growth rarely gener- ates the desired bottom line result, as maturity compels growth-oriented investors to disrupt the all-important and increasingly fragile relationship between supply and demand, wage war over market share and, invariably, drive prices down, take on unforeseen costs, generate too much scrap and alter the relationship between revenues and expenses in such a way that meaning- ful profit improvement becomes nearly impossible. Worse yet, such ROI- fueled exercises distract us from more pressing and profit-oriented invest- ment opportunities.
ROI and Manufacturing Management “Operations guys” love new equip-
ment. ROI invariably validates this fixation through its assumption- laden bias for growth and by its unmatched ability to divert attention from con- temporary profit-making realities, including the fact that for plants other than scale-driven production shops, equipment has almost nothing to do with profitability. Some of the most modern foundries I’ve seen have been at liquidation auctions, and many of today’s most profitable metalcast- ers – businesses earning upwards of 15 percent pre-tax—proudly describe their facilities as “older than dirt.” When they do think about reduc-
ing costs, operations guys and their financial accomplices tend to think about job costs and higher mold-
ROI invariably validates our
industry’s fixation with equipment through its assumption-laden bias for growth and by its unmatched ability to divert attention from contemporary profit-making realities.
ing speeds. But job costs are literally not real, and major investments in increased molding speed too often result in companies being run into the red at higher speed. When genuine cost reduction projects do arise, ROI tends to favor isolated, penny-wise and pound-foolish savings that help optimize one part of the plant but too often ignore or even work against optimizing the whole. Tis reality illustrates another major flaw in the ROI approach, and highlights the extent to which it is out of step both with maturity and contemporary manufacturing man- agement. Teory of Constraints and similar systems eschew isolated cost reductions and instead emphasize systemic improvements that boost productivity and/or shrink the busi- ness’s cost structure. In other words, they seek to improve the overall sys- tem of production, knowing that doing so will shrink cost structures, increase capacity for free, boost productivity and turbocharge profitability. Tis kind of thinking, and the analytics required to support it, are beyond traditional financial tools like ROI.
ROI for the 21st Century
Facilities and equipment were the most important competitive weap- ons in the late 19th and early 20th centuries, when “More production!” was what really mattered and growth seemed limitless. It was in the 1920s that the Harvard Business Review
anointed ROI as the latest and greatest management tool, and its use was most beneficial in the following 40 years. Quality, productivity and lead times
became the key competitive weapons later in the 20th century, as growth gave way to industry maturity, global competition intensified, and customers demanded quality, delivery and price. Now, more than a decade into the new century, management thinking in our industry has only partly evolved from growth to maturity, as for most the 19th century financial mindset and investment model continues to be the go-to source for solutions to what are uniquely different challenges. Managing for maturity means
embracing the new century’s key com- petitive weapon—human resources— and removing traditional financial return as an obstacle to investing there. Managing for maturity also means put- ting a stop to investing in equipment and for capacity expansion and growth. Instead, metalcasters need to invest in people and to shrink cost structures and boost competitiveness via improved quality and short lead times. Likewise, managing for maturity means finding better ways to think about and mea- sure the costs associated with scrap and non-competitive lead times, and it means exploring new ways to steer investment dollars to improving perfor- mance in these critical areas. In maturity, and along with market
pricing, scrap is metalcasting’s most important profit driver. Tis essential
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