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often receive emails like this recent one: “We have almost doubled volume, cut rejections, make a beautiful casting . . . but we are struggling to make a profit. Do you have a magic ‘to do’ list to fix this problem?” While I do have a process for turning struggling metalcasters into star profit performers, there’s nothing magic about it. In fact, I’ve been reveal- ing the secrets in this column for years. Te best kept secret, apparently, is that metalcasting businesses can and do consistently earn double-digit monthly pre-tax profits. To get there, as I wrote in April’s initial column in this Tinking Like a P&L series, CEOs first need to free themselves from the inclinations of operations and the dictates of accountancy. Tey then need to work full-time at making profit, rather than focus on making cast- ings, by accepting that metalcast- ing is not a high-fixed-cost busi- ness and emphasizing margin rather than volume. June’s second installment in the series described how a robust performance management system can enable metalcasters to control their financial destinies and break their de- pendence on demand and volume. In this third and final series install-

ment, thinking like a P&L extends to marketing and manufacturing and to a management approach which fun- damentally realigns the relationship between P&L revenues and costs, with the ultimate result of creating superior profitability by substantially shrinking the percentage of revenues eaten up by the cost of goods sold. Such a realign- ment is sparked when a business strategy rooted in compatibility begins to create synergy between the marketing and manufacturing functions. Compatibility is the “fit” between the part population and production capabilities, and synergy happens as product mix compatibility is enriched. Beyond changes in manage- ment philosophy and focus, concerted action to enrich product mix compatibil- ity and strengthen synergy is the engine required to drive superior profitability.

Even More Thinking Like a P&L Statement I


facturing by shifting operations’ focus from “volume at any cost” to “removing cost from the volume we already have.” Above all else, that shift means elimi- nating “losers” from the part popula- tion. Tese parts—which clearly do not fit and thus do not belong—generate significant scrap, create huge measur- able and un-measurable inefficiencies, cause chronic overtime, and otherwise generate wastes that drive the P&L’s cost of goods sold to profit-killing levels. Losers exist at every metalcasting

When CEOs think like a P&L, pre-tax profitability can reach levels many still believe must be magic.

business that I know of and are a vastly underappreciated evil that bring with them profoundly negative P&L cost and profit consequences. And all the volume in the world can’t overcome the P&L drag caused by losers; in fact, more volume typically makes the “struggling to make a profit” problem worse. Beyond jettisoning losers, CEOs must

also act to redefine manufacturing success in terms of quality rather than production. On the one hand, this means emphasizing dollars and de-emphasizing tons, as well as changing manufacturing’s key success metric to the cost of poor quality. On the other hand, CEOs need to empower a production design team to aggressively upgrade casting design, tooling, rigging and production design to fix parts that are compatible, and therefore do belong, but nevertheless run at unacceptable scrap levels. As the product mix is cleaned up, counterproductive volume is elimi- nated, the cost of poor quality plummets, productivity skyrockets, waste is destroyed, and the P&L’s cost of goods sold shrinks while bottom line profit expands. Compatibility and, in turn, synergy and profitability must be relentlessly

pursued from the marketing side as well, and doing so is mainly about mix and margin enhancement. Mix en- hancement means the marketing de- partment needs to give up its top line sales orientation and actively facilitate decision making and action taking to shed losers and other non-compatible parts. Beyond this short term impera- tive, mix enhancement also requires that marketing success be redefined so margin is valued over revenue and only carefully selected target accounts are called on and compatible castings quoted and brought in. Margin enhancement, from

the marketing perspective, means profit-oriented market pricing. It’s a fact that decades of cost-plus pricing, aimed at growing top line sales, has left most castings un- derpriced and starved for margin. Market pricing is the cure for this problem and, in the immediate term, requires that metalcasters re-

price their existing portfolio of business to the market-based standard. Beyond this near term objective, market pricing enables and impels metalcasters to shift their business development focus from making the sale to maximizing margin on the new sales they make. Assembling the profitability

engine, shrinking the percentage of revenues eaten up by the cost of goods sold and, thereby, consistently earning double digit pre-tax profits is a chal- lenging but eminently doable two- track process built on a foundation of enlightened financial performance management. Te manufacturing track seeks to eliminate waste and boost bottom line profits by mak- ing big reductions in P&L costs. Te marketing track enables similar bot- tom line gains by growing cost-free P&L revenues. And when CEOs and their management teams think like a P&L, pre-tax profitability can in fact reach levels many in our industry still believe must be magic.

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August 2011 MODERN CASTING | 49

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