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Steel Foundry Practices and Performance Benchmarking Raymond Monroe Steel Foundry Practices and Performance Benchmarking Raymond Monroe The Steel Founders’ Society regularly surveys member companies to determine the typical practices used in steel casting production. SFSA has also promoted the participation of member companies in the Performance Benchmarking survey available each year to members of participating manufacturing associations. It is useful to take a look across the results of the past several years and to reflect on some of the trends and issues that face the industry. Major Challenges Each year, SFSA surveys the entire North American steel casting industry concerning its members’ needs and concerns. Important to our consideration here is the first question of the survey: What are the most important challenges the industry faces for the next three years? The most recent answers, in order of priority, are: 1. Foreign competition, especially from China and Mexico 2. Lack of qualified engineers/ foundry talent/ employee retention/ training 3. High raw material costs/ availability 4. Cash flow/ profitability/capital resources 5. Government policies/ regulations 6. Maintaining adequate business stability These challenges are interconnected, and should be considered and included in the plans of North American producers as they organize for the next few years. How well companies are addressing these challenges emerges in both SFSA surveys and Performance Benchmarking reports. Performance Benchmarking The Performance Benchmarking report is not yet available for just steel foundries, since industry participation has not yet reached the required threshold of 20 participants. We as an industry need more plants to be involved in this worthwhile activity. Non-steel foundries also fail to achieve the threshold. As a result of our cooperation with Dan Luria at Performance Benchmarking; however, we were able to do an analysis of steel foundries and compare them with other foundries. In 2007, there were 13 steel foundries that cover a representative sample of North America; half had sales between $15 million and $60 million. The 15 non- ferrous plants were, on average, smaller: half had sales between $5 million to $12 million. This suggests that the other foundries are typically smaller businesses and may not be the best for comparisons in some categories. 91% of the non-steel foundries made castings in aluminum, 46% in copper, and 18% in iron. Table 1 Characteristics of Foundries Included Percentile Steel Foundries Other Foundries Unit price Median $1,000 $45 25% below $35 $10 75% below $3,000 $200 Production volume One to few 31% 0% Tens to hundreds 62% 47% Thousands 0% 33% In addition to the other foundries being smaller businesses, Table 1 tells us that on average they make smaller parts at higher volumes. Business Characteristics With the strong recovery in casting demand since 2004, the health of our industry has improved markedly. Sales are up and profits have improved. Table 2 Sales and Profit Improvements Steel Foundries Other Foundries Percent Change in Sales 60 33 2004-2006 Gross Profit Rate % 22 22 (Sales-Costs/Sales) Earnings Before Interest 18 12 & Tax as % of Sales As a result of the lack of capacity and relatively strong demand during the sample period, steel foundries experienced significantly greater sales growth. This of course supported the improvements in margins and profits. Table 3 Market Growth and Development Percent of Sales- median Steel Foundries Other Foundries Products sold less than 3 5 15 years Customers served less 10 10 than 3 years Industries served less 1 2 than three years Was this is the result of new customers and products, or does it reflect a cyclical rebound in demand from traditional customers? One measure of industry health and growth is evaluating how much of its sales volume is from new customers. In Table 3, foundries are compared by the percent of sales generated from new opportunities. Steel foundries are exporting more and are growing into new markets slightly more. On the other hand, on average new products still only make up 5% of sales, compared with 15% for other foundries. A healthy future will require more new product development; but few foundries reported designing their own products. Improved sales and profits may not indicate the efficiency of the business. In fact, in times of strong increases in production, it is typical for efficiencies and quality to suffer declines. In Table 4, steel foundries are shown to have significantly lower inventory turns than other foundries. Part of this is undoubtedly due to the larger castings involved, making production cycles longer. Even with the longer production times and fewer inventory turns, however, steel foundries manage to keep fewer days of receivables. Value-added per dollar of direct labor and capital costs are similar. Also similar are the value-added per square foot of production space. Table 4 Financial Performance Median Steel Foundries Other Foundries Inventory Turns 7 12 (Cost of Sales/Inventory) Average Days of 35 40 Receivables Value-Added per dollar of labor and $1.44 $1.38 capital … per dollar of $2.02 $1.50 machinery … per square foot of $96 $96 production Steel foundries have higher value-added per dollar of machinery. This may be due to the larger, more costly items made in steel foundries. It is not the result of older machinery: the value of equipment per employee is similar in the steel and other foundries. SFSA did a quick survey to try to see how much capital investment was required to increase capacity. For a steel mini-mill, a new site can be constructed for a cost of about $350 per ton per year. The typical selling price of hot-rolled coil (HRC) is currently about $600 a ton. To add a ton of capacity to the steel foundry, the costs ranged from $600 to $2,800 per ton per year. Most responses were from $1,500 to $2,000. It is interesting that the incremental cost of adding a ton of capacity seems to be related to the average selling price of the item. In trying to evaluate inventory turns, the question of the valuation of inventory is key. SFSA conducted a small survey to determine how steel foundries valued their work in process (WIP). 1. How do you value WIP? The answers generally were either some standard or estimated cost at their stage of production or some fraction of the selling price at certain gates. If valued at cost, the most common value was the full cost of production to that point. Some valued materials and energy at full cost and other inputs at some fraction (85%) of cost or of direct costs. The other approach commonly placed a value of 50% to 70% of the selling price after the casting is poured. 2. How do you value returns? Unfortunately, some answered the question of the value of revert, while others took the question to be about the value of customer returns. For the value of revert, it was common to value most revert at the current value of purchased scrap. For alloyed grades, the cost of expensive alloys is often valued at current market price. Some, however, valued alloys at the current scrap sales price for the grade. Others adjusted the cost of materials by the credit for revert. For customer returns, some fraction (70-90%) of production costs is commonly used for the value. The approach can be quite varied from a value of the full selling price to zero. 3. What is your cost system? Most used standard costs updated periodically, commonly once a year. This is supplemented by market prices for energy and raw materials, and estimates. 4. What software do you use? Many used one of the programs available from B&L Systems. Many use custom or homegrown systems. Some use Mapics or SAP. A logical question in assessing costs of WIP and other cost questions is what are the important elements of cost for steel casting production. Table 5 presents a breakdown of the percent of sales for various costs of production. Materials and labor are the largest components of cost: each is about a third of cost of sales. Table 5 Components of the Cost of Production Percent of Sales- Median Steel Foundries Other Foundries Materials 34 36 Labor 34 35 Services 8 12 Energy & Utilities 6 5 In considering the cost of materials, one issue in steel foundries is the consumption of binders and sand. Molds and molding systems can use a wide range of materials to produce a ton of finished casting. If only chemically bonded sand is considered, the results are as shown in Table 6. If the typical sand-to-metal ratio is 5 and the binder content is 125, then the typical binder level is 1.25%. It seems that we use a lot of sand by volume. Sand is about 1/5 the density of steel so a 5:1 sand-to-metal ratio means 25 volumes of sand for each casting volume shipped or, at 50% yield, more than ten volumes of sand to steel poured. Table 6 Binder and Sand required for Steel Casting Production Binder (Lbs/ton) Sand (Tons/ton) New Sand (Tons/ton) Castings shipped Castings shipped Castings shipped Median 126.0 5.1 0.5 range 193.5 9.0 0.3 SFSA solicited energy used plant-wide to produce a ton of shipped steel castings. As can be seen in Table 7, induction melting shops use more electricity and gas to produce a ton of castings. One would expect this, since the batch size is smaller and the energy efficiency is related to the modulus, volume to surface area. Electric Arc Melting has lower average energy requirement. An earlier (1977) SFSA study underreported the electricity required, but had a credible estimate for gas.
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