Steel Foundry Practices and Performance Benchmarking Raymond Monroe
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1 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 nonferrous 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%
2 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 Gross Profit Rate % (Sales-Costs/Sales) Earnings Before Interest & 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 years 5 15 Customers served less than 3 years Industries served less than three years 1 2 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.
3 Table 4 Financial Performance Median Steel Foundries Other Foundries Inventory Turns (Cost of Sales/Inventory) 7 12 Average Days of Receivables Value-Added per dollar of labor and $1.44 $1.38 capital per dollar of machinery $2.02 $1.50 per square foot of production $96 $96 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.
4 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 Labor 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 range 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. The 2004 DOE report on typical energy required gave a reasonable estimate, based on our survey. Table 7 Energy required making a Ton of Steel Castings Electricity kwh/ton Natural Gas scf/ton Natural Gas mmbtu/ton EAF Average EAF Standard Deviation IF Average IF Standard Deviation SFSA DOE
5 Quality Table 8 Quality Performance Quality- Median Steel Foundries Other Foundries Customer rejects 0.85% 1.0% Scrap Rate 3.5% 3.4% Scrap and Rework as A percent of COGS 3.9% 2.4% Labor hours spent on rework 2.6% 1.0% On time delivery 90% 87% Expedited jobs bump planned production 5.0% 10.0% Premium freight as A percent of sales 0.033% 0.031% Quality is frequently assessed by the level of rework, scrap and returns. Typical levels are 5% scrap and less than 1% customer returns. Rework is a cost of production and not generally measured meaningfully. It may be more useful to track finishing operation productivity or weld rod consumption. Weld rod consumption is dependent on product type and size. Typical values are 12 to 15 lbs/ton. Many operations are able to get to less than 7. It is typical for 75% of the cost of finishing to be unexpected grinding and finishing. Important measures of finishing are work in process and throughput times. Typically the process map shows less than 20% of operations are value-added. Measuring first time through capability can be another useful measure; typically, this is around 60%. Maintenance and Repair Twenty member plants submitted results for the survey on maintenance and repair costs per ton of castings shipped. This is a tricky question. Some contract out some of this effort, especially fork truck work. It is not clear how to account for environmental equipment. Is the upkeep part of M&R or an environmental cost? Also, like sales and marketing, lower costs may not always be better. It may be that some higher level of investment is needed to ensure maximum uptime. The range of expenditures went from around $100 to over $1,000 per ton. The lower numbers were from larger arc furnace shops, with a typical number of about $110 for labor and $165 for material. For a base of selling price of $3000 a ton, this would represent 9%. Induction furnace shops had higher average results, with a typical value of $350 for labor and $350 for material, for a total of $700 per ton. In terms of labor required, what is the ratio of maintenance hours to production hours? Maintenance hours are reported to range from 6% to 14% of operating hours. One plant targets their maintenance costs as a percent of gross sales in the range of 10% to 15%. If too little is done, the plant is inadequately maintained; if too much is done, then there is no value-added. Labor Labor productivity improvement is critical to remaining competitive. Improvements in productivity allow higher wages, absorption of rising benefits costs, and improved profits. Measuring profitability remains an open question. The Bureau of Labor Statistics has a report on productivity improvements from 1987 through Several metalworking industries are shown in Table 9.
6 Table 9 Productivity and Costs by Industry, % change per year, Type of Production Output per Output Hours Compensation hour % % % % Foundries Forging Machining Fabrication Steel products from purchased steel Unit labor costs % Foundries taken as a whole reflect typical improvements. Each member company can calculate their own performance against this standard. You can use change in output per hour worked as a measure of productivity. This could be done on the traditional basis of hours worked and tons shipped. It could also be done based on number of castings shipped. If the improvement per year averages less than 2%, you are falling behind in the race to compete. If you exceed 3% on average, you should remain competitive with the bulk of industry. This productivity can also be evaluated by operation. Is melting improving? Is labor productivity in molding and core-making improving? How much productivity improvement has been seen in finishing? An alternative measure of labor productivity is annual sales per employee. The goal in most manufacturing is to exceed $150,000 U.S. per year based on total employment. Steel foundries often fail to even achieve $100,000. This is reflected in our poor profitability and lack of reinvestment. This measure can be artificially improved, however, by outsourcing labor intensive operations, as the large OEMs do. The other output approach outlined above can also be fooled by maximizing the material flow and shipped tons of less difficult and less profitable work. Thus, many traditional measures of casting productivity are of limited value. In general job shop operations, labor productivity is typically around 70 manhours per ton; but railroad shops are the most efficient, with a typical value of 35 manhours per ton. Many shops are even better than that, with less than 30 manhours per ton routinely and with just 20 as a goal. Iron foundries in high production environments may get to averages below 15, with individual parts less than 10. Table 10 Labor in Steel Foundries Labor Steel Foundries Other Foundries Value added per FTE $78,000 $72,800 Average hourly wage $16.00 $13.89 Benefits as percent 18.2% 17.3% of labor costs Turnover Rate 38.4% 22.2% Shop payroll as percent 74.2% 75.3% Of total payroll Manual labor as percent 80% 84% of shop payroll Rework as percent 2.6% 1.0% of shop hours
7 A number of measures of labor contribution to steel casting production are included in Table 10. Value-added per full time equivalent (FTE) is a more precise way of evaluating the contribution of the employees labor. Steel castings are better than the smaller, higher production shops included in other foundries. Steel foundries pay higher wages, yet still have a higher turnover rate. This is consistent with the SFSA survey on employee retention. Employees leave because of the difficult work environment. We must improve working conditions, but we will still probably need to outbid others for the labor we need. We also have benefits which are a significantly higher percentage of a higher hourly rate. Our production does not require more manual labor than other foundries, but we do require more in rework and reprocessing. Retention of new hires is an ongoing concern for steel castings producers. SFSA did a survey of members to determine the extent of the issue. What are the top 5 reasons ranked by importance of employees leaving employment from steel foundries? Summary of reasons number of citations Wages / Better Job 17 Difficult work 13 Cause 7 Attendance 6 Retirement / Death 4 Acceptance by coworkers 3 Transportation 3 Benefits 2 Shift work 2 Drugs / Alcohol 1 Incarceration 1 Disabled 1 Only foundry in town 1 What is the seniority of the employees terminating employment? Summary of Results Less than 1 year 55% 1 to 2 years 17% 2 to 3 years 6% Greater than 3 years 8% What new ideas are being tested to improve employee retention in the steel foundry industry? Answers included: better screening buddying more flexibility in hours or attendance better training safety emphasis better wages targeted bonuses In steel casting production, the finishing area is particularly difficult. For the foundry as a whole, average turnover was 36% with the range being from 20 to 50%. But in finishing operations, the turnover was higher, 52% on average, with a much larger range from 2% to 300%.
8 Demographics As you know, the severe economic conditions of much of the last 20 years has limited the hiring and retention of younger workers. We asked for the age breakdown of first line supervisors and higher positions. As you can see from the chart below, most of our leaders are late in their careers. Almost half of our managers are within ten years of retirement. Only one third of managers are younger than 40. It will be necessary for us to train and develop the required new leadership in the next few years. The problem is most acute when someone 55+ is in a key position with no obvious successor. Demographics Percent Age Bracket
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