How Foundries Can INCREASE Profitability in the New Network Economy

by Joe Scarry

At the end of April, 2001, CastingTrade.com participated in "E-Commerce in the Foundry Industry," a panel at the AFS Congress. Below (and in related links) are details to accompany the outline provided in the slide presentation.

(1) Market Environment - We started off by reviewing a number of market trends, including a very important one: global competition. (For more on this topic see The Changing Profile of World Foundry Production elsewhere on this site.) We touched, of course, on everyone's concerns over Internet auctions and other forms of e-commerce. But we stressed two market factors that are most important to everyone in the casting industry:

• obstacles to castings use (i.e. buyers/designers choosing products other than castings -- see detail from AFS report on buyer/specifier views)
• "interoperability" -- the desire to use and do things in a maximally flexible manner

We believe the driving in force in the market environment for castings today is that buyers are determined to take advantage of NETWORKS -- flexible supply chains that give them maximum options -- and they seek to AVOID arrangements that limit them, make them take risks, or slow them down.

(2) Proposed Solution: "TIP" - Our goal in this section of the presentation was to propose a concrete marketing measure that foundries can take to profitably address this new situation.

Everybody always talks about "adding value" and providing "solutions" and being "knowledge intensive." The beautiful thing about the casting industry is that its methods really ARE "information intensive" -- it's all about storing an enormous number of data points in one spot (a tool or pattern or mold) and then -- BOOM! -- transferring that information to a shot of metal in one fell swoop! This is very different than other forms of manufacturing that impart similar amounts of information in 5 or 20 or 57 steps! And it is ideal for use in a NETWORKED economy, where each participant does a specific part of a job, and then passes it along to someone else.

The trick, of course, is to get paid for the work you do. The best way for foundries to make sure they are well-compensated is to stress the value that they add in making the casting process as INTEROPERABLE as possible, and then to charge a PREMIUM whenever they do that job well! Since that is basically a function of making tools (or patterns or molds) be more fully interoperable, we call that a "Tooling Interoperability Premium (TIP)."

In other words, we propose that you say to the casting buyer, "Look, there are really three different things I'm going to do for you, and there is a separate price attached to each. First, I'm going to help you design and create a tool that makes the part you want. Next, I'm going to make that tool functional on the foundry floor -- prove it out, work the bugs out, use all my years of know-how. Finally, I'm going to cast as many of these parts as you want, or help some other foundry do it if that's what you want. I want to make sure your unit costs are as competitive as you can make them. And to show you how committed we are to that goal, we're going to take part of our compensation as a small royalty on the total number of parts produced, no matter who produces them -- so WE only really make good money if we can help YOU ramp up your business!"

In fact, this approach closely resembles the approach currently being taken by some of the most successful players in the industry. (For more on this topic see How RP is Changing Our Industry elsewhere on this site.)

(3) Practical Issues in Making TIP Work - We touched on several issues in making TIP operational in an e-commerce setting. One of the most important points is that the nuts and bolts of keeping track of the kind of compensation structure proposed are really EASY when commerce is being conducted on an integrated computer system.

A second point is one with great STRATEGIC importance to everyone in the casting industry. It is important to recognize that big, industry-wide networks really consist of combinations of SMALLER networks. For instance, the auto supply chain is in the process of becoming an integrated, industry-wide network, but that network will consist of a series of smaller networks -- not just for the major portions of the system (procurement vs. assembly vs. dealer sales vs. financing vs. marketing) but also for the intermediate-sized portions (interior modules vs. powertrain modules vs. suspension modules) and the more self-contained portions (procurement by model vs. by module vs. by plant vs. by company-wide).

These big-networks-made-up-of-little-networks are held together by the pieces of data that everyone jointly agrees are the most important ones -- the "points of integration" -- and those become the "facts of life" that become impossible to get rid of.

There is no question that the casting industry will be successful in commanding SOME sort of premium for the huge value it adds in helping buyers of cast metal parts benefit from interoperability in the global manufacturing supply chain! The BIG question is this: will the industry succeed in making TIP a fundamental point of integration in the data architecture of the networks used in its supply chains, especially in the auto industry? And will they succeed in doing so as high in the network hierarchy as possible?

(For more on this topic see the Covisint website.)

(4) Conclusion - A vision for the future starts with a clear idea of where we are today. We think it's critical to recognize that, despite the many marketplace trends, THE key trend is "interoperability."

Once you are confident of that fact, your path is clear: start charging a premium for the value you add in making "interoperability" a reality -- a "Tooling Interoperability Premium (TIP)."

And, to really put the icing on the cake, and make sure that your interests are protected, start NOW to embed TIP in the network ARCHITECTURE, so that it becomes a normal part of manufacturing anything containing castings.

We concluded our presentation with a "closing thought," and I can't stress it strongly enough. When it comes to understanding interoperability, your knowledge gives you a HEAD START! Your head start is your biggest ASSET. But a head start is an asset that loses value over time -- it is an "expiring" asset -- because every day competitors are catching up to you. The only way to get the value out of that asset is to put it to work for you -- NOW!

Good luck!

We're grateful to the AFS for providing the forum for us and other companies to present new -- sometimes provocative -- ideas about where the industry is headed, and how we can all operate more profitably in the future.