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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. 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
Natural Gas
Electricity kwh/ton Natural Gas scf/ton
mmbtu/ton
EAF Average 2070 11000 11
EAF Standard
500 5000 5
Deviation
IF Average 5150 21100 21
IF Standard Deviation 1900 14000 14
SFSA 1977 1500 12000 12
DOE 2004 2350 11100 11
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
3.9% 2.4%
A percent of COGS
Labor hours spent
2.6% 1.0%
on rework
On time delivery 90% 87%
Expedited jobs bump
5.0% 10.0%
planned production
Premium freight as
0.033% 0.031%
A percent of sales
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 2003. Several metalworking
industries are shown in Table 9.
Table 9 Productivity and Costs by Industry, % change per year, 1987 - 2003
Output per Output Hours Compensation Unit labor
Type of Production
hour % % % % costs %
Foundries 2.3 0.8 -1.5 1.7 0.9
Forging 2.8 1.5 -1.3 1.6 0.1
Machining 2.6 3.0 0.4 4.0 0.9
Fabrication 1.7 1.3 -0.4 2.6 1.3
Steel products from
1.5 0.6 -0.9 1.6 0.9
purchased steel
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
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%.
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

40
35
30
25
Percent

20
15
10
5
0
20 30 40 50 60
Age Bracket