Beating the Inflation Demons - MC Magazine January/February 2005 - Concrete Publications

Beating the INflation demons

High prices force precasters to find ways to work more efficiently.

By Bridget McCrea

During the first six months of 2004, Gainey’s Concrete Products watched the cost of concrete rise by a whopping 16 percent, reinforced concrete by 26 percent and plant labor by 14 percent. The Holden, La.-based precaster’s materials range from a 4 percent increase in certain admixtures to more than 100 percent for rebar and mesh.

To make matters worse, local use tax had to be added to some materials that had previously not included it, further raising the cost of goods sold by another 4 percent. Aware that those increases could neither be absorbed nor passed on, the company went back to the drawing board to figure out a way to stay viable in this inflationary environment.

“Based on the fact that we didn’t raise prices, a selling price for a yard of reinforced concretewith full overhead absorption and a 20 percent margin in January 2004 would six months later have yielded a mere 6 percent,” says Greg Roache, CEO of the 65-employee manufacturer.

Unwilling to watch its profit margins dwindle, Roache says the precaster, which specializes in products for wastewater and stormwater control, implemented a few key strategies to keep itself viable. Calling 2004 “the most unusual year in my 25 years in the industry,” Roache says the company redesigned its mix using a cheaper aggregate, incorporated fly ash and changed proportions to bring the increase down from 16 percent to 6 percent.

Gainey’s also switched from a combination of mesh and rebar to engineered mat, and as a result significantly reduced waste and manpower required for fabrication, ultimately lowering the increase from 101 percent to 45 percent.

“We also reassessed plant labor by considering total plant labor cost per hour, not just average cost per hour, and lowered an increase of 14 percent to no increase at all,” says Roache. “And we recalculated all product costs and initiated a time and motion study, ultimately raising prices for most items by only 6 percent while re-establishing prior selling margins.”
In return, the precaster benefited from renewed confidence in product costing as well as selling prices, obtained information that it could use when justifying increases to customers, reduced cement demand (thus cutting its risk of failure to supply during the nationwide cement shortage) and “emerged as a leaner organization,” says Roache.

“We also used the exercise to justify the removal of people or positions which no longer made sense, clearing the way to add new higher quality personnel or shift resource allocation,” adds Roache.

Feeling the squeeze
As if the economic pressures of the last few years weren’t enough to contend with, 2004 saw precasters like Gainey’s grappling with higher cement, steel and transportation costs.
From Connecticut to Florida, Texas to Michigan and across the Southwest, cement shortages alone have become so severe that construction was halted or slowed, leaving a growing number of roads, stadiums and patios unfinished. The steel industry is equally as volatile. In October 2004, for example, the price of cold-rolled steel was $740 a ton, up 68 percent from $440 a ton in January.

Being in a commodity industry themselves, precasters simply don’t have the luxury of passing those rising costs on to customers. “Most of the product that precasters make is produced to a common spec, so it’s interchangeable,” says Bill Ray, owner of Atlanta-based Precast Consulting. “Precasters are operating in a competitive economy, where the low-cost producer has a huge advantage.”

To gain that advantage, Ray suggests looking not at how to raise prices, but at how to maximize efficiencies within the precast operations. “Sticking your head in the sand like an ostrich isn’t going to work on this one,” says Ray. “Taking shortcuts on quality and hoping everything will be OK also won’t work. In fact, it’s a prescription for disaster.”

A better approach, according to Roache, is to prepare for the fact that $100-a-ton cement costs are probably right around the corner. By improving the water-cement mix ratios, for example, you can extract more yield from your raw goods. Replacing cement with fly ash is another option, as are choices like self-consolidating concrete, the latter of which Ray says “many producers are using right now to keep costs under control.”

Ray points to batch plant controls as another area where precasters can make up money lost to inflation and price hikes. “There’s an opportunity for most producers in aggregate moisture control and measurement, in pile management and sprinklingand in getting the chemicals and batch plant under control,” Ray explains.

Many batch plant personnel, for example, aren’t properly trained. “NPCA just sponsored a seminar on statistical process control and how it can improve control in the batch plant,” says Ray. “That can be very beneficial for precasters, most of whom have $5 a yard waiting for them to find (via improved process controls and mix design) out there in the batch plant.”

And because the cost of steel probably isn’t going down significantly anytime soon, Ray says getting control over product design is critical. “Look at the amount of steel that you’re using,” he suggests. “You may find an extra 10 percent of ‘feel-good steel’ that can be removed while still meeting engineering specifications.”

With fuel costs also taking their toll on precasters’ bottom lines, Ray says now is the time to inspect the plant’s boiler operation to make sure it’s capable of running on either oil or gas, depending on which fuel is more economical at any given time. Also check boiler efficiency by paying particular attention to pipe insulation. “Make sure you’re not losing a bunch of heat,” says Ray. “Most firms are and don’t even realize that there’s money to be saved in that area.”

Ray says precasters who cure products may want to check wall insulation and replace it with a higher R-factor (the higher the R-factor, the thicker and more energy efficient the insulation), and consider turning off the heat earlier in the curing process, if possible.

“You may be able to rely on heat of hydration to a greater extent by monitoring the process and fine-tuning it,” says Ray.

Lastly, any precast plant with its own delivery fleet will want to take a hard look at the fuel efficiency of its vehicles and seek ways to either improve those efficiencies or replace the vehicles altogether. Take advantage of “route optimization” computer software programs that can help you optimize your delivery routes, such as UnderTow Software’s Precision Mapping Streets and Traveler v7.0 with Route Optimization (www.undertowsoftware.com).

Start now, not later
Because many of the steps a precaster can take to combat inflation involve operational issues, it only makes sense that a firm’s employees will play a key role in turning the dream of lower costs into a reality. “The greatest waste of resources on the plant side comes when you don’t engage the talents and interests of nonmanagement personnel,” Ray says.

Rebecca A. Morgan, president at Fulcrum ConsultingWorks Inc. in Cleveland, concurs. She says that in the race to become “lean,” many manufacturers overlook the need to empower employees. Cultivating effective leaders comes first, says Morgan, but precasters must also take advantage of the fact that “most employees want to go home after a hard day’s work, knowing that they contributed to the success of a good company.”

To make sure that happens at your firm, Ray says simply asking employees for their input, then putting that information to work when creating company-wide initiatives, is a great starting place. If you’re considering a significant mix change, for example, it would pay to ask employees working with the mix on a day-to-day basis for their opinion on the pending change.

“It’s about asking rather than just telling,” says Ray. “The firm that does that and truly reaches out to its employees and puts them in a position to solve critical problems will be the most successful.”

While larger precasters may be willing to put money and time into making significant changes within their operations, Roache says small to midsize firms tend to be stuck on autopilot, unwilling to embrace and adjust to the inflationary business environment that they’re working in. Those companies will be affected the most by rising material, transportation and labor costs.

“Smaller, privately held precasters have to realize that customers don’t discriminate between their firms and the larger, publicly held companies,” says Roache. “The days are done where our day was spent making concrete well. Now we have to focus on our business skills.”

Morgan adds that in today’s changing economy, the business that doesn’t adapt and change is the one that will cease to exist. “Start streamlining right now,” she suggests. “Don’t wait. Your competitors aren’t waiting and the marketplace isn’t waiting. Define your strategy, identify your key relationships and start making improvements today.”