MC Magazine

Cost Management Strategies That Work

Getting a grasp on today’s spiraling costs is more important than ever.

By William Atkinson
William Atkinson is a freelance writer who covers business and safety issues for MC and other publications.

If it’s not one thing, it’s another. There are times when the economy is in the dumps and precasters are desperately looking for business. Then, it seems, when the economy is steaming ahead and business is strong, costs spiral out of control and materials end up in short supply. It’s no secret that the latter is the case these days.

According to Jon Gavin, president of United Concrete Products Inc. in Yalesville, Conn., the biggest cost pressures these days relate to cement, steel and diesel fuel. “We got an increase in cement prices last January, but it has leveled off for us since then,” he reports. However, Gavin recently talked with a friend of his in Denver who is hauling cement all the way from Chicago. “He’s probably paying double what I am, and he’s lucky if he’s getting it,” he says.

Charley Rea, interim executive director of the California Precast Concrete Association based in Sacramento, Calif., is also hearing about increases in cement costs and diesel costs. “Cement cost increases have been in place for about a year and a half due to increased worldwide demand,” he says.

While Rea is at a loss to suggest ways precasters can reduce costs, he believes that the thriving economy is at least some form of a buffer. “What is helping precasters is that, at least in California, business has been increasing due to a strong construction market,” he says.

One precaster who is looking at ways to better manage costs and increase the total value proposition is Don Humphrey, president of Central Precast Concrete in Livermore, Calif. “We have taken a hard look at purchasing and the relationships we have with our suppliers,” he explains. “We look at what value they bring besides just price.” For example: What are they doing in terms of inventory levels? Will they make deliveries on an as-needed basis, or do they require purchases of a container load? “We are also looking at other suppliers to make sure we are getting the best value from our current suppliers,” he continues. “If we find we aren’t, we try to address those issues with the supplier. If we can’t, we change suppliers.”

Here are four areas in which precasters are tending to see price increases and what they can do to specifically reduce costs: cement, steel, fuel and labor.

Cement
Abe Morales, general manager of Code Precast Products Inc. in Shafter, Calif., is another precaster who has seen cement prices increase. “We just got a notice the other day that cement is increasing another $10 a ton,” he says. “This is on top of a $19-a-ton increase last year.” Morales has heard that the increases are largely due to increased demand from China, which has led to a reduced supply. “Companies that used to ship cement to the United States are now shipping it to China instead,” he explains.

If there is anyone in the industry who understands rising costs and reduced supply of materials that precasters use – and also knows how to address these problems – it is Bill Ray, principal of Precast Consulting Services in Snellville, Ga. “Cement prices are rising continuously as a result of supply and demand conditions,” he reports. “Prices go up about $2 every quarter. In addition, there are shortages in 30 of the 50 states, and it is being rationed or allocated.” According to Ray, domestic operations are at capacity. Capacity has been increasing 2 percent to 3 percent a year, but demand has been increasing 6 percent to 7 percent a year. “They find it difficult to expand because of environmental considerations,” he explains. “It is difficult for them to get new permits.”

As such, as a nation the United States is dependent on cement imports, according to Ray. About 25 percent of its cement comes from other countries, including Canada, Greece and Colombia. This requires ships that can carry bulk cargo, but since cement is less valuable than iron ore, grain and other commodities, there tends to be a shortage of ships to carry cement.

Compounding the problem is the fact that the largest port for importing cement into the United States is New Orleans. Second is Houston, and third is Mobile, Ala. Recent hurricanes in these regions have obviously aggravated an already very difficult situation in two ways. First, shippers can’t get imports in because of damage to the ports and other obstructions. Second, even when they can get cement in, the majority of it is staying within a couple of hundred miles of these ports to assist with rebuilding. “In other words, any shipments that come in are going to stay there,” he notes. “They won’t get sent anywhere else in the country, as they once would have.” In sum, according to Ray, precasters should expect severe cement shortages for at least a year.

While Ray has a number of suggestions to reduce cement costs, he first addresses the challenge of ensuring sufficient supply to begin with. The best advice: Have more than one vendor. “Some producers are also putting in an extra silo so they can alternate between vendors,” he adds. Also, try to find a way to have cement delivered via rail cars.

In terms of reducing costs, Ray offers two ideas. First, change your mix design to replace some cement with fly ash and slag cement. Second, improve controls on your batch plant so you don’t have to run as rich a mix. “Required strength varies based on a number of things, including how much water is in the mix,” he explains. It is difficult to measure water, because some of it is present in the sand and aggregates. Of course, the more unwanted water, the weaker the mix. “As such, many producers use more cement than needed to provide insurance against the variability,” he adds. Producers can save about $5 a yard in cement costs if they can improve the controls in their batch plants. This also improves quality and consistency.

Steel
Last year, two of the biggest cost challenges for Humphrey and Central Precast were steel and rebar. “They doubled in a period of just a few months,” he recalls. “Part of this was because China has been using a lot of both,” he says. “Another was that cargo ships are being used for other products.”

As is the case with cement, according to Ray, the United States is also dependent on imports for reinforcing steel, because there is insufficient domestic supply. “About 18 months ago, the price shot up like a rocket and hit a high point a year ago,” he notes. Since demand continues to increase, he says that precasters can expect price increases again in the future.

He offers three solutions. First, look at the design of your product to see if you need to put as much steel in as the original design calls for. “I call this ‘feel good’ steel,” he says. For example, if an application calls for #8, an engineer might specify #10 just to be on the safe side. As a result, the product has more reinforcement than is actually required. “Utility vaults are a good example,” he continues. “The producer gets his design from an engineer in the municipality, who specifies a lot of steel.” Ray suggests hiring your own engineer, who may be able to determine that products require less steel than originally specified. Then have your engineer talk with the municipality’s engineer.

Second, with certain underground products, you can replace some steel with fiber reinforcement in the concrete. In general, fiber reinforcement is capable of replacing secondary reinforcement, which is used to resist temperature and shrinkage effects. Contact manufacturers of synthetic fibers and have them run some trials in your plant. “You will probably be pleasantly surprised at the results,” says Ray.

Third, while the first two suggestions will cut your costs of steel, the biggest savings will be in labor costs. “You won’t have to hire people to tie as many cages and place the steel,” he notes.

Fuel
Ray’s recommendations for saving fuel fall into two areas: curing and transportation.

Curing costs. “Many producers put their product in kilns or under curing blankets and put steam under the blanket to accelerate the cure and strip the product in as short a time as possible,” he says. “It takes a good deal of energy to heat the product to accelerate the cure.”

For kilns: First look at the insulation in your curing kiln. You may find that you either have no insulation, or it has worn thin. Add or replace as necessary.

Second, in many cases, there are air leaks in the kiln. “This creates convection, where cold air is pulled in at the bottom and hot air vents out the top,” he explains. It is important to eliminate these leaks. The easiest way to find whether you have a leak is to light a cigarette and put it on the floor in front of the kiln. “If smoke is being drawn into the kiln, you have a leak,” he notes.

Third, kilns may be made out of concrete blocks, and your insulation may be outside of the kiln. There is a problem with this configuration. For example, if you put in 20,000 pounds of product to cure and the building materials of your kiln also weigh 20,000 pounds, you end up having to heat 40,000 pounds in order to cure 20,000 pounds of product. Ray’s recommendation: “Place the insulation on the inside.”

For curing blankets: Some producers use plastic sheeting, which has a low
R-value. Ray recommends purchasing curing blankets with R-10 or R-15 values, which will significantly reduce energy requirements.

Also, your existing blanket may become weak or tattered. His recommendation: “Replace it.”

Heating temperatures: Look at the heating temperatures you use. Ray has found that it is not unusual to put more heat in than is required to cure the product. He recommends installing an automatic cutoff for the boiler and placing a temperature probe in the product. “Some producers may turn their heat on at 6 p.m. and shut it off at 6 a.m.,” he notes. “However, you may only need heat until 11 p.m., then let it ‘coast’ the rest of the night.”

If you implement all of these suggestions, Ray estimates that you may be able to cut your fuel consumption in half.

Transportation costs. Diesel costs have increased more than 50 percent in the past year, according to Morales. “It is difficult to convince customers that we need to keep raising our rates,” he says. “Some people are adding a surcharge of as much as 20 percent for deliveries.”

One idea to reduce fuel costs is to consider commercially available route management software. “This helps determine the shortest distances in order to cut miles driven,” says Ray.

Another technology to consider is a GPS (global positioning satellite) system. In October 2005, Arrow Concrete Products in Granby, Conn., installed a GPS system for its trucks to get a better handle on trucking costs. “The purpose was to utilize the equipment better, because with the cost of fuel, every mile counts,” explains Kurt Burkhart, president. Although the system is too new to show savings, he does expect to see some savings over time.

Labor
As with cement, steel and fuel, Ray projects that the cost of labor will continue to increase. He recommends two strategies to keep these costs in line.

First, send supervisors to first-line supervisory school. “The guy who was the best producer isn’t necessarily the best supervisor,” he states. As such, supervisors need training in how to handle their jobs effectively. Training should focus on activities such as delegation, communication, discipline and other learnable skills. It has been shown over the years that poor supervision is a significant cause of turnover, poor productivity and poor quality.

Second, consider “lean manufacturing,” an industrial engineering discipline that focuses on learning how to work smarter, not harder. “It focuses on eliminating waste and on continuous improvement,” says Ray. “This helps improve productivity.” He adds that it can be especially useful for large producers, who can see a 20 percent improvement in productivity and a 50 percent reduction in errors and rejects.

One precast manufacturer that has always focused on cost management via efficiency is United Concrete. “We have always tried to operate as efficiently as possible and keep our costs down,” says Gavin. For example, the company has its own steel shop on site, which keeps costs down. Also, management tries to make the employees’ jobs as easy as possible, such as making molds as easy as possible to strip, and putting in a central form-spraying system so the employees don’t have to look around for bottles.

Code Precast recently implemented a new quality control program. “If you have to redo the product, that adds to your cost,” explains Morales. In addition, poor quality gives you a bad name, which cuts into business.

United Concrete has taken another step to reduce labor-related costs: It has been able to reduce its workers’ compensation costs significantly. “Last year, in fact, we had zero comp claims,” states Gavin. “This leads to large rebates from our insurance people.” The key was to spend a lot of time educating employees and managers about safety.

Cost increases
Even if you implement all of the above suggestions, it is likely that you will still have to pass on some cost increases to customers. To get customers to understand the need for increases, United Concrete publishes a monthly newsletter that discusses the cost increases and why they are necessary. “At first, I was concerned about losing customers as a result of price increases, but I’ve been happy with their responses,” says Gavin. That is, most customers say, “We’ve been expecting it.” In fact, when the company announced its increase, some customers were happy it wasn’t a larger increase like they have been seeing with some other bulk commodities.

In 2004, Central Precast increased its prices three times within a six-month period. When it increases prices, management does so carefully so that it doesn’t pass on increases that are either too low or too high. The cost increases are tied to specific costs that are going up for the company. “For example, we look at and understand our cost of delivery,” says Humphrey. “We try to charge appropriately for delivery. We then build the appropriate cost increases into future work that we are bidding.”

Humphrey has found that, when his company must pass along a price increase, a personal phone call to the largest customers is the best policy. “This is very important,” he emphasizes. Sending an impersonal letter does not generate the understanding that is necessary.

In sum, cost increases are a fact of life. As a result, it is important to find ways to manage costs as effectively as you can at all times in order to keep unnecessary cost increases to a minimum. It is also important to look for additional creative ways to reduce costs, such as the ideas Bill Ray has suggested. Finally, when you’ve done everything you can in these areas, the only alternative may be to increase prices with your customers. However, if you’ve done well managing your own costs, the increases you pass on to your customers should end up being relatively small – and more importantly, your customers will know you have done everything possible to help keep costs down.

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