Part 3 of a four-part series. Part 1 can be read here; Part 2, here.
Expanding Production Capacity
As a manufacturing organization, the United States Mint’s production capacity is limited by what a typical manufacturer is limited by: our leadership, our manufacturing processes, our human resources, and our space and equipment.
Having the right leadership is key to expanding production capacity. Adding to our challenges, though, at about this time, our head of manufacturing voluntarily resigned for another federal government position. While we had a deep bench of talent within the Mint, I believed we needed to fill the new vacancy with a leader who could elevate our performance during this crisis. Instead of having a problem, I believed, we had an opportunity. We found that person when Andy and his team recommended that I hire Richard A. Peterson.
Dick was the right person for the job. He came directly from an executive position in the General Electric Company, where he’d gained extensive experience in manufacturing, supply chains, supplier performance, and engineering. Also helpful was his experience in the GE culture (which was then a manufacturing juggernaut) and Six Sigma. Dick began his career in the U.S. Navy, were he served on nuclear submarines. Along the way, he earned an M.B.A. from the Harvard Business School. He became the associate director for manufacturing in October 2008 and reported to Deputy Director Brunhart.
With our manufacturing leadership in great shape, it was time for Dick and the manufacturing team to devise a strategy to quickly ramp up our production capacity.
One key focus for them was to improve our manufacturing processes. The U.S. Mint had been making bullion coins since 1986, so our manufacturing processes had been honed to a model of efficiency. All the major improvements had been made long ago. The improvements that we could make now were minor—but when added up, they delivered some noticeable expansion of our production capacity. Because all our bullion coins were made at the West Point Mint, our plant manager there, Ellen McCullom, played an important role.
The West Point Mint. (Daniel Case photo)
Ellen was a seasoned Mint veteran who ran one of our most efficient and collegial manufacturing facilities. The team she had built over many decades was drawn from the local talent pool, loved what they did, and did their work well. When our plant manager at the Philadelphia Mint was transferred, Andy chose Ellen to become the acting plant manager of the largest coin production facility in the world. She reported to Dick, and he and I had utmost confidence in her.
Automation was one way to improve our manufacturing process. Our manufacturing team examined every step to see if automating could expand production capacity and be cost effective. They discovered there were many steps in the process that could benefit from automation. For example, our press operators (who actually made the bullion coins) manually counted the finished bullion coins and put them into plastic tubes for delivery to our Authorized Purchasers. That process could easily be automated, which would free up the press operator to make more coins and reduce the time it took to package the coins. Automation could also be used to weigh the planchets instead of doing it manually, which would make planchets available for production more quickly.
Maximizing press production was another way to improve our manufacturing process. Our coining presses could do 80 strikes per minute, and each bullion coin was struck twice. A single coining press would produce 100,000 bullion coins per week. Improving the strike rate to 90 strikes per minute could raise production to 112,500 coins per week—a 12.5% increase. While our presses were rated to perform more strokes than standard presses, we needed to work with the manufacturer, Graebner Press Systems, Inc., on how best to achieve that speed. And the quality-control department had to determine the right balance between increasing strokes per minute versus the quality of the resulting bullion coins.
Coinage dies for 1/10-ounce $5 gold American Eagle coins. (Source: American Gold and Platinum Eagles, by Edmund C. Moy)
Learning best practices from other mints was yet another way to improve our manufacturing process. Dick tasked Ron Harrigal, who reported to Dick as the head of manufacturing research and development, to reach out to the community of international mints for technical help. One use of that technical intelligence helped us extend die life. We learned that certain steels were more durable under the stress of multiple strokes and pressure. Using dies made of that specific steel meant that the dies would have to be changed less frequently, so the presses could operate with less interruption and therefore produce more bullion coins.
Ron Harrigal, acting quality manager of the U.S. Mint, participates in the release of the quarter dollar commemorating the Saratoga National Historical Park, November 2015. (U.S. Mint photo)
Our second key focus, after improving manufacturing processes, was our people. We had dedicated, seasoned employees, and I was proud to lead the men and women of the United States Mint. Expanding our production capacity alongside the process of hiring more people would mean stretching our employees to their limits, which would have to be accomplished while we also protected our people’s safety and well-being.
Because there is an infinitesimal number of experienced coin-press operators, especially in the geographic area surrounding our West Point Mint, it would be difficult to hire people who could hit the ground running. Our immediate solution was to have our employees work overtime. At first, they welcomed the additional income, which bought us some time to implement mid- and long-term solutions. Concurrently, we went from two to three shifts a day, which offered our existing employees who were not press operators an opportunity for promotion, and expedited training as they were already familiar with the work. When many of them took advantage of the opportunity to become press operators, that opened up less-skilled positions that would be easier to recruit candidates for. We didn’t know how long the demand would continue, so we made these positions temporary. The new hires accepted these positions knowing that they would end if long-term demand trends shrunk.
The third key focus was on space and equipment. Manufacturing organizations are limited by the size of their plants, and each plant has to be laid out in an efficient circuit: incoming supplies need to flow to quality control, which leads to a production line, which ends in packaging and shipping. Adding new presses might disrupt the circuit, which might need to be reconfigured to handle the new production lines.
We were fortunate that the circuit at West Point had been planned with available space for additional presses. The problem was that coining presses are not available at the shopping mall but have to be custom made, and manufacturing a coining press can take six months to a year. And because each press weighs 360 tons, extra planning is needed to make sure the floors can support the added weight. Presses are also expensive, and any investment would have to be justified to the taxpayers. Imagine if new presses were bought and demand fell so much as to make them unnecessary.
The new presses were much improved from the older models, with faster striking speeds, lower noise levels, and improved reliability. Even so, some of their features, like new controllers, meant that the press operators needed to be re-trained.
The San Francisco Mint, which produced numismatic coins, was perfectly set up to meet the Mint’s exacting standards for U.S. bullion-coin production. (Seth Golub photo)
The U.S. Mint had 8 bullion-coining presses when I became director in 2006. When my term ended five years later, the Mint had 11 coining presses. That expansion took up all the available space at West Point. When demand continued to exceed our ability to produce supply at West Point, we decided to explore having the San Francisco Mint make precious-metal bullion coins. They use the same Graebner presses that West Point used. Further, because San Francisco made numismatic coins, and numismatic sales were flattening, it made sense to use their excess manufacturing capacity to make bullion coins. Thus a new supply chain had to be created to service San Francisco.
Together, all three of these key focuses greatly expanded our production capacity without compromising quality. The employees at the U.S. Mint, especially at West Point and San Francisco, took so much pride in their work. Further, there were no accidents during this time. They knew they were playing an internal role providing Americans with precious-metal bullion coins during the Financial Crisis. Each coin produced had to meet the highest standards: their personal satisfaction with the product they made with their own hands.
Further, I am proud to say that every single coin produced under my tenure met the U.S. government’s guarantee for weight, content, and purity. Not a single bullion coin was ever returned to the United States Mint.
The Mint’s production capacity was now up to the demand for precious-metal bullion coins. But in order to meet that demand, we also needed to work on expanding the supply chain that produced precious-metal planchets for us.
Expanding the Precious-Metal Planchet Supply Chain
Planchets are round metal disks ready to be struck into coins. They are also called blanks. The number of planchet makers in the world is small; precious-metal planchet makers are even a smaller group of entities.
Like most mints that make precious-metal bullion coins, the U.S. Mint outsources the fabrication of planchets. There are several reasons for this.
First, specialists in the private sector can fabricate planchets better, more cheaply, and more efficiently. The unique value of the U.S. Mint during the coining process is the actual stamping of the design. Only a government mint can convert a precious-metal planchet into a coin (a coin being defined as money or currency having a denomination on it). As a result, the Mint outsources other processes that are beyond its expertise or its unique value-added.
Second, the investment needed to make precious-metal planchets is high, and planchet fabrication is unlike anything else the Mint does. New equipment would be needed, as well as either appropriate training of our existing employees or the hiring of new employees with the relevant expertise. The safety and environmental issues would also be a significant hurdle.
U.S. Mint Director Edmund Moy in the working-stock room at the West Point Mint, where pallets of good delivery bars, each consisting of 400 troy ounces of 0.9999 fine gold, are stored. (Source: American Gold and Platinum Eagles, by Edmund C. Moy)
Gold planchets made for the U.S. Mint have an additional requirement: according to the contracts with our suppliers, the planchets must be made of gold mined in America. (There is no such requirement for the platinum or silver used for bullion coins.) To make it easier for our planchet fabricators to meet that requirement, the West Point Mint keeps around $2 billion in American gold as working stock. This gold is in the form of good delivery bars, each of which consists of 400 ounces of 0.9999 pure gold certified by the bar’s fabricator to be made from metal mined in the United States. Each bar’s hallmark is checked, then the bar is tested and weighed.
When our planchet fabricators need gold to make planchets, the Mint ships gold to them from this working stock. The fabricator then makes 24-karat gold planchets for the American Buffalo gold bullion coin, or else alloys the gold to make 22-karat gold planchets for the American Eagle gold bullion coin. The planchets are then delivered to the appropriate Mint manufacturing facility to be struck into coins.
When the planchets arrive at the right facility, they have to be weighed, tested, and assayed to ensure they can meet the U.S. government’s guarantee for the weight, content, and purity of every bullion coin. The metallurgists and quality-control team also examine grain size and direction to make sure the bullion coins will be of consistently high quality when struck.
Given the complexities of this process, acquiring more precious-metal planchets is not as easy as going to the local big-box store.
It was up to our finance team to procure more planchets. This effort was led by our very capable procurement team, who reported to the finance team. Sandy Macadoff was our procurement branch chief and metals manager during this time and directly responsible for precious-metal planchet procurement. Sandy had been with the U.S. Mint since 1999 and had gotten her first taste of runaway precious-metal bullion demand during Y2K.
The so-called Y2K bug, it was feared, could result in global computer crashes, power-grid failures, financial panic, even anarchy. Survivalists stocked their bunkers; others simply laid in a supply of gold coins and bottled water, just in case. As the clocks struck midnight in one time zone after another, very little took place other than cries of “Happy New Year!” The lack of societal collapse was something of an anticlimax. Fortunately, those who’d purchased gold as an insurance policy were left in the same position they’d been in at a minute before midnight—that is, they still possessed a durable, time-honored store of value, which they could either hold or sell as the market, and their own needs, dictated. (Paul Mannix photo; inset, brochure by Her Majesty’s Government, United Kingdom)
Not long afterward, in 2002, she saw gold and silver refiner Johnson Matthey PLC get out of the precious-metal planchet business thanks to the tremendous pressure from the U.S. Mint to make enough inventory to anticipate demand due to Y2K. When nothing major went wrong with computer systems in the United States on January 1, 2000, that demand disappeared, and on January 2 the Mint was left sitting on a huge inventory of gold planchets.
When gold prices dropped from almost $200 an ounce to almost $150 an ounce two weeks later, the Mint was criticized for not being good stewards of public resources. To further add to the Mint’s problems, demand for gold bullion coins fell more than 90%. In 1991, some 2,055,500 American Eagle gold bullion coins had been minted and issued, but in 2000, only 164,500 ounces were minted and issued. In June 2000, Johnson Matthey informed the Mint that the company would no longer be providing blanks due to decreases in orders, which resulted from decreased sales of both gold and platinum coins. Johnson Matthey exited the gold planchet business because the Mint did not have to place a planchet order for years.
There are many reasons the universe of precious-metal planchet makers is small. It is a very specialized business with a limited number of customers, namely government mints. It is also a low-margin, high-volume business. The precious-metal bullion coin market is very competitive, which keeps prices down. Because investors buy precious-metal bullion coins mainly for the metal value, they want to pay as little as possible for the manufacturing of the coin. With such low margins, precious-metal fabricators have to make their profit on the volume as well as by keeping their costs down. It takes a substantial capital investment to make precious-metal planchets in large quantities and still maintain the quality required by government mints. It was in this environment that more planchets needed to be acquired in 2010.
Sandy met the challenge by taking a multi-pronged approach to expanding the planchet supply.
The Perth Mint. (Photo by Orderinchaos)
She worked closely with our two existing suppliers, Leach Garner and Gold Corporation, to acquire more planchets. LeachGarner (known as Stern-Leach during the Financial Crisis) was a supplier of precious metals to the jewelry industry, industrial manufacturers, and governments. They made 24- and 22-karat gold planchets as well as some silver planchets. Gold Corporation supplies precious-metal products like London good delivery bars, ingots, and precious-metal blanks. The parent company of the Perth Mint, Gold Corporation supplied 24- and 22-karat gold planchets and platinum planchets to the U.S. Mint. Both suppliers could produce large volumes at the quality required to back the U.S. Mint guarantee.
Sandy had to work through two issues with our suppliers. The first was to acquire more planchets from their current production. Planchet makers do not keep an inventory of ready-made planchets. Each mint’s requirements are different, and planchets are custom made to each set of specifications. Further, gold, platinum, and silver are expensive metals, and it would not be good financially to keep a company’s capital tied up in inventory.
Both of the U.S. Mint’s planchet suppliers were producing the maximum number of planchets their existing production capacity would allow. If we had been able to acquire 100% of their production, it would have been enough to satisfy all the demand from the U.S. Mint. But we were not their only customer—they supplied numerous government mints, all of which were competing to acquire more of their limited supply. The U.S. Mint could have bought more but would have had to pay higher prices to do so. This would have added to the cost of making the bullion coins, which in turn would have raised prices to customers. Because the market for bullion coins is extremely competitive, higher prices would mean fewer sales and less accessibility to the American buyer, which would not have been in the spirit of the authorizing legislation. And there was the high likelihood that having higher prices would result in complaints to Congress.
Sandy’s second issue was to expand our planchet suppliers’ production capacity. Planchet fabricators have the same manufacturing considerations as mints: they need to improve their manufacturing processes, build up their human resources, and work within space and equipment limitations. But unlike the U.S. Mint, which has a statutory requirement to meet demand, they are private-sector companies that are in the business of making profit.
Sandy was confronted with requests from our planchet fabricators for long-term contracts that guaranteed a minimum quantity purchased. The fabricators want this assurance to make sure their substantial investment in expanding planchet-production capacity and in hiring and training new employees could be paid off and a profit could be made. But a priority of U.S. Mint is to be a good steward on behalf of the American taxpayer. If demand fell for precious-metal bullion coins, the Mint would be on the hook for continuing to buy planchets that were no longer needed. It was a déjà vu of the Y2K aftermath in 2000. That would not be a good use of public resources.
In the end, the strategy that worked the best for all parties was that the U.S. Mint would not guarantee a minimum quantity of planchets purchased over a long-term contract—but because of our good relationships built over time with our planchet suppliers, they were willing to take the risk of gradually increasing their production capacity. Their business decision was based on their forecasting along with their ability to fund capital expenditures, and I believe they are stronger businesses because of it. They can scale up or down with much less disruption than if they had relied on the U.S. Mint as a guaranteed buyer. As a result, production of planchets has dramatically increased, as have government mints’ production of bullion coins.
In addition to meeting these challenges with our existing suppliers, Sandy needed to expand the number of planchet suppliers. The U.S. Mint announced an “open solicitation for proposal” (government-speak for looking for new suppliers on an ongoing basis instead of requesting proposals for a limited period of time). There were a number of interested parties, especially in the United States. Sandy worked with them as they developed and submitted sample planchets, which were then put through our quality-control process. Unfortunately, either the planchets were of poor or inconsistent quality, or the potential production volumes were so low that a contract would be more of an administrative burden than a benefit.
A 24-karat gold bar produced by Sunshine Minting, Inc., and sold under its own brand. Formerly the major supplier of silver planchets to the U.S. Mint, Sunshine rose to the challenge during the Financial Crisis and began producing 22- and 24-karat gold planchets for the Mint’s bullion coinage. (Photo by DLD)
Instead, Sandy went to our largest supplier of silver planchets to skillfully negotiate with them to make gold planchets. In 2007, with no guarantee of quantity, Sunshine Minting, Inc., decided initially to make 24-karat gold planchets, which, at 0.9999 pure, could be made directly from our working stock of 24-karat gold good delivery bars. Eventually Sunshine expanded into making 22-karat gold planchets, which are 0.9167 pure; this required an investment in capital expenditures for the equipment. The 24-karat gold that the U.S. Mint supplies must be alloyed with copper-silver to the precise proportion of 8.33%. (The 22-karat gold American Eagle bullion coin still has one ounce of gold in it, but because of the copper-silver alloy, its total weight is 1.0909 troy ounces, or 33.93 grams.)
Sandy’s fourth challenge was to make sure the quality of the planchets continued to meet the high standards of the U.S. Mint’s guarantee even as production dramatically increased. As with the Mint, when planchet fabricators dramatically increase production it usually results in a decrease in quality unless it is done carefully. Because each planchet needs to meet a very high, strict standard, our quality-assurance team worked closely with our planchet suppliers, constantly testing the sample planchets and providing technical insights to fix certain problems.
Next up: “Good, but Not Enough,” and the conclusion to this four-part series.
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