Here’s a very interesting post from Elizabeth Dick of TigerStop. You can view the full article from Tigerstop’s website here.
I would like to discuss scrap. Not the most scintillating topic, but one where a lot of money goes down the drain. Operations people have a weird perspective on scrap, particularly when the scrap has a significant commodity value in the market. Such materials include copper, brass, aluminum and sometimes even steel and other ferrous alloys.
When a Plant Manager gets his monthly operations statements back, he will typically see a cost of goods sold. This whopper of a number tends to be a behemoth on any operating statement. Typically, as part of the cost of goods sold number, there will be a line for materials and the percentage of costs against revenue this represents. The larger the number as a percentage, the worse he and his operation has performed.
But wait! There’s more! There is a small, yet significant number that lowers Mr. Plant Manager’s material costs. This is the amount he receives for his scrap. The bigger the number the better is what he thinks. So, in his mind scrap is not a bad thing but a good thing. WARNING: This is an incredibly dangerous way of thinking.
If Mr. Plant Manager had been able to put more of his scrap into his product, then his material costs would have been significantly lower to begin with.
Let’s presume that Mr. Plant Manager’s scrap is aluminum. When he is buying aluminum extrusions he typically purchases by linear foot not by weight (an industry standard). But he sells his scrap by the pound or kilo, not the foot or meter. An easy way to see this, for example, is to take an extrusion that is one pound per foot. Typically, such an extrusion will cost the buyer around $2.50 a foot or pound. When he sells that pound of extrusion on the scrap market he will get something like $0.50 for it. These prices vary by the extrusion profile, alloy, and the market for scrap. But the ratio of price to purchase verses price for scrap is in the rough ball park.
So for every pound of material that does not go into scrap, our plant manager saves $2.50, but loses $0.50 in scrap revenue for a net savings of $2.00 per pound. A typical plant may have 60,000 pounds of scrap aluminum per month, putting $30,000 back onto the profit from scrap sales. But if the operator could reduce that scrap by 33% (not an unreasonable number!) with the right processes and equipment, he would save or reduce his cost of materials by $50,000. Yes, he would lose the scrap value at $10,000, but he would still put $40,000 extra profit onto the Profit and Loss statement. Repeat this 12 times in a year and now you have some real money at $480,000 of additional profit or margin.
In conclusion, giving up 33% of your scrap at our fictional company netted a remarkable amount of additional profit. NOTE: This does not account for other savings that implementing the right processes and equipment will generate in lower labor costs, lower set up times, lower rework rates, better accuracy, and reduced handling and paper work. These saving can be equal or greater than the material savings in most cases.
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