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. But what happens if we change that scrap waste recuperation mentality to a scrap waste savings mindset?
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.
Instead, 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’s 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 versus price for scrap is in the rough ballpark.
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 into the profit from scrap sales.
But if the operator could reduce that scrap by 33 percent (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.
So, giving up 33 percent 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 paperwork. These savings can be equal to or greater than the material savings in most cases.
Scrap Waste Savings Mindset
So what are the steps to achieve these scrap waste savings?
1. Utilize Automated Positioning Equipment
Automated positioning equipment increases accuracy, increases productivity and output, reduces rework, and saves a remarkable amount of labor time.
2. Optimize Your Cut Lists
The ability to download cutting lists to automated positioning equipment eliminates the need to check for quantities and clerical errors, not to mention, miscut lengths due to entry errors.
Labeling parts as you’re cutting allows you easily sort and route materials without hand labeling and related clerical issues.
Optimizing your cut lists at the machine and not in the office saves an incredible amount of time and increases material yield. We like to call this “worst first.” With automated positioning equipment that has optimization software, you no longer need production planning to run an optimization on materials that may or may not be in stock. Your operator doesn’t have to track and report leftovers (remnants) or drops.
Rather, the optimization happens at the machine without the operator having any special knowledge except to put the shortest materials into the system first. So if someone took some of the drops you were counting on for an office optimization, you don’t have to redo everything. Both your yield and labor costs are improved with this system without the confusion of trying to coordinate data between the cut-to-length department and the planning department.
3. Defect In-House
The ability to defect parts in-house allows you to:
- Save time cutting around knots, wane, and defects yourself
- Get credits from your vendors for defected parts without having to ship them back and deal with the shipping and receiving hassle and associated costs
- Maximize your yield and eliminate any hold-ups in the manufacturing process
Most companies send back full-lengths to their vendor with all the incumbent issues of paperwork, handling, and disputes. The vendor will turn around and sell it for scrap, not just losing the full value of the extrusion less the scrap value, but also all of the costs to transport and issue the credits and paperwork. In this system, the vendor comes out with some value for the damaged extrusion, and you get to not store or handle it.
Operators don’t like doing the paperwork and, more often than not, will cut around the defect anyway. That means you lose the cost of that section, which is significant over time. Defect parts yourself and toss the remnants into a second to-be-used-later bin. This way, you get the full value of the part, save time by defecting yourself, and get a credit for the defected part from your vendor that will cover the time associated with removing and using the good portions. Voila.
By: Spencer Dick, Late Founder of TigerStop