The top 5 facts about Manufacturing Scrap that you should keep in mind before you set out to eliminate it.

The top 5 facts about Manufacturing Scrap that you should keep in mind before you set out to eliminate it.

1) Scrap is not the same as waste. The environmental footprint reduction pressure can lead you into the deception that finding cool creative ways to sell your scrap to recyclers is great. You will do it and it might earn you some congratulations from the sustainability guys, but it does not make the scrap itself go away. Unless you are in the money laundry business, you don't just buy materials to later sell them at a loss, or do you? When you generate scrap and later work on selling it, that is essentially what you are doing. You may also decide it is a great idea to invest your time to create re-work and re-process methods, procedures and policies so that your scrap does not entirely go to waste. The reality is that whatever tricks you use, the scrap will still be there in your financial balance sheet, making you look bad. You should not have incurred in it in the first place, but you have now managed to spend excess manufacturing overheads. So go work on eliminating the scrap, not on making the waste management and recycling companies richer, while yours gets poorer.

2) Scrap is just scrap no matter how you name it or sub-classify it. Purge scrap, quality check scrap, yield scrap, warehouse damage scrap, trim scrap, operating scrap...does it really matter how you call it? It is all just scrap, money going down the drain. We see too often organizations sub classifying scrap. They do it to make it look less bad, or because they are trying to isolate the so-called operating scrap, which is the most usual suspect. This operational scrap is then broken down into Paretto charts to launch 6-sigma models and so forth. Of course, prioritizing reduction efforts is important (after all, you have limited resources), but you do not create a culture of zero losses by feeding a myth that operating scrap is at the center of everything while others are acceptable or can be dealt with later. You need a culture where every functional group must be set to work immediately and simultaneously on the scrap reason closer to them, where they can impact the most. Besides, at times, large scrap sources reside in unusual places of the supply chain where no-one looks because they are too busy looking at the so-called operating scrap. So, just call it one name: scrap, and build it into every department's performance indicators. Get everyone involved.

3) Do not allow scrap to be built into the cost structure. Very often organizations build material utilization factors into the cost structure of their products, the bill of materials and similar. Why not? it is just the cost of doing business, right? The organization protects itself this way, making sure the loss is transferred to the customer with a price that gives the desired contribution margin despite the scrap. They expect that when the scrap is eventually reduced, the price will be maintained and the contribution margin and the profits will then be even higher. Fantastic! Right? No, you are not doing yourself a favor. This "insurance policy" not only makes scrap become invisible, worse still, it makes it look acceptable to people, so why should they work on eliminating it, if someone else is already paying for it?. If your competition is being more aggressive on loss elimination and decides to transfer a little bit of that benefit to the customers via the price, you might be in for a market share loss soon. That may eventually lead to your losing your job as part of desperate cost reduction efforts, because cutting heads is simply easier and faster than cutting scrap. So always make sure you know the true theoretical cost of goods, your ideal state, and measure, count and communicate separately, everything outside of it.

4) Scrap is money, so always measure it as such. Well, this assumes you are measuring and tracking your scrap and that you are doing it accurately. Remember you cannot improve what you do not measure. Many organizations love to measure scrap as a %, or as an absolute number of units scrapped. This accounts to nothing and it builds neither a sense of urgency nor a zero-loss culture. Someone in finance will eventually do the calculation of how much that scrap % represents in $ numbers in order to present it to management and answers and explanations will be demanded, which you will of course provide. But this $ figure is actually more useful when you discuss it with the actual people doing the work on the ground, to motivate them for real. They may be out there thinking they did a great job because the scrap this month, percentage-wise, was a little better than last. Lucky for you, all people relate really well to money, so when you put the scrap loss in tangible $ terms such as: "oops, there goes the next Christmas party we won’t be able to afford", or "With this scrap, I don't think this year's salary raise will happen, so better cancel those vacation plans", they will get it. Remember, people do not change, they just behave differently when they are after something of interest to them. Money talks, so talk money whenever you talk scrap.

5) Scrap should never be managed from an output measure perspective alone. This is probably one of the toughest concepts to explain to organizations because some of them don’t even know the difference between output measures and in-process measures. An output measure tells you if you reached the goal or not, whereas the in-process measure tells you if you are on the right path to reach the goal. In other words, the in-process measure tells you if the job is getting done or not. You save the output measure discussion for the monthly or quarterly review, but you are supposed to discuss the in-process measure every day with your people. As an in-process measure, track and measure the execution of the tasks which you know, if done correctly and on time, will prevent the scrap to begin with. How do you determine what those tasks are?... 

I am not in the productivity consulting business anymore (for now), but if you have a scrap problem, I can direct you to a couple of extremely good companies that will guide you. Just drop me a note.

Ricardo Lárez