The Trap of History

Unless you have spent a fair amount of time in operations, you may only be peripherally aware of how utilization and scrap impact product flow in the supply chain.?The impact can be subtle but important.?In brief, when utilization and scrap match what is planned, then there is enough material to sustain production flow.?When they do not match, inventory builds, or shortages crop up.?In the worst of worlds, which is what we may see over the next two years, both can happen at the same time as assemblies wait on a few problem parts to catch up.

So, what are utilization and scrap factors??Utilization is a calculation to account for the difference between the raw stock and the yield of parts to go into production.?This is commonly referred to as drop off or remnants in many companies.?For example, a sheet metal shop will take a full sheet and cut many small blanks from it.?The material that remains when the blanks are removed is accounted for in a utilization factor.?Essentially it accounts for the fact that the puzzle pieces do not fit exactly.?Scrap is simpler to understand.?It is when a part fails in the production process and must be replaced by another part.?This is also referred to as yield sometimes.?For example, in a hand operation, it may be normal to need to introduce 50 units into the production process to be sure to get 49 units that will pass inspection.?Scrap is also expected and accounted for in MRP system through applying a factor to the base requirements.?Some companies will account for both with one factor and other have separate utilization and scrap factors.

I bored you with that explanation to make clearer that companies need to review those factors in the current environment.?Utilization and scrap factors are generally developed off historical performance.?Every so often that history gets reviewed (not often enough in my experience).?I suggest that history is now a trap.?It is not as reliable of a predictor as it was.?From handling the material in the warehouse through production operations all the way to shipping the final product, we will have more scrap and waste.?An inexperienced workforce will generate more scrap.?Emergency orders and one off refabrication to replace scrapped parts will yield worse utilization rates.?With today’s tightened quality oversight, customers are dispositioning more discrepant parts as scrap than rework.?All of these are changes that companies should expect.?Utilization and scrap factors should be adjusted accordingly until production smooths out.?Failure to do so will cause a noticeable increase in unplanned demand with associated costs and shortages in supply chain.