When is Scrap Allowed?
The waste bins by the thermal sealer were overflowing. So many deformed plastic bags were being tossed that they spill over onto the floor. Frustrated workers adding more to pile with every batch. This was not a pretty picture for a medical manufacturer. It was perhaps the biggest catch during a Gemba walk taken as part of a Lean training class at the factory.
The instructor, a LSS Black Belt, sent me an email about it that night, along with pictures. After class he talked with the line workers and factory engineers. The molding heads on the sealer were old and worn. They could be easily replaced for about $20,000. But it would take shut down the line for a day. The instructor asked if he could stay at the plant, after the completion of the class, to assist with the swap out and provide some mentoring to some of the Lean students.
This is the type of situation we in Process Improvement live for…an obvious problem causing discontent among workers and clearly costing the company money. It was going to be an easy project to pitch as I started getting everything lined up…the defect rate, cost of scrap, and even a few comments from line workers.
Two days later, at the weekly Operations Meeting, I presented the idea, asking the team for $20,000 and permission to shut the line down for a day. It was a no brainer. The scrap rate was three times that repair cost. The down time would cost us a bit, but overall, the repair costs would be recouped in less than month. We’d then see a positive return. And, oh yeah, we’d get some happier workers who felt like they always got crap equipment and nobody ever listened to them. It was a win all the way around.
The questions that came after my presentation didn’t bother me. I was ready for them. But then there was discussion which concerned me…it should have been a straight up “Yes.” Then I was dumbstruck when the VP of Ops said “No.”
Turns out the company had an “allowable scrap rate.” As long as the costs of scrap stayed under 20% of sales of an item, it was deemed acceptable. Evidently this policy was enacted before they had an Operational Excellence division whose mission was to eliminate defects. But it was the policy, and the finance guy made it quite clear the scrap rate was well below that 20% margin, and that we did not have $20,000 in the capital budget for the year.
I tried again…the recouped costs, the happy workers…but it feel on deaf ears. I also argued the scrap rate calculation was flawed. They counted manufacturing costs as the scrap. That was mere pennies a big. But then the calculated it against the sale prices of the page, which had an obscene mark up of, and so sold for dollars a bag. It was apples to oranges. Instead compare cost to cost, or sales to sales. It would then be well above 20% waste. But it didn’t matter, the answer was still “No.” For not only did the waste not exceed the flawed allowable standards; there were market forces at play.
A competitor who had almost 80% of the market share that these plastic bags represented, was rumored to be leaving that market. They had a run of defects themselves, which led to some lawsuits. The medical device field is very litigious.
Our company was planning on capitalizing on that news and capturing the lion’s share of the market. To do that, production needed to ramp up. The line could not be taken down for a day. Inventory (another waste, but that’s another story) had to be stockpiled in preparation for the big market shift.
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Later that day I had to send an email to my Black Belt letting him know the sealer was not going to be fixed anytime soon. He told his class, which had the exact impact you would expect…they stopped believing in the Op Ex program. He told me later the class basically shut down the remaining days of the class.
And so time marched on. We ramped up production, actually going to three shifts to make bags around the clock. The defects piled up…actually getting worse as more strain was place on the equipment, but it was still under 20%. And soon three semi-trailers were packed with bags, ready to be shipped out as the expected announcement was made.
Perhaps it was some cosmic corporate karma, or perhaps the Gods of Operations Excellence, or maybe it was the ghost of Dr. Deming…but things took quite a turn.
The competitor made the announcement they were stopping production and sales of the medical bags. We announced our initiative to make up for the short fall, inviting all the competitors customers to come over to use. As that was all going on, an unannounced FDA audit of our assembly line found an abnormally high rate of defects (not a show stopper, but validation of my claims), and worse, they found several bags improperly sealed that were about to be shipped out.
Not only was production stopped so a deeper dive could be made. But the three trailers of product had to be pulled out and re-inspected. And this led a recall of our bags. Any of our product in the supply chain had to be pulled back.
The line shut down was several days long. The re-inspection of the tailer inventory was about $300,000. I never did hear a dollar figure on the recall, but believe it was several million. On top of all that, with the negative publicity of a recall at such a dynamic time in the market, the competitors customers didn’t come to us...they went to other competitors.?
And the worst of it? Nobody signed up for the next Lean Class at the factory…