Over the years I’ve had many conversations with people who own or run plastics molding companies. Persistently I’ve heard them say: “We don’t worry too much about scrap because we can always regrind it. It’s not waste.”
I’ve always found myself stuttering in response to that.
On the one hand, it seems obvious to me that any time you have to do something more than once, your costs have to go up. On the other hand, these are smart people and they know their business. I make software, not plastic.
Recently I got into one of these conversations with the owners and the CFO at a molding company. They had told me they have a 10% – 12% scrap rate, but “We don’t worry too much about scrap because we can always regrind it. It’s not waste.”
At one point the CFO grabbed a pocket calculator and started punching numbers. In about 30 seconds he announced: “I come up with __X__ dollars.” (I can’t tell you what the number was, but I will tell you that it made all of us sit up in our chairs.)
Here is how he came up with his numbers. (This example is for a fifty million dollar company with a scrap rate of 11 % and a COGS (Material Cost of Goods Sold) of 52%).
| Assumptions | |
| [A] Annual Sales | $50,000,000 |
| [B] Actual Material Costs | $26,000,000 |
| [C] Current Scrap Rate | 11% |
| [D] Average Price per Pound | $0.75 |
Use this information to calculate the Scrap Material Costs, and then use that to calculate the number of Regrind Pounds produced each year.
| Calculate Cost of Scrap # of Pounds of Regrind | ||
| [E] Scrap Material Costs | $2,860,000 | Multiply Material Costs [B] by Current Scrap Rate [C] |
| [F] Regrind Pounds | 3,813,333 | Divide Total Scrap Material Costs [E] by the Average Price per Pound [D] to get the number of Regrind Pounds each year |
With this estimate of Regrind Pounds produced each year, we need to calculate the actual cost of regrind:
| Cost of Regrind per Pound | ||
| Material Cost | $0.75 | |
| Labor / Processing | $0.35 | |
| Machine Depreciation | $0.10 | |
| Regrind Value | ($0.35) | |
| [G] Cost of Regrind per Pound | $0.85 | Sum or all costs and credits |
Now that we know the number regrind pounds produced each year and the actual cost of regrind per pound we can calculate the annual cost of regrind:
| Annualized Cost of Regrind | ||
| [H] Annualized Cost of Regrind | $3,241,333.33 | Regrind pounds [F] * Cost of Regrind per Pound [G] |
| Regrind as a percent of Sales | 6.48% | Annualized Cost [H] / Annual Sales [A] |
This process made a lot of sense to all of us, and put the true cost of regrind at this company in a different light. In today’s economy, can anybody afford to squander over six percent of their revenue on a non-value-added activity like regrinding scrap?
I thought you might be interested in running these numbers for your own business, so I put together a little spreadsheet that you can download and plug in your own figures and come up with your own cost of regrind value. Are there any other costs of regrind that we should have included in our model?
The spreadsheet includes a space to show the impact of stepwise reductions in regrind. Obviously you can’t eliminate regrind because of job change overs, planned or unplanned down time, and so forth. But what is the value of reducing scrap by 1%” or 2% or 5%?
Does this model apply to your business? Please comment, schedule a conversation, or call us at 800-958-2709.
3 Comments
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Why would the value of regrind not be equal to the material cost of virgin material (in this case $0.75 per pound)? If it can be mixed back into the process without incurring physical limitations on use, then the cost of the sctivity should be the cost of conversion only – i.e. preparing the pruge/regrind in such a manner that will allow it to be reintroduced into the productive cycle. If cost of regrind is limited to conversion it is still not Lean, but it is more cost efficient relative to the example here.
Great question, Charles. I think this is the way most people look at it.
The real issue is that we need to account for all the costs that go into making that scrap. Last year one of our customers, Titleist, was featured in an article in Plastics Business. High up in the article the author makes the point that a business with a 5% scrap rate and 20 molding machines has one machine dedicated to making scrap.
It doesn’t matter that you can regrind and reuse the material. You still have all the costs of running that machine (depreciation, labor, tooling, maintenance, and so forth) to make the material that you’re going to regrind. That adds up to far more than the material cost of the virgin material. The formulas provided above attempt to account for that.
You should also factor in the lost opportunity costs. If you can sell everything you make, then the machine that you’re running to make that 5% scrap is making stuff you can’t sell. If it was making good product then you’d have that income. This point may seem moot in today’s economy when it seems that many are running way below capacity. However I’m aware of a number of businesses that are still running at capacity and need to squeeze every ounce of productive capacity out of their systems.
Hope that helps.
Evan
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