Did you know that 38% of manufacturers say they lose 1 to 2 percent of annual sales to scrap and rework? That means for every million dollars in sales you are losing $10,000 to $20,000. How do you score on percentage of scrap and rework?
Whatever your score is on this metric you can improve it by becoming engaged in continuous process improvement. Consider this, companies engaged in continuous process improvement see higher productivity, faster turnaround times, greater throughput, and greater profitability. Continuous process improvement is the key to achieving world-class status in the eyes of your customers.
Any amount of scrap or rework you’re experiencing in your operations points to an opportunity for improvement. The biggest challenge is discovering the root cause of the issue so you can make the process improvements that will allow you to approach the goal of right the first time quality. Otherwise you will be stuck in an endless loop of fire fighting without actually solving the problem – a solution that will save you money and improve your cash flow.
How Scrap Hurts the Bottom Line
Because the cost of inventory so high, you simply cannot afford to generate waste. Consider this: if your raw materials cost is 33% of your product, and you must scrap the original order, needing to remake the original product, your raw materials costs have just doubled and the ability to turn a profit has been greatly reduced. You need to efficiently turn raw materials to cash as quickly as possible. Even a small amount of waste can be very costly. Let’s say, your scrap rate is 6% of your production now and it is reduced to 4%, that newly created capacity may now be used to produce new/additional product and your savings should account for the cost avoidance of using new/additional material to complete the existing order. Reducing rework and scrap can generate money that goes right to your bottom line.
Scrap and Rework Affect your On-Time Delivery Performance
Any time you experience defects in your production that generates scrap or rework your chances of attaining on-time delivery shrink. Future production also suffers because rework rob you of the capacity to complete the other jobs in the system, which puts you at risk of delivering other orders late, potentially upsetting customers who expect on-time delivery.
Be Proactive–Collect Process Data
Instituting a system of Lean metrics to address production deficiencies is the key to managing your processes. What’s your first-pass yield, Overall Equipment Effectiveness (OEE), dock to dock time, manufacturing cycle time, scrap rate, inventory turns? Having the right metrics help to drive the intended behavior and performance. Once you decide on the data to collect, collect it and use it to improve your processes and/or products.
Scrap and rework not only impacts your bottom line but it also reduces your cash flow. The solution to the scrap issues is to continually improve your processes to prevent scrap from occurring. The benefits accrued include improved productivity and efficiency, increased capacity, and above all higher profits.
Willie Carter began his career as a paint chemist at a Akzo Nobel subsidiary in suburban Chicago where his love for manufacturing began. Over the years his career has taken him to work with numerous SMEs to Fortune 500 companies in assisting them with optimizing their operations and administrative functions through continuous process improvement techniques. Carter is currently serving as president of Quantum Associates, Inc, which specializes in optimizing business processes to minimize costs, accelerate cycle times and improve efficiency. The company’s overarching goal is to help clients do more with less. Carter holds a BA in Chemistry as well as an MBA. He holds certifications as a Lean Sensei, Manager of Quality and Organizational Excellence and ISO 9000 Lead Assessor. He is also the author of Process Improvement for Administrative Departments: The Key to Internal Customer Satisfaction.
He can be reached at email@example.com or by phone – 847-919-6127.