MARKETING MATTERSCEO JOURNAL


The True Cost of Scrap S


DAN MARCUS, TDC CONSULTING INC., AMHERST, WISCONSIN


crap is the biggest cost prob- lem most metalcasters have and will ever have. By far. But


accounting can’t measure the true cost of scrap, and cost systems actually thwart our understanding of it. Cost of quality (COQ) metrics are better but can’t fully capture it either. As a result, management attention and action is typically drawn elsewhere, and the enormous potential for scrap elimination to turbocharge profits remains untapped. Truth be told, too many metalcasters


are preoccupied with pinching pen- nies, to their own detriment. It’s one of manufacturing’s enduring paradoxes that a strategy of cost cutting is the surest way to dam- age operational performance, weaken competitiveness and, ultimately, increase costs. But it doesn’t have to be that way, for modern manufacturing and quality management tools and techniques long ago proved scrap elimination to be a sure path to significant perfor- mance improvements as well as sustainable cost reduction. Specifically for yours truly, intimate familiarity with scores of income statements tracking the pro- found bottom line impact of Compat- ibility-driven scrap elimination has led me to the unshakable conclusion that scrap’s true and total cost is around five times the castings’ sales value. Scrap’s true cost begins with the


occurs if remakes require overtime, secondary processing is involved, or additional scrap is produced and more remakes are needed. Te activities surrounding the act


of scrapping out parts also create lots of expensive waste—inspection and re-inspection, lab testing, defect anal- ysis, multiple shipments, QC data entry and paperwork, accounting data entry and paperwork, rescheduling, and on and on. Tis waste serves to push the cost of scrap to around three times its sales value and, as always, the deeper into the supply chain the scrap goes, the more expensive this and all waste becomes.


disease, the total cost of which is around five times the sales value of the original scrapped castings. But there’s more. Scrap creates costs


Te true and total cost of


scrap is mainly hidden,and is around five times the sales value of scrapped castings.


Most deeply hidden of all is the


obvious reality that metalcasters must produce twice while receiving pay- ment only once. Tis is about as far as accounting can take us, to a scrap cost approaching two times the sales value of the castings thrown onto the scrap pile. Moving beyond the obvious, it’s a fact that capacity and the opportunity to produce parts customers will actually pay for is lost when scrap is remade. Tat this profit-making opportunity is wasted pushes the true cost of scrap to more than double the sales value of scrapped parts. Even more cost damage


fact that scrap causes the worst pos- sible kinds of damage to flow, pro- ductivity and throughput, making scrap by far the most deadly of the seven deadly wastes. In this context, scrap not only creates situation-spe- cific and job-specific damage, which can be said to nearly quintuple its cost, but it also creates systemic and semi-permanent cost structure damage by reducing efficiencies and increasing costs throughout the entire order fulfillment system. In this way, persistent scrap prevents operations and offices alike from being fully productive, and thereby actually short-circuits the business’s ability to generate profit. Overall then, scrap is best thought of as a substantially hidden profit-killing


that go well beyond the P&L to the very heart of vital customer relation- ships and revenue sources. On one hand, scrap often results in metalcast- ers being cut off from their best source of new business, as scrap-prone sup- pliers get few opportunities to quote if they are perceived by customers as unable to handle the work they already have. On the other hand, persistent scrap can cause customers to pull some or all of their business, which in turn erodes competitive standing, cuts metalcasters off from even more new business opportunities, and sparks an accelerating decline in the business’s ability to gener- ate revenue, control costs and earn profit. Te cost of this kind of damage cannot (for all practical purposes) be quantified, but common sense tells us that the true and total cost of scrap is increased by them. While many in our


industry insist on thinking


and behaving in pennywise but pound foolish ways, CEOs who are think- ing outside of that box are creating businesses that earn three times the industry’s average profitability or more. And at bottom it’s Compatibility, and the low scrap and exceptionally lean cost structure Compatibility allows, which separates those winners from the rest. Appreciating the true cost of scrap and embracing Compatibility- driven scrap elimination can have such profound bottom line impacts that they may seem a little like magic, but real-world examples abound and point the way for all CEOs who are truly serious about cost reduction.


Keep the conversation going. Reach the author at tdcconsulting@outlook.com to comment on this or any CEO Journal column or to suggest topics for future columns.


April 2015 MODERN CASTING | 43


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