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%).
|[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|
|Labor / Processing||$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.