Editorial Foundry Trade Journal January/February 2017
SYNCHRO ERP is embarking on a technical scrap reduction study and associated cost analysis with a large USA customer. This article is the first in a multi-part series in which we will define, control, analyse, and publish the results. We welcome your input into this study; please contact Synchro ERP - firstname.lastname@example.org if you wish to contribute.
The True Cost of Scrap within the Metalcasting Industry.
Imagine a high volume automated foundry running an overall 21% scrap rate with suspect castings making it to the customer’s production line. A new general manager takes the helm and mandates that scrap will be no higher than 4%. Within two weeks and without any tooling changes, production changes, or scrap analysis, the new scrap target was achieved. How was this possible? As it turns out, the solution was to “remelt and not report our mistakes”. WIP and material inventory numbers become skewed when castings are remelted without being reported. Once the remelt bins were monitored to prevent unreported scrap from being remelted, the motto became “we bury our mistakes”. Material inventory, WIP, and Finished Goods continued to spiral out of control and the computer department was told that the software could not add and subtract and that a bug must exist. The financial controller of the company and the production supervisor stopped and inspected a dump truck leaving the facility with spent molding and core sand. Upon further examination, buried in the sand were scrap castings. The landfill was dug up and hundreds of tons of scrapped castings were located. The moral to the story: scrap reduction can only be achieved through analysis and changes and that a modern ERP software solution is required.
The authors maintain that all scrap reduction improves the bottom financial line. There is an economic opportunity cost associated with scrap in that the money, time, and materials could have been expended on other profitable endeavors. There is a real cost and a hidden cost associated with scrap. The real costs are easily derived while the hidden costs must be dug out of the landfill.
There are different types of scrap and a cause and effect relationship between the scrap reasons. In order to understand scrap, root cause analysis is paramount. With root cause analysis through a modern ERP-MRP software solution, the cost of the analysis can be minimized. Data entry of the production WIP and scrap is required and should be able to be achieved with a minimum of time and effort. Modern software solutions provide cost effective methods of data input through shop floor data collection terminals and tablet applications. Before embarking upon a scrap analysis reduction program, goals should be established such as reduction in PPM, identifying scrap or suspect castings at the earliest possible process step, and ability to identify the true cost savings.
Figure1 Example of rapid data entry of scrap information using a tablet APP
The true cost of scrap is a feedback loop in which the different types of scrap identified, the scrap is analyzed, corrections made, and then the results are fed back into the system and monitored. As a starting point in a scrap analysis, it is best to start with the castings that are the most costly to produce and have the highest scrap percentages. Reporting tools and dashboards along with historical information are readily available.
FIGURE2 Example of reporting and dashboard tools
As a precept, it is understood that not all scrap can be eliminated due to factors beyond the control of the metalcasting operation. Worn tooling is a cause of scrap and if the tooling cannot be replaced or repaired due to economic factors, then the cost of the scrap should be built into the pricing methodology models when warranted.
There will always be a certain amount of scrap within metalcasting operations due to human, equipment, material, and even environmental factors such as high humidity. The goal is to identify the scrap at the earliest possible production process within the process routing. At each process step, additional costs are incurred as the casting progresses through the steps towards becoming a finished good and ultimately arriving with the customer.
The authors have identified the following within the feedback loop from the highest to the lowest cost associated with the scrap and we identify hidden cost factors.
Ultimate Failure – Highest Cost
- Defective casting is received by the customer and is used in production. Example. U-Joint casting fails on a vehicle at highway speed
- Litigation, Recalls, Loss of reputation, Enhanced quality checks required such as 100% X-Ray, on-site sorting, shipping costs, costs of rework, repair, remake, reship, rework, repair, remake costs. Customer supply chain disruption and production line stoppage. Penalties, performance guarantees. Internal metalcasting disruption of the supply chain and scheduling.
Higher Failure – High Cost
- Defective casting received by customer and scrapped at customer before production usage.
- Same cost factors as Ultimate Failure
High Failure – High Cost
- Casting scrapped at final inspection before shipping.
- The full cost of the casting, less shipping and support charges, is applied to the cost of scrap.
Mid Failure – Lower Costs
- Castings that are scrapped in foundry before final inspection and shipping
- Analysis performed at each process in the routing and is costed at the point of discovery.
- Rework costs
Low Failure – Lowest Cost
- Identify the causation of the scrap at the source before utilization, be it tooling, material, labor, or process
In calculating the true cost of the scrap, an analysis involves these factors.
Cost and price of the casting vs. returns
Cost of scrap vs. internal costs vs. sold
Cost of scrap and rework vs. price
A key factor analysis needs to determine these factors:
Is the problem in the process, tooling, or material?
- Process analysis may indicate human factors such as inadequate training, failure to follow procedures, or equipment issues.
- Tooling is the basis for quality castings. Suspect tooling has a direct 1:1 correlation to suspect castings.
- Incorrect our out of specification materials must be quarantined and rejected during PO receipt
- If the scrap causation is external as with outside contractors and suppliers, these must be addressed through quality and inspection programs.
Economic Opportunity costs of scrapped castings dictate that a scrapped or reworked casting incurs “lost money” and incurs “costs” of time, labor, material. Once a casting has been scrapped, that “lost money” can never be recovered. An analogy of this premise is that if an airline pulls away from the gate with empty seats, those empty seats represent lost revenue potential that can never be recovered.
Other factors of the true cost of scrap have been identified by the authors include
- Analysis of overhead, SG&A, associated with processing scrap
- Direct costs of labor at the individual level vs. indirect costs
- Cost of remelt, especially when using pre-certified materials
- Determine the cost of rework vs. cost of scrapping. Is it less expensive to scrap than rework?
Central to scrap reduction is the identification of root cause. The question should be “what caused this casting to be scrapped”? Root cause is not always easy or possible to determine and due to the inherent complexity of metalcasting operations, many employees may not have the experience or training to determine the root cause. However, root cause must be available to the software during scrap data entry to be able to resolve the issues.
FIGURE4 Reporting examples available in modern ERP-MRP systems
In conclusion, scrap impacts the financial line. Reducing scrap, based on PPM, should be the goal of any metalcasting operations. The synergy derived from modern ERP-MRP solutions form a basis in reducing scrap percentages. A scrap analysis and reduction program is an infinite loop as it is constantly ongoing.
FOUNDRY TRADE JOURNAL January/February 2017
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