A common problem I encountered in the companies I worked for in the past was that there were differences between "reported scrap" and "actual scrap." In many respects, it turned out that the scrap that was reported did not in fact reflect all scrap, or was not reported where it should have been.
Many businesses state that their scrap rate is between 1-2%. In very few businesses, however, does this reflect reality. From this it should be understood that, although scrap is somehow shown as lower in the figures, the cost in the business is actually much higher. In general, I can say that the true rate is around 5%.
How should it be? The points that must be observed in order to say that scrap is reported fully and correctly can be listed as follows:
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Every item of scrap must be entered in the reports of the line / workstation where it occurred.
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Every product that is repaired has, first of all, become scrap; accordingly, it must be entered in the scrap report before repair.
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Defective products resulting from the production of scrap have ceased to be raw material. They must be entered in the scrap report at product cost. It should be remembered that machine time and labor time have also been spent in order to produce scrap.
What is being done? Although there are many kinds of methods used to report less scrap, here we will address the ones that are applied most often.
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Not showing repaired products within scrap. In many companies this method is even treated as a success. Employees and foremen who are able to do the repair are placed in a privileged position. Fundamentally, however, you must not forget that the product ought to be produced right the first time, and you should treat every practice to the contrary within scrap costs.
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Reporting scrapped products only at raw-material cost. By showing the raw-material cost of scrapped products within scrap costs, the scrap cost is shown as low. Fundamentally, however, a scrapped product does not consist of raw-material cost alone. Labor, depreciation, overhead, and all other similar expenses have also been consumed. In addition, the profit that would have been earned if the product had not been scrapped has also been consumed. All of these should be included in scrap costs and reported in this way.
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When scrap is detected on another line, showing it on another line and, in a sense, diverting the target. This is a method applied especially to products that pass through many processes. When scrap is high, some of the scrap is sent to the next process together with the good parts. Because the scrap is then detected in the later process, the scrap rate stays low.
In every case, scrap eats away at the company. Correct reports are the beginning of reducing scrap. Knowing your situation clearly is useful from many points of view. At least, when you know the cost of scrap, you will have the chance to set your prices accordingly. In this respect, I recommend that you check your system and verify your scrap costs.
