Reducing material waste means better resource efficiency, minimizing pollution and more profits. Each dollar saved on raw materials cost saves the company at the bottom line. With costs for raw materials on the rise the pressure for manufacturing facilities to reduce product waste is becoming more and more important. Emerging markets are causing a dramatic increase in demand for resources, and supplies of many raw materials have become more difficult to secure. Commodity prices are likely to continue to rise and will remain unstable. Manufacturers are already feeling the effects in operations and bottom lines, and these issues will most likely persist , if not get worse.
Companies that take the necessary steps to increase resource productivity could produce significant value in minimizing cost while establishing better operations.
Direct material cost is something that everyone knows and can relate too. This is the cost of the direct materials necessary for producing goods for production. Here is an idea of how to calculate direct material cost.
Find the total amount to be produced. This is usually stated by the order size.
Calculate the total amount of raw materials required to produce the order.
Multiply that amount by the cost associated with the unit price of the raw material.
If there is waste, or scrap, it should be added to the cost in step 3.
If the waste or scrap can be sold at salvage value, this should be subtracted from the cost in step 4.
Looking through the steps and seeing how the calculation is done brings up some questions you should be asking yourself. Here are some of the questions you need to ask yourself.
If you calculate the total amount of raw materials you need to complete the order, then why would you have leftover waste or scrap?
What happens if you make a mistake in estimating the total amount of raw material and order a deficient amount?
What is the unit price of the raw material versus the unit price of the salvaged material?
How do these issues affect the total operational time-to-market?
Wouldn’t it be better to hold more inventory to reduce product lead time and needed less raw material to order?
For this article we will dive into the cost of material waste and how incorrect material orders can affect time and money.
Raw materials are the basis for all products in manufacturing. Increased manufacturing resource cost is encouraging management to find better ways to minimize product waste. Product waste is the excess raw material not needed from the supply. For example, it could be the copper wire that is snipped off to make the correct length for a wiring harness. Or the excess steel that was machined from the raw materials block. It does not matter if it is from the machining or installation of component materials the result is the same.
Salvaging is often conducted in industry to regain the cost of waste supplies. The issue with this method is that the marketed price is much greater than anything that could be regained through recycling waste. This just shows that understanding how much excess waste can cost and how it can affect direct material cost.
Having the estimated amount of raw materials needed to complete production is never an exact science. There is always going to be some margin of error in determining the precise amount. A good rule of thumb is buy more instead of less. Trying to squeeze all the money you can from the materials order is definitely good practice, but underestimating a supply order can be worse than overestimating the supply order.
Think about this from the start. Manufacturing facilities for products to market don’t have access to the basic raw materials necessary to start production once orders come in. There is often inventory reserves, but these do little more than offset the start period before the remainder of the material arrives. For small orders reserves could be enough, but for larger orders the amount stored might not suffice.
Estimating for cost efficiency is always a great practice, but making sure that the materials that arrive are the exact amount necessary to complete the project is hard buy. Using the example stated for improper measurements of raw materials for manufacturing is a prime example. If the original order did not take into account that there would be material loss then the manager would need to place another raw material order.
This might not be too much of an issue if the order is reasonable small, but again for large orders the same problem would go for the vendor you are purchasing from. The lead time for the vendor to ship the materials could range from a couple of days to a couple of weeks. This all depends on where they stand with their own inventory. The entire lead time must include the following:
Preprocessing Lead Time
This is the time required to release a purchase order from the time you learn of the requirements.
Process Lead Time
This is the time required to procure or manufacture the item.
Post-Processing Lead Time
This represents the time to make a purchased item available in inventory from the time you receive it.
If luck is in your favor then the company will have your product available in inventory and you can skip straight the the processing lead time step. If the product needs to be manufactured then this can slow progress down. At this point you are at the highest amount of lead time. If there are prior orders then this increases the lead time even more.
Now the manufacturing process is suspended for that project until materials arrive. This could have detrimental effects on the time-to-market deadline presented by the client.
It is important to understand that materials are not always available on demand and original estimates might need be on the high side for safety measures.
When dealing with long and/or unpredictable lead time, supply professionals often add raw material inventories to offset the added lead times and risk. Many companies practice this method as inventory is an asset on the balance sheet and it is judged to be cheap insurance. Assisting this decision process is the low cost to carry inventory used by most companies.
Even though holding inventories is a good way to mitigate the pain of falling short in manufactured goods, the direct and indirect cost are much high that typically believed.
Equitable cost to carry inventory ranges between 50 and 75 percent of the purchase price per year. Many companies have understated their costs by not considering the indirect cost associated with maintaining inventory. Companies don’t realize that inventory is beneficial for certain instances. Especially when production falls short and more products are needed immediately, or if small orders come in that inventory satisfies, but the truth is that the indirect cost associated with holding products is rather large.
The problem with inventories and their associates costs show up in increased overhead costs, low inventory turns, poor cash flow, and high obsolescence inventories. Perhaps these cost might be appropriately associated with increased lead times throughout the supply chain.
To sum it up the manufacturing waste associated with products is a growing concern for production managers. Having a precision means of estimating raw material costs can save money and time down the road. To accurately estimate the materials needed for a project an investigation of how and who will be performing the manufacturing should be conducted, to gage how much is needed to complete the order. Don’t be fooled and to think that the estimated, ideal, amount is exactly the amount needed to complete the project, because along the way from vendor facility to your own manufacturing personnel, some materials might not make it to the final stage.
Are there current operations that are setup to handle excess waste in your company? Or do you see ways to increase efficiency in production waste?