Scrap Allowance

Question:

We are starting an anodizing project with a large automotive company. According to their policy, no fallout is allowed, and any scrap will be charged back to our company. We are in the electrocoating, anodizing and painting business. The automotive industry takes up 90% of our business. We have always tried to establish some type of scrap allowance when we deal with a new customer. This scrap allowance may be up to 2% of the total volume that we simply ask the customer to accept as a natural cost of doing business. Our actual scrap rate is always less than 0.5%, however. Do you think it is reasonable for this customer not to allow (pay for) any scrap? A.S.

Answer:

Back in the "old" days (before 1980, let’s say) it was common practice for the job shop finisher to lose parts or make scrap parts in the course of processing, often at an unacceptable rate. Customers usually did not hold finishers strictly accountable for this, what seems now, sloppy practice. When scrap rates became too large, there was usually a discussion initiated by the customer, which purpose was to get the finisher to do better, or else the customer would find a new supplier.

As America began to lose ground in world markets throughout the ‘60’s and ‘70’s due to universally poor quality, customer-driven quality programs began to take root in this country. The core philosophy of quality programs was, and is, to get everyone in the manufacturing chain to determine the causes of poor quality, take ownership for them and institute policies and processing procedures to raise quality and reduce scrap. Somebody has to pay for the scrap and customers started holding accountable those who produced it. Finishers were among those who were made accountable, and rightfully so, if the scrap was due to their poor processing and mishandling of customer parts. As scrap rates began to fall everybody was happier, but unless scrap or rework is zero, somebody still has to pay for it.

Rework and scrap is not always the fault of the finisher. Sometimes the parts are not within the acceptable tolerance. This could be due to bad metal, wrong size, scratches and abrasions from mishandling or poor packaging or a myriad of other causes. If this is the case, one must discover these defects before processing and make it known to the customer. If your scrap rate is consistently less than 0.5%, you probably have some effective quality control procedures in place. If the parts are priced to achieve a profit level that is acceptable to you, even after accounting for the cost of the scrap parts that you make in your process, it seems to me that you have already built in the cost of scrap. If, on the other hand, your scrap rate is significantly higher, it might be difficult, or impossible, to build in the cost of your scrap rate and still be competitive.