How would you calculate cost savings for scrap reduction? With scrap being more of a cost avoidance, how would calculate costs that would have happened if improvements were not made?

It's easy to think too hard into this subject.

Juran advises us not to try to count every dime, because it is too cumbersome a process. He advocates trending.

Cost of scrap is either the cost of materials and everything that happens to them to the point of scrap, including human time and overhead costs. Some people count the cost of the goods if they had been sold. The latter is the more straightforward approach but doesn't allow us to differentiate partial costs if the material is scrapped early versus far into manufacturing.

There is a quality cost calculators in this thread: http://elsmar.com/Forums/showthread.php?t=13438&page=2

How would you calculate cost savings for scrap reduction? With scrap being more of a cost avoidance, how would calculate costs that would have happened if improvements were not made?

Can you help me to understand why you say scrap is a cost avoidance? If you have it, it's a failure cost. If you can remove it, it's improvement. I can't see that it's an avoidance cost.

Scrap cost = cost of materials and labor/overhead to produce.

True you don't wnat to over analyze the related/potential costs, but you could consider, if it's high enough, the costs of process the papeerwork to reject, evaluate etc the scrap and the overtime taken to make up the numbers of product scrapped off.

Andy

Well, first, it is performance review time and scrap %/$ is one of our key measurables. I need to present cost savings/avoidance info to justify that big raise I'm hoping for.

Understanding that I'm not the accounting guru, it has been explained to me that certain costs like scrap is considered a cost avoidance rather than a cost savings. Maybe someone else can better explain. Basically it is unplanned cost. Look at http://www.esourcingforum.com/?p=175 for a general explanation.

What I'm trying to calculate is the cost savings due from our scrap reduction efforts. If we had a scrap reduction of 1.8% in 2005 to 1.2% in 2006, how would I translate the %improvement into a dollar amount?

I hope I'm not oversimplifying it, but the question seems like a straightforward math problem to me.

1. If you know the constant (Gross? Net?) you'd know your cost is (your chosen amount for that year) times 1.8%.

2. Take that same constant (for the new year, as I expect the figures could be different) and multiple it by 1.2%.

Subtract result 2 from result 1. My math shows that this third result, when divided by the first one, shows a gain of 33% (translated into 33% less loss) which passes the straight-face test when comparing 1.2% against 1.8%.