How to Reduce Rework and Scrap to Improve Cash Flow

December 05, 2013

by Bill Kirchherr

Any amount of scrap or rework you’re experiencing in your operations points to an opportunity for improvement. The biggest challenge is discovering the root cause of the issue so you can make the improvements that will allow you to approach the goal of 100% quality. Otherwise you will be stuck in an endless loop of fixing the symptoms of the problem without actually coming to a better resolution – a resolution that will save you money and improve your cash flow.

How Scrap Hurts the Bottom Line

Because the cost of inventory so high, you simply cannot afford to generate waste. Consider this: if your raw materials cost is 30% of your product, and you must scrap the original order, needing to remake the original product, your raw materials costs have doubled and the ability to turn a profit has been greatly reduced. You need to efficiently turn raw materials to cash as quickly as possible. The number one reason small businesses go out of business is lack of cash flow! Even a small amount of waste can be very costly. If the scrap rate is 8% of your production now and it is reduced to 6%, that newly created 2% may now be used to produce new/additional product and your savings should account for the cost avoidance of using new/additional material to complete the existing order. Reducing rework and scrap from occurring can generate money that goes right to your bottom line.

Scrap and Rework Affect the On-Time Deliveries Customers Expect

Any time you experience defects in your production that generates scrap or rework your chances of attaining on-time delivery diminish. Future production also suffers, as while you complete the rework, the job you should have been working on becomes the next job in line. So now that job’s on-time capability is affected as well, potentially upsetting customers who expect on-time delivery. It’s a negative geometric progression that gets worse over time.

Finding the Root Problem of Scrap and Rework

To get to the root cause of the rework and scrap, CONNSTEP conducts Root Cause Analysis – a analytical, systematic approach to define, identify and solve problems by seeking out the origin of the problem. There are many tools associated with RCA including fishbone diagrams, Pareto Charts, cause and effect diagrams, failure mode and effects analysis (FMEA), and Kaizen, to name a few. The objective is to define the problem, collect data to substantiate the problem, identify possible causes, identify the root cause, and recommend – and implement – solutions. Asking a simple “why” is often not enough to delve deep into the root cause and create a permanent working solution. We need to ask that question several times over to get to the true root cause of what’s causing the defects and rework. The exercise of “The Five Whys” is a continuous improvement technique used to reveal an issue’s root cause.

Developing a Proactive System

Having a proactive system in place to address production deficiencies is key to your success. What’s your first-pass yield, OEE, dock to dock time, manufacturing cycle time, scrap rate, inventory turns? It is essential to have the right metrics to drive the right behavior and performance. The data collected needs to be used to improve the product or process otherwise why take the time and effort to collect it? Scrap is detrimental to your entire process – no matter where it is generated. But if it’s occurring at your operation’s pacemaker or constraint, it will have an even more severe detrimental impact. Time lost at the constraint is lost forever while time lost at the non constraint theoretically has time to catch up.

Accurately measuring what’s happening on your production floor is crucial. Using the PDCA: Plan/Do/Check/Act method also helps companies improve their process methodology. As in the rest of continuous improvement and Lean Manufacturing methods, this is a closed loop system. Even after you’ve improved your processes and reduced scrap and rework, you still need to continuously measure your progress and make required adjustments. Any deviation from plan, no matter how small, is still a deviation that must be addressed for overall success.

The easiest way to limit defective product is to “make one, move one.” Using Lean continuous improvement initiatives, flowing product at the smallest possible increment that makes sense. By consistently monitoring the progress in a one piece flow environment, your exposure to large quantities of quality problems is drastically diminished. The positive impact this can have on managing scrap and rework cannot be overstated.

Is scrap and rework impacting your bottom line?

Contact us today for assistance with reducing your scrap and rework rate.

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