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Do you manage scrap properly?

That waste stream should be looked at as a revenue stream

Figure 1
Most metal fabricators don’t think much of scrap. They throw it into a bin and forget about it. Is that really the way that a company wants to treat a revenue source?

Editor’s Note: This article is adapted from “Scrap Management: Are you maximizing your revenue stream?” presented at FABTECH 2015, Chicago, Nov. 9-12, 2015.

A company that processes metal wants to eliminate as much waste as possible. To put it simply, the scrap is worth less than the finished part.

Worthington Industries, which is involved in processing steel for automotive parts and in the production of engineered cabs for heavy equipment, cylinders and tanks for energy storage, and ceiling grid systems, knows this firsthand. It processed 6 million tons of steel in 2015 and is the largest purchaser of steel in the U.S. behind vehicle manufacturers. In fact, Worthington Industries’ steel is in more than half of the cars produced in the U.S. last year.

About a decade ago, Worthington Industries decided to focus more on its scrap. The reason was simple: It was a revenue source. In fact, they had so much success managing and growing this revenue stream that today the company manages scrap programs for a number of its customers across the country.

Some manufacturers may not think of scrap as potential revenue, but in most instances, scrap represents the second-biggest revenue source for a company that makes metal products. While your company may make products that generate a primary source of revenue (see Figure 1), in a general sense, most metal processing operations can point to scrap as a secondary source of revenue.

Of course, recognizing scrap as a revenue source is key. When you do that, you are more likely to create procedures and controls to focus on maximizing the revenue stream. You would not let finished products ship without the proper internal procedures, so why shouldn’t you apply the same thinking to scrap?

Here are six tips that have helped Worthington Industries with its scrap management and that can help other metal processors.

1. Have the Conversation

Scrap may not be a hot commodity right now, but it is a hot topic. The scrap-processing market has changed dramatically, with many vendors going out of business. Scrap prices have declined significantly, and those scrap vendors that remain are trying to renegotiate contracts to achieve more acceptable terms.

This year is likely to be a continuation of tough times for scrap companies. The market may improve when global demand for metal increases, but the chance that scrap prices will hit 2008 levels anytime soon is unlikely.

The time is ripe for you to have internal discussions about your scrap management. Scrap vendors are in a position where they have to be responsive. A loss of any sizable customer is a blow to surviving these tough financial times.

Figure 2
A shop that can segregate its metal scrap can maximize its revenue from a scrap dealer.

It’s always good to assign a point person to oversee this effort. Having one employee who is vested in scrap management and is keeping an eye on the process can help boost the revenue stream.

2. Put a Team on It

One person can be responsible for scrap management, but it is going to take a team to control the process. In many instances, this is going to fall in the laps of employees in shipping or logistics. The simple reason is that shipping personnel are right there when the scrap driver comes to pick up the material. The driver probably fills out the appropriate paperwork in the shipping office.

The goal is to get that paperwork to the accounts receivable manager in the front office. How the paperwork gets there will help to define who is part of the team.

This could be part of a continuous improvement activity. It’s just a matter of answering some questions. Who should be responsible for ensuring information flows from shipping to the front office? What people are involved, from the generation of the scrap to the remittance of the payment? What steps are taken to get from scrap generation to payment?

3. Take a Critical Look at the Scrap Vendor

Pay a visit to the scrap vendor or potential business partner. Look for a facility that is secure, which keeps trespassers out and protects the scrap from theft. Make sure there is a truck scale with digital controls; hand-written scale tickets can be mislabeled very easily, but computer-generated, stamped scale tickets are hard to manipulate.

A quick look around the property should give you an idea how the scrap vendor handles potential environmental issues. If oil has collected in various spots around the lot, the vendor might not be the most environmentally conscious.

One potential source to consult when looking at scrap vendors is the Institute of Scrap Recycling Industries website (www.isri.org). Members of this organization are considered to be leaders in the scrap handling industry. For example, if highly valuable scrap is stolen from a company, a note is placed on an ISRI message board to notify members of the crime and to ask them to be vigilant of any parties that may be looking to sell the stolen goods.

4. Know What Goes Into the Scrap Price

To find out the price that a mill is paying for scrap (which is then melted and formed into steel products), consult a reference such as American Metal Market (www.amm.com). AMM reports an industry-accepted market price for scrap in geographic areas of the country.

Ask any scrap handler and they can provide the “base” number. For instance, a scrap vendor might say, “I’m at AMM Chicago minus 50” or even “I’m minus 50.” This means if the market price in a given region reported by AMM is $200, he’s paying a customer $150 per ton.

The biggest cost eating away at the price received for scrap is freight. Ideally, you want a nearby dealer to deliver scrap to a mill. Do not engage in a relationship with a scrap dealer that is 200 miles away and ships scrap to a mill 200 miles farther from them. The price is reduced each time scrap is handled or transported.

It is also helpful to know the types of scrap nearby mills accept. Knowing where the scrap is being shipped for remelting will help with the negotiations.

Figure 3
Which of these objects doesn’t belong in the metal scrap bin? If a metal processor is not in a position to demand multiple bins from a scrap handler, it at least can instruct employees to keep nonmetal and trash out of the main scrap bin.

Other factors influencing scrap pricing are equipment cost, fees associated with scrap processing and handling, and the vendor’s profit margin.

5. Organize the Scrap Correctly

Not all scrap is equal. Punched holes from hot-rolled steel with good chemistry usually goes to a foundry. Heavier scrap, such as a plate or structural steel, is a different grade and usually goes to a larger mill for melting.

If possible, segregate the different types of metal (see Figure 2). That’s less handling that a scrap vendor has to worry about and ultimately charge for. If the scrap is of a smaller size, say 3 to 5 feet or less, a mill can accept it without much worry.

Do not treat the scrap hopper like a trash hopper (see Figure 3). An employee might throw his fast-food bag in the hopper after lunch. A maintenance technician might throw a paint can in the scrap bin. Mixing trash and scrap reduces its overall value (see Figure 4) because the scrap handler must segregate the material when it gets back to the yard and charge you accordingly.

Investigate your equipment requirements prior to negotiating a contract with a scrap company. While multiple bins may be desired to help segregate the waste, the scrap vendor may not be of the same mindset. The scrap dealer wants to provide boxes that turn over regularly, and may not want to have a bin sit there for six months before it is full enough to be picked up. Include these requirements during negotiations.

6. Keep in Mind That It’s Business

Without a doubt, the truck driver who picks up scrap on a regular basis is going to have a great relationship with the shipping clerk. They see each other regularly and may have a real bond.

That’s nice, but it’s not the No. 1 goal. Maximizing the scrap revenue stream is what matters. You’re selling a product. That revenue needs to be captured before any discussion of grandchildren or secret fishing holes takes place.

In the end, metal processors need to realize that a better scrap contract is not about saving money. It’s about growing revenue.

Scrap isn’t a waste stream. It’s a revenue stream. Companies need to wrap their arms around the process and make sure it’s under control—just as they would any other revenue source.

If metal fabricators have difficulty in improving their own scrap management, it may be worth a call to an outside organization that can assist them in growing this revenue stream.

Figure 4
Scrap vendors value clean metal scrap, not a collection of trash with some metal in it.