Feeling Pinched? Try Scrap Management for a Few Margin Points

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Sourcing Strategies

Yesterday, we spent some time talking about how middle market manufacturers can create natural hedging opportunities by paying close attention to their scrap management programs. Today, we offer some additional tidbits.

First, security – some firms treat their scrap in such a cavalier fashion as much could be lost in theft each year as is sold for net revenue. Scrap is a valuable commodity and should be held in secure conditions. More important still every pound should be tracked and accounted for, just as inbound goods and raw materials are tracked and accounted for.

Second, where more than one grade of scrap is generated each grade should be segregated and stored in clean conditions. Where multiple metals are concerned this becomes even more critical, as some metals are considered a contaminant to others in the scrap recycling process. Mixed grades and contaminated scrap have a significantly lower value than clean and demonstrable traceable scrap.

Third, maximise the sales value. Don’t rely on a long standing relationship with Joe Metal Merchant down the road. At least benchmark the prices. In virtually any geographic location there are multiple scrap dealers willing to bid for your product. It is the simplest of matters to have them bid for every lot once a month or however you choose to sell. It could be quarterly at a fixed discount from the average futures market quotation. In fact using an average (as with purchasing) helps to even out the peaks and troughs. In an ideal world you would create a mirror of the price fixing from your purchase arrangements to truly achieve a matching hedge to rises or falls in your purchase costs. For an industry that operates so heavily on a cash basis, having an auditable and established price fixing process such as an auction helps to safeguard the business against the possibility of fraud (you won’t be surprised to hear scrap is one of the most notorious sources of loss to metal processing companies).

Last, track Comex or the LME. Stay informed of market movements and create incentives for your staff to track, analyze and maximize the revenue earning opportunities of your scrap management programs. It is an often overlooked source of price stability and revenue. And given increased cost pressures, who wouldn’t implement such a program

–Stuart Burns

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