The Business Case For Formal Scrap Management Programs

Scrap companies often get a bad rap. Yet some of the more sophisticated ones clearly provide tremendous value by elevating the procurement function within manufacturers.

Separated scrap. Photo: United Scrap Metal.

We recently caught up with Brad Serlin, President of United Scrap Metal Inc., and toured their Cicero, Ill., operation to better understand what makes a “best in class” scrap recycling program and why most manufacturing organizations need to formally manage these types of programs.

The Value Proposition

Why would a manufacturing company and/or a producer want to strategically implement a formal scrap program?

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Brad cited several compelling reasons including:

  1. Minimizing capital outlays – With red metals like copper no longer trading at $1/lb, companies of all sizes pay more for raw materials, chewing up larger lines of credit. Proactive scrap programs can help lower raw material cost outlays while decreasing the need for working capital
  2. Large original equipment manufacturers need greater visibility into the materials and capabilities of the extended supply chain. These OEMs want to ensure that their suppliers are efficient and lean because that ultimately drives cost
  3. Compliance and risk management mean OEMs need to know that their suppliers have proper procedures to manage materials across the entire product lifecycle. Moreover these companies want to ensure that key suppliers have paid attention to environmental regulations, OSHA requirements, permitting and operating processes as well as sustainability initiatives
  4. Maximize the opportunity cost of employees’ time — with timely reporting, predictable payments via ACH transfers; automated scrap removal (similar to kan-ban), etc.
Brad Serlin of United Scrap Metal. Photo: Taras Berezowsky, MetalMiner.

Because the scrap company (dealer) sits between the seller (in this case the manufacturing company) and the buyer (the extruder, mill or other producer), value propositions differ slightly. On the mill side, having forward visibility into raw materials and baseline volumes helps maintain heat schedules and melting operations.

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More sophisticated scrap dealers can provide additional visibility as well as assist during periods of material shortfalls. For example, earlier this spring, the market saw a shortage of brass metals including copper. By running a wire chopping line seven days a week, even with overtime and extra expenses, companies like United Scrap Metal can meet mill raw material requirements and, more importantly, maximize uptime for their consumers.

Scrap pile at United Scrap Metal. Photo: Taras Berezowsky, MetalMiner.

Let’s Talk About Risk

Though risk remains a hot topic in procurement and supply chain circles, how does it impact supply chains for scrap?

If a small, unsophisticated scrap company comes to a facility and picks up an old drill-bit machine and proceeds to crash on the Kennedy Expressway causing a fatality, the company seeking to dispose of the machine is on the hook from a liability perspective. Another example involves commercial cooking equipment that goes out of service. If a scrap yard decides to resell it (perhaps on eBay) and there is a fire, the liability goes back to the commercial equipment manufacturer.

“High integrity, key performance indicators, formal documented compliance and risk management programs combined with ISO14001 all describe the type of scrap dealer that manufacturing companies ought to want to work with,” according to Serlin. “Our people are cross-trained from the start and they are more proactive in the business community and have even begun taking more corporate entrepreneurial responsibility.”

Who Should Have a Formal Scrap Program?

Essentially any manufacturing company generating at least 2,000 pounds of non-ferrous scrap or 3 tons of ferrous scrap would meet minimum pick-up requirements. However, these guidelines provide the tonnages but not the business case. Other criteria include:

  1. Any company that produces a by-product from the production of their main products and needs to manage the lifecycle of that product.
  2. Any company that — heaven forbid — produces off-specification or has damaged materials does not want to see those products/materials back in the marketplace.
  3. Any company that needs to ensure products are not co-mingled and/or cross-contaminated would benefit from working with a company with good ISO14001 practices, KPIs, bar code scanning and related tools and techniques.
Bar code ready to be scanned upon arrival. Photo: Taras Berezowsky, MetalMiner.

It’s easy for manufacturing companies to apply the “three bids in a box” type approach and call around for the highest bidder. However, according to Serlin, the customer feedback that he most likes to hear says, “your prices aren’t always the highest, but you provide the best overall value.”

At the end of the day, “best overall value” hardly has a scrappy sound to it.

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