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Industry Best Practices For Tracking and Reducing Spoilage Costs

One of the easiest ways a company can improve their businesses is by reducing spoilage.

Spoilage is defined as wasted materials and labor consumed as a result of avoidable errors. Rework is another form of spoilage. Rework is the costs associated with reproducing a job rejected by the customer or because it did not meet your own expectations.

The most common method of measuring spoilage is to calculate spoilage costs as a percentage of revenue. Using this method, a company with annual spoilage costs of $30,000 and sales of $10,000,000 would have a 3% spoilage rate. The industry leaders aim for a spoilage rate between 1/2 percent and 1 percent of revenue.

There’s another gauge of spoilage that many companies fail to recognize. If a company's profit margin is at 10%, then the profit on a $10,000 job is $1,000. If the company spoils $1,000, then that company losses $10,000 in sales. The lower a company’s profit margin, the greater spoilage impacts the bottom-line. The following chart can help employees realize how much that $100 mistake really cost the company.

% Profit Spoilage Costs
$10 $100 $1,000
3% $330 $3,333 $33,333
5% $200 $2,000 $20,000
10% $100 $1,000 $10,000
  Sales required to recover spoilage costs

So who pays for spoilage? Since all printing organizations are in the business to make a profit or at least break-even, the customers ultimately pay for spoilage. The higher an organization's spoilage, the higher the product sell price must be to recover spoilage costs. Obviously higher prices will make an organization less competitive and more likely to lose business.

To reduce spoilage a company must first identify what’s causing the errors. Errors can be tracked by recording the error cause, the solution, and the recovery costs. Most business management systems also have the capability to track and report errors. Spoilage should be reported and monitored by reason on a weekly, monthly, quarterly, and yearly basis.

Reducing spoilage will also eliminate the non-value added activities needed to recover from errors. Non-value-added activities are those activities that aren't required but still occur. Anything that adds unnecessary time, effort, or cost is considered non value-added. To put it another way, non-value-added activities are any activity for which the customer is not willing to pay.

Most errors can be avoided by implementing better processes and through training. Organizations that implement a spoilage reduction initiative will reduce production costs, add more capacity to perform value-added activities, improve product quality, improve competitiveness, and increase profits.


By: Craig L Press
President
Profectus, Inc.



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