When the economy turns sour and the order book dries up, what does a business owner need to do? Of course, the first thing that comes to mind is to control the bleeding of cash. That means working the receivables to get what’s owed and making sure that expenses are minimized. In manufacturing, sometimes all the reasons for those expenses on the production floor are not completely understood. If the reasons are not known, how can those costs be controlled? It is difficult.

Costs on the production floor obviously include the materials and labor to make the products. But are there areas of hidden costs that really could be improved? Areas like scrap or rework? How many damaged or out of spec components are literally put in the scrap bin? Costs creep upward and capacity creeps lower when a component has to be run through the line again. Sometimes, these are just accepted as a cost of doing business, but what are those costs? Do you know? How can those costs be controlled, reduced or eliminated? It is important to measure these costs in order to take any actions to control, reduce or eliminate them.

In profitable and highly efficient manufacturing companies, yield data is routinely gathered, monitored and actions taken to improve the yield. There are two measures of yield that are important: First Pass Yield and Scrap Rate. First Pass Yield is the number of good pieces completed without any rework anywhere in the process divided by the number of pieces started. This number is sometimes called the Rolled Throughput Yield or Rolled Yield since it really is the product of the yields at each process operation. Scrap rate is the number of pieces scraped out during the process divided by the number of pieces started. Both are important to know in order to control production costs.

Most companies will have some idea of the level of scrap associated with their production. Fewer companies will have an understanding of the amount of rework required to get the product out the door. Rework is often called the hidden factory! Reducing the size of this hidden factory is one key to controlling and reducing production costs.

How do you go about finding how big this hidden factory is and why it exists? Start by gathering data about the First Pass Yield and Scrap Rates at key points in the production process. A simple tick sheet will do. Enlist the help of the production operators to prepare a list of the defects that cause them to either send a piece for rework or to the scrap bin. List these reasons, each on a separate line, on a paper along with one final line for good parts. Then, as each piece exits the operation, for those parts going to rework or to scrap put a tick mark on the line next to the appropriate reason. For good parts put a tick mark on the line for good parts. Gathering this information over the course of a few days will quickly show how big the hidden factory is. This information will also reveal the major reasons for rework and the major reasons are for scrap. Now you’re in a position to make the changes to reduce or eliminate the causes for rework or scrap. You’ll want to work on the big ones first, the ones with the greatest cost impact.

Use some of the same production operators and a couple supervisors to generate solutions for reducing scrap or rework. A quick group problem solving session, called a kaizen in Lean Manufacturing terms, will provide common sense solutions to begin the reduction of rework and scrap. One solution will often lead to another and so it goes.

Finally, to see that the changes have indeed worked as anticipated, it’s a good idea to have the production people maintain a simple graph of the percentage of pieces sent for rework and the percentage of pieces sent to scrap daily. Watching this chart over time will alert you to the occurrence of problems that need action. Also, regularly looking at what are the reasons for rework and scrap will enable you to identify and work on the next bigger problem. By continuously monitoring and taking action, the size of the hidden factory and the cost of scrap can be reduced, maybe even eliminated! Now you are in control of this aspect of your production cost.