I've done quite a bit of that myself.

Waste is basically a by-product. Therefore, you must allocate all the costs of the production of the primary product to that primary product (after all it is the reason for making all these costs in the first place), and not try to split it between all the various products and wastes. I have seen quite a few attempts to develop such cost control systems. All they did was confusing the manufacturer even more, and moreover such systems never paid for themselves back.
the sales force, on their end must make sure that they sell everything, including waste and by-products for the best price possible. Nothing should go be thrown away, especially in a time when recycling has become one of the key issues.
Keep it simple.

Hope this helps!

posted January 14, 2008

Hi David, my experience tells me that in terms of product costing, (specifically in the food industry), the customer is rather unlikely to foot the cost of waste or over consumption (give-away). The industry standard in compiling the costs, however, will no doubt include a loss allowance within the BOM (bill of materials), This allowance will typically be nominal, to a level no more than 1% or 2%, the rest of the waste and over consumption will be paid for by the manufacturer. Typically (I believe) the BOM variance is calculated as follows:
Total BOM = What ingredients you bought
Waste = What you recorded as such from collection
Theoretical use = what you have declared on the product packaging
Over Consumption = Total BOM - theoretical use - waste
After all, if the recipe says you didn't need it, and you didn't sweep it up, it must have gone into the product as over consumption.
Now for the watch out, in 9 out of 10 instances, when you formulate the material blance, the critical element will be the reporting of your consumption and waste, and the focus is required to ensure this is accurate. Where ever any simulation or model shows areas of opportunity, the data must be reliable otherwise local improvement initiatives invariably end up as reporting inaccuracies and the cycle is demoralising for al those involved.
My recommendation is therefor to actively start with acuuracy as the main kpi of the system and then attack with a smile on your face, as history would agree, from first focus, the payback can be huge.
I do hope my answer wasn't at too basic a level, and apologose if this is so, however, it is the fundementals in this type of activity which are crucial in order that those huge savings are achievable rather than purely theoretical.
Best regards
Dylan

posted January 15, 2008

In manufacuring the concept of Overall Equipment Effectiveness (OEE) may be relevant, and transferable to the food industry requirements to measure and allocate the impact of waste & give-away/overproduction.

In this method each step of a manufacturing process provides an impact analysis for wasted time, production cycles and materials in creating a product from raw materials. Labour could be treated as a raw material that adds a cost to the product.

In summary the Overall Equipment Effectiveness for a particular step in a process = Availability% x Performance% x Quality%

Where:

Availability % = actual time producing / planned time to produce (e.g. on-shift time)

Performance% = total production / theoretical production (based on design cycle times)

Quality % = good (useable) pieces / total pieces made

The Quality measure shows that give-aways (total pieces - good pieces) is manufactured using good materials and useful production time. At each step the food has been through every step (except sale) and has had production value added. Therefore I think it should be measured on production costs.

Waste might be considered in one of two ways:

- In-process products that fail some quality criteria and therefore are scrapped. I think this should be measured on production costs.

- Waste materials. On the basis that waste materials have no added value, I hnink they should be measured on material costs.

Because each step in the process has its own OEE, you can look at each step and analyse it in turn. The step with the highest OEE is the "busiest" and therefore probably a bottleneck. Low OEE steps identify opportunities to implement improvements in Performance and Quality. Because of the dynamic nature of processes, low Availability in one step may be the result of poor OEE in another. Hence you sometimes need to use dynamic analysis techniques to produce a complete picture. We have used this many times to help identify the key steps in a complex process, and where the opportunities for efficiency and productivity lie.

What do you think of this analysis and idea?

- Vinod

posted January 15, 2008

Hi David,

The answer - it depends:

1. Assuming your production line has plenty of capacity - it can produce more than market demand, then the impact of scrapped product is purely the material cost (including packaging if that is part of the scrap).

2. If the line is sold out - you have more market demand than the production line can fulfill - then it is the selling price - you lose the full impact of the selling price, not just the scrapped materials.

Rudi

posted January 17, 2008

Hi!
David,

If you are looking for suggestions on reducing wastage and thereafter calculating it for Food Mfg. Industry then I belief a food technologist can help you do it.

But, ..... if you really want to reduce the cost of production, then I would suggest you sart up with a time & motion study to figure out the ManHr engagement per shift of production. This picture would invariably give you a clear direction of Non-value adding time and under-utilizatuion of ManHr and Machine. Check the machine designed capacity. Try to avoid situation of running those below 75% of Load.

I guess this broadly gives the answer to your question.

Best of Luck
Debojit

posted January 16, 2008