IFC ADVISORY SERVICES IN EASTERN EUROPE AND CENTRAL ASIA VISUALIZING MFCA Note how both physical and monetary units are tracked throughout the production process ECA RESOURCE EFFICIENCY PROGRAM (this is an illustrative example). MATERIAL EFFICIENCY CASE STUDY Material Process 1 Material Process 2 Final product 200 tons Slaughter 175 tons Meat 125 tons $100,000 house $87,750 processing $62,750 KEEP TRACK AND STAY IN THE BLACK How manufacturers can improve profitability, make better business decisions, and reduce waste Process 1 — Resources Expended Process 2 — Resources Expended Waste 25 tons Waste 50 tons Did you know that the real cost of waste can be up to 100 times $12,250 $25,000 higher than you think? Energy 22 000 kWh Energy 40 000 kWh $2,800 $5,600 Many manufacturers underestimate their waste costs by focusing on disposal expenses and recycling revenue, missing the high cost of raw materials that don’t end up in the final product. In fact, by tracking the cost Labor 200 man hours Labor 50 man hours $4,000 $1,000 of raw materials, energy and other resources throughout the production process, significant cost reductions can be identified and waste decreased. Tracking also provides actionable information about production processes empowering companies to make more effective business decisions. CHECKLIST FOR GETTING STARTED WITH MFCA: IFC examined three manufacturers in different countries to discover the true cost of waste in their operations, identifying strategies for cutting costs, reducing waste and increasing efficiency. The results of the study and an approach for achieving 1 Involve management to ensure a successful implementation. improvements follow. 2 Form a cross-departmental team from the production, accounting, environmental, quality control, R&D Waste costs can be understated and other applicable groups and familiarize the team with MFCA. by as much as 100 times THE REAL COST OF WASTE FACT Many manufacturers underestimate the real 3 List the main input materials (raw and auxiliary) and output materials (product and waste) including $10,000 Perceived cost of the waste they generate waste costs energy expended. Use this list to estimate an initial input-output-mass-balance for the plant. By focusing on waste disposal fees and misleading recycling revenue 4 Define the material flows to monitor (a production line, a specific product, or a specific material) along with at the end of the manufacturing process, producers can overlook costs a time period for taking measurements. Material flows are movements of material between various quantity for managing waste like labor, energy, and most importantly, the expen- centers, where the material is processed or stored. sive cost of wasted material purchased at the beginning of production. Actual $1,000,000 waste costs 5 Create a flow chart to depict the movement of material through the production process noting both 100x perceived PROFIT POTENTIAL REVEALED waste costs the physical and monetary values of material and expended resources. The flow chart can be based on a plant or production line layout. FACT Identifying and reducing the true cost of waste can set the stage for new profits 6 Define quantity centers as cost centers along the material flow (e.g. a machine, a unit of the production The best way to identify and reduce the cost of waste is to examine Material Costs as a Percentage line, a department, or a storage area). the amount of material used to make your product. Since material of Production Costs costs are often the largest share of all production expenses, using 7 Identify the amount of material and energy going into and out of each process/quantity center. less material can lead to significant savings. In fact, this is a sounder 78% Aluminum production 15% strategy for reducing overall costs than focusing on labor expenses 7% 8 Identify system costs for handling material including labor, depreciation, maintenance, and transportation which are usually a smaller portion of costs. 70% for each quantity center and each transition between quantity centers. Meat For the three companies involved A small increase in material efficiency 12% processor in this study, material costs accounted can yield big savings. Specifically a 2,5% 18% 9 Build a rough summary of the input and output volumes and costs. You can use a simple MFCA matrix. for 70 – 80% of their production material efficiency increase can yield 80% This will provide you with an overview of both product and non-product costs, providing a guide Tin can expenses. Thus, reducing material a yearly savings of $1,360,000 11% for the most promising ways to reduce costs. producer in product as well as in waste is a great (real-world example of company 9% way to decrease overall costs — a much in this study with $55,000,000 German 56% 80% 10 Once MFCA is in place, integrate it within a Plan, Do, Check, Act (PDCA) management cycle and set production 26% more effective option than cutting labor in annual production costs). measurable targets for increasing material efficiency, reducing costs and rewarding employees for successful industry 18% expenditures. implementation. The PDCA cycle should be repeated regularly in order to ensure constant improvement. Material Other Labor In partnership with www.ifc.org 2014 BETTER DECISION MAKING USE LESS MATERIAL, LOWER COSTS FACT Tracking material, energy and other resources in the production process can identify By carefully tracking the cost of materials and resources discarded during the manufacturing process, the factories the true cost of waste and provide useful information for making a factory more efficient in this study can identify the true cost of waste and become more efficient. They have the potential to reduce costs from 2.5% — 4% of total production expenses per year. Tracking pinpoints where the most expensive resources are wasted in the production process, providing a blueprint for corrective and useful information for adjusting manufacturing processes. For all three companies in the study, the biggest cost reduction potential comes from an improvement in material efficiency since material costs range from 70 – 80% of total production costs. A small improvement in material efficiency can yield big savings and significant waste reduction. Labor Energy Other An increase in material efficiency would result in the following estimated benefits Material Aluminum Production Meat Processor Tin Can Producer Final product Slaughter Material Meat house processing Material costs Other costs Labor costs Waste: 7% 9% 18% Material, Energy 15% 11% Labor, Other 12% $19,300,000 Cost of Wasted Resources 78% 70% 80% FIND THE WASTE, CUT YOUR COSTS Using ISO 14051 guidelines for material flow cost accounting (MFCA), IFC assessed three factories in Europe Cost reduction potential Cost reduction potential Cost reduction potential and Central Asia to identify the cost of waste in their operations. IFC discovered that the manufacturers where vastly underestimating their waste costs. In particular, each factory demonstrated a significant potential for cutting 3% of production costs 4% of production costs 2.5% of production costs costs by reducing the amount of physical material that was lost during the manufacturing process. $800,000 $2,320,000 $1,360,000 THE TRUE COST OF WASTE IFC discovered millions of dollars of hidden waste costs after assessing the three manufacturers in this study. The true cost of waste for each plant ranged from 4 — 103 times higher than the companies’ estimates. In fact, when considering recycling revenues, two out of the three companies considered waste disposal to actually FINDING THE HIDDEN COST OF WASTE bring in revenue, causing a major misperception about waste costs. ISO 14051 and Material Flow Cost Accounting Aluminum Products Producer Meat Processor Tin Can Manufacturer In order to identify the true cost of waste it is essential for manufacturers to closely track material as it flows CIS company; Serbian company; Turkish company; through the production process and assign costs to discarded material and the resources expended to manage 150 million meters 18,000 tons of meat Makes tin food and aerosol cans; the discarded material. This can be accomplished using material flow cost accounting (MFCA) as described of roll-formed profiles per year; products annually; 375 billion unit production capacity; in ISO 14051. 25,000 tons of coated Exports to Western $450 million turnover; Material flow cost accounting (MFCA) is based on the concept that all raw materials that enter a factory aluminum coils made per year; European market. 450 employees at a 17,000 m2 will exit as part of a final product or as some type of waste (otherwise known as non-product). MFCA is a system 70,000 tons of coated steel facility. for tracing the amounts and costs of this material through the entire production process, as well as the resources coils made per year. used to process this material, such as energy, labor and transportation. The end result of a proper MFCA implementation is a clear picture of the costs of these resources as they are $18,000 Reported $187,000 Reported $1,200,000 Reported waste costs waste costs waste costs deployed or lost in specific points of the production process, providing useful data for identifying opportunities to reduce costs and improve the production process. For example, in this study, MFCA techniques revealed that the tin can producer which was reporting $200,000 74x Hidden 103x Hidden 4x Hidden in revenue from waste ($1,400,000 in recycling revenue less $1,200,000 in waste expenses was actually Reported waste costs Reported waste costs Reported waste costs incurring $5,550,000 in waste costs. Thus, MFCA revealed that it is advantageous to cut the amount of waste costs costs costs generated instead of creating more recyclable waste which appeared to generate revenue. $1,350,000 $19,300,000 $5,550,000 True cost of waste True cost of waste True cost of waste