In manufacturing, scrap is an inevitable part of the process. Whether it's metal shavings, resin pellets, or meat trimmings, companies must account for material waste to maintain accurate costing and efficient operations. Microsoft Dynamics 365 Finance and Operations (D365 FO) offers robust tools to manage scrap effectively, helping manufacturers stay on top of their production metrics.
1. What is scrap?
The Association of Supply Chain Management (ASCM) defines scrap as “material outside of specifications and processing characteristics that make rework impractical.” Scrap is the discarded material that is generated during a manufacturing process. Companies try to reduce the amount of scrap that is produced but it is not possible to eliminate it entirely. Scrap is either used in subsequent production runs, or it can be sold to other companies which recycle it. Or companies may need to pay to dispose of scrap.
For example, a metals company might not be able to use the metal shavings from a single production run; however, as metal shavings accumulate over time, they can be incorporated into a future production run or sent to a metal scrap processor for further refinement.
Image 1: Metal shavings
Another example of scrap is the discarded resin generated during a plastic extrusion process. The resin scrap can be collected and used in subsequent orders, or it could be sold to a recycling company. The company might also choose to replace virgin material with scrap, regrind, or recycled material.
Image 2: Resin pellets
In a meat processing plant, trimmings might be the scrap generated after other cuts are made. The trimmings can be used in another process, as animal feed, or sold to another food manufacturer.
Image 3: Meat trimmings
D365 Finance and Operations allows both discrete and process companies to define scrap on Bills of Materials (BOM), formulas, and routes to enable organizations to plan for additional raw material quantities and capacity required for a production run. Organizations can also define the yield percentage while defining the formula.
This article discusses the differences between setting up scrap on BOM/formulas vs. a route.
2. BOM/formula scrap calculations
Where to find these settings in D365:
Path: Product information management/Bills of materials and formulas/Bills of materials or
Path: Product information management/Bills of materials and formulas/Formulas
Note: We will use a formula defined in Contoso Process Industries (USPI) for Illustration purposes.
Bill of Materials/Formulas in D365 allows users to define 2 different types of scrap:
1. Constant Scrap
2. Variable Scrap
Image 4: Formula Details for item P4000
2.1. Constant scrap
The quantity of material used during the initial setup and startup of a line is constant scrap. This is the amount of material that is not dependent on the quantity produced and will always be scrapped during the machine start-up and calibration for this item.
Example of constant scrap formula: Item P4000, Name: Polypropylene Pellet
Image 5: Constant scrap on Formula Line M4004
- Create a production order for Item P4000 (Polypropylene Pellet) for 10,000 lbs. and estimate it.
- D365 calculates the quantity of M4004 Polypropylene required for the order of 10,000 pellets by multiplying the order amount by the quantity of the formula and then adding constant scrap: 10*867 +100 = 8770 lbs.
- The estimated quantity of M4004 now shows 8770 lbs. on the formula line for the production order.
Image 6: Formula lines on a production order with estimated quantities
2.2. Variable scrap
Variable scrap is the amount of material that is lost during the production run and, as the name suggests, it varies based on the quantity produced. The losses can occur due to the machine, the material, or the process itself, and are defined as a percentage. The quantity specified in this field increases the raw material requirement.
Example of variable scrap formula: Item P4000, Name: Polypropylene Pellet
Image 7: Variable scrap on Formula line M4004
- As in the first example, we will create a production order for Item P4000 (Polypropylene Pellet) for 10,000 lbs. and estimate the order to calculate the raw materials required. In this case ‘Variable Scrap’= 10.00 (or 10%)
- To calculate the quantity of M4004 required, multiply the order amount by the formula quantity and then add 10% of variable scrap: 10*867+ (10*867) *(10/100)= 9537 lbs.
- The estimated quantity of M4004 now shows 9537 lbs. in the formula line item.
Image 8: Formula lines on a production order with estimated quantities
2.3. Constant and variable scrap
Example of constant and variable scrap formula: Item P4000, Name: Polypropylene Pellet
Image 9: Constant and variable scrap on formula line M4004
In this example, we will include both constant and variable scrap in our calculation.
- Create a production order for Item P4000 (Polypropylene Pellet) for 10,000 lbs. to estimate the amount of polypropylene required during production to fulfill it.
- Quantity of M4004 required = 10*867+ (10*867)*(10/100) + 100= 9637 lbs.
- The estimated quantity of M4004 now shows 9637 lbs. are required.
Image 10: Formula lines on a production order with estimated quantities
Note: When the cost roll up is done for the BOM/Formula the scrap quantities are included in the calculations
3. Route scrap calculations
Route scrap is used when an organization wants to specify the scrap by operation. Each operation can have a different scrap percentage, which tells the system the additional quantity that must be produced because of the scrap on that operation. The calculated hours of the operation are also affected by the scrap percentage specified.
Where to find these settings in D365:
- Routes can be accessed by going to Production control>Operations>All Routes
- Click on Route details
Route 000003 is associated with Item P4000 (Polypropylene Pellet)
Image 11: Route details form
When a new route operation is created:
- The scrap percentage by default is 0.00
- The Accumulated value by default is 1.00
The accumulated value is updated when the scrap value changes; it drives the component quantity requirements to account for the inefficiencies in the operation.
3.1 Calculation of accumulated value
The accumulated field on the route operation is calculated using the formula below:
Case 1: Change the scrap percentage of operation 10 to 10 %
Image 12: Scrap percentage on operation 10
When the scrap percentage changes, the “Accumulated” value does not change automatically. The value is calculated when a user either closes the form or clicks the “Update Route” button on the activity tab as shown below.
Image 13: Update route
The Accumulated field now shows a value of 1.11.
Image 14: Calculated accumulated value on operation 10
If we look at the calculation for Accumulated we find:
Case 2: Define the scrap percentage of 10 on operation 10 and operation 30
Image 15: Scrap percentage on operation 10 and 30
- Click on Route/Update route
- The update accumulated values are shown below
Image 16: Calculated accumulated value on operation 10, 20 and 30
The system calculates the values from the last operation to the first one.
3.2. Association of operation to a formula Item
Formula details section allows users to specify the operation in which each item is consumed
Image 17: Association of operations with formula lines
- In the above example the first 2 items are associated with operation 10. The accumulated value specified on operation 10 in the previous section will be used to calculate the amount of the component M4004 and M4005 needed for the production.
- If an operation is not specified on the Formula/BOM lines, then the system considers all materials will be required for operation 10.
3.3. Production order using route scrap
Create a production order for Item P4000 (Polypropylene Pellet) for 10,000 lbs. and estimate it. In Image 18 below, you can see that only operation 10 has a scrap percentage specified on it.
Image 18: Calculated accumulated value on operation 10
The system calculates a value of 9633.33 for item M4004 and 1077.78 for item M4005
Image 19: Estimated quantities of items M4004 and M4005
Calculation of estimated quantity for M4004 = (10000) *(867/1000) *1.11111 = 96333.33
Calculation of estimated quantity for M4005 = 10000(97/1000) *1.11111= 1077.78
In this example, because of inefficiencies in operation 10, you need extra quantities of items M4004 and M4005. Other items which are used on subsequent operations are not affected by this.
Route
Schedule the order
Image 20: Scheduled jobs for the production order
- Operation 10 is scheduled from 7:30 AM to 9: 10 AM = 100 Minutes
- The standard route was specified at 45 mins for 5000 units
- For 10,000 units = 90 mins
- Taking the Accumulated(scrap) into account = 90 *1.11111= 99.9999 =100 minutes
In conclusion, the scrap percentages can be specified both on BOM/Formulas or Routes. Where you specify will depend on the business needs of your organization.
Key takeaways
- Choose the right setup: Use BOM scrap for static, setup-based waste and route scrap for operation-specific control.
- Plan for accuracy: Including scrap in cost roll-ups ensures better financial and operational planning.
- Optimize efficiency: Understanding and managing scrap helps reduce waste and improve production outcomes.
Scrap may be unavoidable, but with the right tools and setup in D365 FO, manufacturers can turn waste into opportunity. Whether you're refining your costing model or improving production efficiency, scrap management is a key lever for success. Contact our manufacturing experts to learn how to turn waste into opportunity with D365.
