Disposal of Scrap, Surplus

& Obsolete Stores

There is a old outdated Organ, to be dispose off

You have received bids of $ 10,000, $ 11,000, $

10,500/- How would you go about disposing off
of the Organ?
 The Organ
Organ was disassembled costing $ 3000

Tin from pipes was sold for $ 30,000

Remainder was sold for $ 3200

 Definitions
• What are Scrap, Surplus, Obsolete, and Obsolescent
Stores?
• (i) Obsolescent
• An item is said to be obsolescent when it is going out of use, but is not yet
completely unusable
• Example:
• A transport company has been running lorries of model X, but now
decides that in future, all replacement vehicles will be model Y, from a
different manufacturer.
• With effect from the date when this is announced, all spare parts in stock
for model X become obsolescent. However, these spares can be used for
repairing the vehicles to which they belong, as long as these models are in
service.
• When all the model X lorries are withdrawn, the left over spares can be
sold only at scrap value
 Definitions

• (ii) Obsolete
• An item is regarded as obsolete when it is no longer usable by
the organization concerned, because of change in operational
practice or production methods, or change in design

• In the example quoted above, when all the model X lorries

have disappeared, the spares of model X will no longer be
obsolescent, but will become obsolete
 Definitions

• (iii) Surplus
• When the quantity of an item in stock is more than is reasonably to
provide an adequate service to the production or operational activity, the
excess over the normal holding is said to be surplus. In other words, it
becomes redundant
• Example:
• If the consumption of 1/2 HP motors in a factory is 50 per month and the
quantity in stock is 6000 numbers, there is obviously some surplus,
because would last for 10 years!
• Surplus stock may arise as a result of change in production or operational
methods, or due to mistakes or inefficiency in stock control or in
purchasing
• Slow moving inventory is defined as stock keeping units (SKUs) that have
not shipped in a certain amount of time, such as 90 or 180 days, and
merchandise that has a low turn rate relative to the quantity on hand.
 Definitions
• (iv) Scrap
• This refers to unusable material whose value is only in terms of its material
content, whether it is metal, paper, or cloth
• The scrap industry in India is very big, because all scrap can be recycled to
produce materials of utility and of greater value
• Waste paper is used to produce cardboard or other packing paper. Steel scrap
is melted and rerolled. Waste engine oils are purified and converted to
engine oils with original specifications
• Scrap is usually of three categories:
– (a) Ferrous scrap: This is suitable for re-smelting to produce to produce iron, steel, or its
alloys. Some scrap – rerolling grade – is not smelted but heated and re-formed. Some grades
are basic open hearth and blast furnace grades, foundry grades and C.I. grades
– (b) Metal scrap (non-ferrous scrap): Copper, brass, tin, lead, zinc, aluminum, and nickel fall
in this category
– (c) Waste: It refers to all non-metallic scrap. Paper, corrugated containers, oils, bags, plastics,
rubber, wood, etc. fall in this category
 Definitions
• (v) Salvaging
• This refers to recovering or saving condemned, discarded, or abandoned
materials, equipment, or property, in order to obtain useful parts
therefrom. Salvaging can also mean the saving of material for further
utilization. The material thus saved is called salvaged material

• (vi) Reclamation
• This involves bringing back the equipment, worn-out parts etc. to their
original serviceable condition

• A typical example is retreading a tyre or metalizing a worn out spare part

and bringing it back to its original specification
 Definitions
• (vii) Review
• In most organizations, some degree of obsolescence or surplus is
inevitable
• It is mainly due to manufacture of products where the design changes
frequently and also in transport undertakings where rapid technical
development is a frequent phenomenon and large quantities of spares are
used for the equipment in service.
• It is, therefore, desirable to review all stock held from time to time to
identify items which are obsolete and surplus. This may be combined with
normal stock taking operation
• It is usual to conduct review by classification as it provides the maximum
opportunity to suggest alternative uses for items which are no longer
required for the purpose they originally served
• For example, if due to production changes, round bars of 10 mm are no
longer required, but there is heavy demand for 8 mm bars, it might be
more economical to use 10 mm in place of 8 mm until the existing stock is
exhausted, instead of disposing it off outside
 Obsolete and Surplus Materials
• How obsolete and surplus stocks arise:
• (i) a change in the design of the manufactured product
• (ii) change in the method of manufacture
• (iii) unforeseen reduction in the volume of production
• (iv) change of the product itself, i.e., where it has been decided to do away
with the manufacture of the particular product or make drastic changes in
its shape, size, qualities etc. such that it becomes quite different from the
old product
• (v) in the case of spare parts of existing equipment, when it has been
decided to phase out or sell off the old equipment and buy a new model
• (vi) some wrong decision on the part of management

• Such stocks must be put to some other use or disposed of

promptly, to realize maximum profits
 Obsolete and Surplus Materials
• Surplus and obsolete materials usually consist of raw
materials, spare parts, maintenance and operating supplies
• The operating department is usually responsible for declaring
surplus or obsolete raw materials and operating supplies
• The engineering and maintenance departments are
responsible for replacement parts and maintenance supplies
• Stores will figure in such decisions if the materials are regular
stock items
• In all the cases, the purchase department may be consulted
before stocks are declared surplus or obsolete
• Surplus and obsolete materials should be reported to the
purchase department for further action
 Obsolete and Surplus Materials
• Identifying Surplus and Obsolete Stocks
• These are usually identified from stock records
• This can be done by making an age and consumption analysis
• For example, if the stock is 2000 and the issues made during the last 5
years are only 6, 14, 21, 30, and 35, it will reveal a case of surplus stocking
• If no issues have been made at all for the past, say, 3 years, it is a case of a
non-moving item
• Such an analysis will throw up cases of slow-moving and non-moving items
from which surplus and obsolete stocks can be identified
• Before the review begins, Stores officer should find out what recent
changes in production or operations have taken place or what changes are
imminent
• From this information, it should be determined what major items of
materials or spares are likely to become obsolete and surplus. These will
merit special attention during the review. In addition, slow-moving stock
should be particularly examined whether it is still required
 Obsolete and Surplus Materials
• List of obsolescent, obsolete, and surplus materials
• The result of detailed examination of stock records is to produce a
preliminary list of items which appear to be obsolescent, obsolete, or
surplus. The next step is to investigate these items along following lines:
• (i) Obsolescent:
• In case of machinery or equipment spares, make a fair estimate of the
probable usage of each item up to the time when it is expected to become
obsolete.
• The balance quantity should be submitted for disposal immediately
• In case of raw materials, consult the Production Department with a view
to using as many items as possible for alternative purposes, as it is often
economical to do so
 Obsolete and Surplus Materials
• List of obsolescent, obsolete, and surplus materials
• (ii) Obsolete
• List for disposal without further inquiry

• (iii) Surplus
• In consultation with the operating department, scrutinize these items to
see if they can be put to alternative uses and, if not, decide on the
proportion of the stock to be retained

• (iv) Slow-moving stock

• Give special attention to those items where there has been no movement
for six months or more
 Obsolete and Surplus Materials
• The following information usually appears in the final list:
– Code number of the item
– Description
– Quantity in stock
– Quantity to be retained
– Quantity to be disposed off
– Original book value of the quantity in stock
– Recommended book value of the quantity to be retained
– Recommended book value of the quantity to be disposed off
– Amount to be written off
– Comments (e.g. remarks on condition, or slow-movement of stock, or
suggestions for method of disposal
 Obsolete and Surplus Materials
• Responsibility for disposal of surplus material and scrap is usually that of
the Purchase Department

• The operating department is usually responsible for declaring surplus or

obsolete raw materials and operating supplies while Engineering and
Maintenance Departments are responsible for replacement parts and
maintenance supplies. The Stores will be responsible to report on non-
moving items

• It is usual for many companies to have a committee to decide on surplus

materials

• This is a useful method to adopt

 Obsolete and Surplus Materials
• The following actions will be taken on the final; list:
• (i) the first task is to find out if the item can be used in any other
department, shop floor or plant. This is usually possible in a multi-plant
company
• (ii) another effective method of disposal is to investigate whether the
original suppliers will take it back, at the original price or a negotiated one
• (iii) the best method is to find out if any other user wants it. For example,
a mining company which has scrapped a particular equipment can find out
if another mining company using a similar type of equipment would need
the spares
• (iv) the material can be offered to a jobber or a second-hand dealer.
Sometimes, even employees are offered surplus items such as old car,
furniture, air-conditioner, or typewriter. Sale is usually by auction or by
obtaining sealed quotations
 Obsolete and Surplus Materials
• For equipment, machinery, vehicles etc. it is usual to fix a
reserve price. If the offers received are below this,
negotiations may be held to raise the prices. In some
companies, powers for disposal are given to various officers
for disposal of goods for which reserve price has been fixed
• (v) If none of the above methods work, the surplus material
may be sold as scrap. If the material in the existing form is
likely to be misused, it should be destroyed before sale as
scrap. It can also be sold as scrap if the cost of transfer or
return, or sale to another party, is less than what can be
obtained from sale as scrap
 Obsolete and Surplus Materials
• To avoid responsibility for malfunctioning of the item, after it
is purchased by the buyer, the sale is normally done on as-is-
where-is condition. This means that the selling firm takes no
responsibility or makes no express or implied warranty as to
fitness of the product
• Generally advertisements in newspapers or trade journals are
given for sale of surplus materials, which gives wide publicity
• The objective is to obtain the best possible value
• Surplus and obsolete stocks should be disposed off as soon as
possible, because retaining them in storage will incur
unnecessary inventory carrying costs
 Scrap Management
• Important points to be noted in scrap management are:
• (a) in the past it was assumed that scrap is inevitable in a manufacturing
environment.
• However, it should be realized that scrap is money usually sent down the
drain.
• It is necessary to investigate how it arose and whether it was really
inevitable
• Scrap might have arisen because of careless operations or rework might
have resulted in success
• Or the materials might have been sub-standard leading to quality
problems and ultimately to scrap
• The first task, therefore, is to investigate in each case as to why the scrap
has arisen
• This will help in reducing, if not totally eliminating, the scrap
 Scrap Management
• (b) next step is to collect, sort, and prepare the scrap metal
and waste
• Each grade of ferrous scrap or metal has a different value and
hence they should not be mixed up
• Also, different items will have separate buyers.
• Sorting, categorizing, and preparing the scrap are, therefore,
important

• (c) the scrap must be disposed off as soon as possible,

otherwise it can deteriorate
• Some companies have a policy of disposing of their scrap once
in 3 months to avoid deterioration in storage
 Scrap Management
• Some general recommendations with regard to scrap:
• (i) the best method of disposing of scrap is to make the buyer collect it
straight from the shop floor as it arises. A contract may be entered into for
this purpose. The scrap is weighed in a weighbridge. Main advantages of
this system are:
– (a) the scrap does not deteriorate,
– (b) it is not mixed with other material or other scrap,
– (C) it reduces the cost to the seller in terms of handling, and
– (d) storage space for the scrap is usually not required

• (ii) If the above procedure is not feasible, it should be ensured that each
type of scrap is kept without being mixed with other materials. The buyers
would generally prefer this, as it would save them the cost to sort out the
scrap
 Scrap Management
• (iii) It should be ensured that proper arrangements are made for weighing
the scrap, under the control of the seller, since many times, the seller is
taken for a ride by the buyer in respect of weight

• (iv) Scrap arising should be reduced to the minimum. The best approach
towards reducing scrap is to buy metals nearest in shape or form or size to
the product

• (v) some scrap can be used as raw material for smaller parts. This can be
either in one’s own factory or elsewhere. If it is elsewhere, the scrap can
be sold as raw material as it will fetch better price.

• (vi) Try to find out if a customer can be located for a direct transaction,
instead of selling to scrap dealer, as this will fetch better price.
Investigation into such a possibility will prove financially beneficial
 Scrap Management
• (vii) scrap has a value and must be treated as any other stores
item, i.e., as inventory.
• It should be accounted for properly and someone should be
made responsible for it

• (Viii) As a cost saving device, cost consciousness should be

created within the factory, in respect of scrap
• This can be done by training programs, posters, etc.
• This will, however, depend on the size of the company and the
magnitude of scrap arising
 Disposal
• Proper procedure should be laid down for all disposal actions
and accountability should be fixed
• It is preferable to have a team to constantly investigate the
possibility of better prices
• There are four methods of disposal:
– (i) re-use within one’s own company
– (ii) return to supplier
– (iii) sale to another company which will use it as raw material
– (iv) sale to a dealer or a broker
• Greatest return is realized if the material can be re-used
within one’s own plant
• Some processing may be necessary, but the savings still
substantial
 Disposal
• There can be various types of contracts for sale of scrap:
• (i) Fixed price contract
• This is usually for one year. The contractor removes the
material at stipulated regular intervals and is penalized in case
of default. The reason for the penalty is that the factory may
have problems in arranging enough storage space

• (ii) Varying price contract

• In this case, the price will be the ruling market price less the
dealer’s commission, which can be a stipulated percentage of
total value. This should be fixed by negotiation and the
method of ascertaining the market price should also be
stipulated in the contract
 Disposal

• (iii) Specific bids

• For each lot put up for sale, tenders are obtained and the lot
is sold to the highest bidder or through negotiation

• (iv) Ab initio negotiation

• Prices for each lot are negotiated with a regular dealer or
broker.
• Here, the seller will have to be careful and should find the
prevailing market price
 Salvaging
• It refers to the saving for advantageous use or disposal of a
company’s property which is no longer economically useful to
its owner in its present condition
• Salvaging provides a means for increasing cash income ,
reducing the cost of the company’s product or service, and
conserving raw materials
• A well managed salvage operation for manufacturing from
waste occurring in manufacturing, calls attention to apparent
excess of waste materials, reclaims materials and parts for use
in another form or for respiration to workable condition at a
cost lower than for buying new equipment
• Thus it contributes to conservation by restoring useful
materials to [production
 Salvaging
• Salvage material includes every type of unwanted and
disposable material mentioned earlier
• Salvage operations include:
• (i) Proper collection of all materials, preferably at one place
• (ii) Storing them as systematically as other items
• (iii) Sorting in terms of quality, size, or specification, so as to obtain
maximum sale value
• (iv) Ascertaining if any of the worn-out parts or materials can be
reclaimed. Metalizing techniques enable many worn-out parts to be
brought back to their original specification
• (v) Restoring materials to functional condition and transferring them to
Stores
• (vi) Reviewing purchase requisitions to see if reclaimed or salvaged items
can be used instead of purchasing new ones
 Reclamation
• Reclamation involves a knowledge of material, plant, and
equipment, and how a component is made and used

• Familiarity with various methods and equipment available is

important to bring worn-out parts back to serviceable
condition

• With some initiative, a company can develop improvements in

techniques for reclamation
 Reclamation
• The work of reclamation involves the following
responsibilities:
• (i) Knowing what materials are discarded in the company’s operations.
There must be detailed knowledge as to individual items and quantities,
and for this reason, reclamation should be part of the overall salvaging
effort of the company.

• (ii) Determining what can be reclaimed. This is not limited to making

material suitable again for its original purpose. Management should find
ways to convert many discarded items to some entirely different product
which the company requires

• (iii) Deciding the method by which each part or material will be reclaimed
 Reclamation
• (iv) Calculating the cost to return each item to usefulness. All costs,
including expense of collecting, sorting, inspecting, packaging, and
stocking, should be considered, as well as direct labor and materials and
supervising expense required in the operation.
• Sometimes, the cost to reclaim by one method will be very high, whereas
another procedure will be inexpensive. Constant study is necessary to
reduce costs by changes in method.
• (v) Determining whether it is economical to reclaim. It is necessary to
monitor the performance of reclaimed articles, to know whether they are
rendering service comparable to new products. Also, allowance should be
made for any difference in service life. Sometimes it may be desirable to
reclaim items for preserving critical material even though the cost is
higher than the price of new material
• (vi) Operating as a manufacturer. Regulate the production of reclaimed
material to meet actual requirements of the company.
 Reclamation
• Some examples of reclaimable items are:
• (i) Used lubricating oils
• These are re-refined by removing impurities and adding lighter-bodied oils
to restore the original viscosity and specifications. The cost will be less
than that of new oils.
• Cutting oils may be recovered from chips by several processes, simple
being by draining into vats. Another widely used process is use of
centrifugal extractor

• (ii) Tools
• Many hand tools like hammers, wrenches, files, screwdrivers, crowbars,
pneumatic tools, etc. can be reclaimed through various processes.
Similarly, a wide variety of cutting tools like saws, taps, dies, broaches,
chisels, reamers, milling cutters, drill bits etc. are reclaimable.
 Reclamation
• (iii) Bearings
• Economy in operation and maintenance can be realized through repair of
faulty bearings rather than purchase of new ones. Practically all types of
bearings may be reclaimed if existing conditions warrant.

• (iv) Metallic items

• Most widely used methods of reclamation are welding, brazing,
metalizing, and hard chromium plating. The choice depends on the
material of the part, the character of its failure or defect, the nature of the
service, the probable replacement cost, availability etc.
• Each method should be studied as to the economy of the procedure and
possible alternatives
 Reclamation
• Some examples of items which may be repaired by various
methods are:
• (a) Brazing or welding:
• Shafts, cutting tools, machine parts, castings, cylinder heads etc.
• (b) Hardfacing or metalizing:
• Shafts, axles, journals, pistons, cylinders, rail ends etc.
• (C) Re-forging:
• Various types of rods, some hand tools, most forgings etc.
• (D) Re-rolling:
• Axles, shafts, rods etc.
 General Remarks
• Coordination with other departments
• From what has been stated above, it is clear that a very large quantum of
losses can arise from surplus or obsolete stocks or from deterioration of
stocks
• All measures should, therefore, be taken to reduce these losses to the
barest minimum
• One of the measures that needs to be taken in this regard is to open a line
of communication with Sales and Production Departments and proper
coordination with them at all times
• Sales should inform Production immediately if there is any change in sales
volumes forecast. Production should immediately inform Stores, of any
change in rate of consumption. Similarly, when there is a phasing out of
either an equipment used or a product being manufactured, it is
necessary for Stores to be informed as quickly as possible. Stores should
then advise Purchase about the changes.
 General Remarks

• Some of the information that Stores should regularly pass on

to Purchase Department relates to:

• (i) Changes in consumption

• (ii) Slow-moving materials in stock
• (iii) Obsolescent materials (those which are falling into disuse and
becoming obsolete)
• (iv) Obsolete materials in stock (those which are completely not in use and
have no further value as stock)
• (v) Scrap for disposal
• (vi) Surplus materials
 RECYCLING- Environmental problem:
Elimination of causes of pollution and conservation of natural
resources.Natural resources are limited- minerals coal, oil etc

Benefits of Recycling:

Recycling of steel, almn, lead, zinc, copper scrap saves:

for 1000 mt of steel instead of iron ores.

1. 76% Energy.

2. Water 6.70 million gallons saved.

3. 104 mt of air pollution avoided

4. 2.75 mt of mining wastes avoided