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All too often, pressured business owners run their companies by focusing on shipping product and achieving sales goals, with just a secondary emphasis on what factors impact the gross margin. Caught in a do-more-with-less philosophy, the complexities of margin erosion are often overlooked or not fully understood. Combine those factors with status-quo business controls, and a flat year might look good to many.
Proactive owners, however, are visionaries who can realize profits throughout their plant without having to make a sale. They understand that savings within the business equate directly to better margins and help for the bottom line. Whether it’s getting more out of employees or reviewing the details of manufacturing expense, these business owners realize that successful companies must reinvent themselves in order to remain competitive.
While most companies maintain good manufacturing standards, the challenge to make things better, faster and lighter through higher efficiencies is a continuous process. Those companies that are complacent or do not challenge their processes will find themselves in a downward spiral.
Manufacturing with CommoditiesManufacturing goods with precious metals is a tricky business. Customers want the glitter of gold, yet unprecedented metal prices and large market swings within the last several years have caused many a headache for purchasing managers and cost accountants. Only the largest users of precious metals are familiar with hedging techniques, and the rest are left to suffer the ups and downs of the markets through gross margin.
For example, let’s say a manufacturer prices an order where production costs call for gold at $800 per ounce. The customer accepts the order and the manufacturing process begins. However, the manufacturer has not yet purchased the gold, and the price has moved up to $850 per ounce. The manufacturer is now “un-hedged,” and their gross margin takes a beating.
Larger precious metal users should be quite familiar with hedging techniques. Ideally, revenue dollars should always match expenses, thus covering precious metals exposure within the sale. Smaller manufacturers might find relief within forward contracts, which effectively lock in the existing market price for future delivery. But manufacturers should make margins on what they do best-designing and manufacturing-not commodity speculation.
When Scrap is Not ScrapOne of the inherent evils of manufacturing is scrap. The ability to control scrap, reduce it and recycle it is an art in itself. Precious metals are easily tradeable commodities, and, because they are high in value and take on many forms within the plant, they demand constant respect. As such, manufacturers should not treat gold, silver, platinum or palladium the same way they would packaging supplies or cardboard for recycling.
Precious metal materials can be found in a plant under many different guises, and none should be ignored simply because of looks. All reclaimable materials contribute to the gross margin, whether they’re high-grade virgin materials; obsolete or spent inks, rags, wipes or scrap decals; ink containers; screen washings; squeegees; or hazardous wastes. To ensure continuity, all precious metal reclaim and recycling programs should be reviewed by senior management and tested regularly.
One mistake commonly made by companies is that their greatest concern is not where the precious metal scrap is going, but when the recovery check is coming back. Material is often collected by the shipping clerk and sent off to the same place; the check comes back like clockwork, and everyone is happy. But should they be? Hardly. In many instances, no refining history is maintained, no comparisons of refining lots are ever done, no one has ever visited the refinery, no compliance audits are ever performed, and no questions are ever asked.
Given the nature of precious metals inventories and their high values, business owners should be intimately involved in the reclaim process from start to finish, and they should analyze the recovery data as well. For example, one refinery could increase a manufacturer’s refining recoveries by 14%, or $8000, for one year. Assuming gross margins of 25%, the manufacturer would have to generate $32,000 in new sales to create $8000 in margins. Switching refineries is much simpler and less expensive than having salespeople find new customers and make new sales.
Gross Profit MarginGross profit margin is the major indictor of a company’s financial health. It shows the profit a company makes on the cost of sales and indicates how efficiently management uses employees and supplies in the production process. Without maintaining accurate profit margins, managers might find themselves making ill-conceived financial decisions.
Many times, companies simply book the recovery transaction incorrectly, thus distorting the gross profit margin. “The matching of revenue and expenses in the same period is an accounting principle that must be adhered to under GAAP (generally accepted accounting principles),” says Michael R. Okenquist, CPA, MST, CVA, MBA, a partner with Paresky Flitt & Company, LLP.
Manufacturers should be sure to book scrap recoveries as receivables. A common error when booking scrap recovery is that funds get applied to other income rather than as revenue. “If scrap income is an ordinary component of your business income, it should be properly included in revenue, so that your margins properly reflect your business results,” notes Okenquist. Including scrap income in other income rather than as part of gross revenue sold understates the actual revenue of the company, as well as the true gross margin of the business (see Table 1).
Refining ProcessUpon receipt by the refiner, material is weighed and the weights are then compared to the packing slip. A lot control number is assigned, and this number follows the material throughout production. It is best if each lot is run separately so materials do not co-mingle. After inspection, the refiner determines the best refining circuit for the material. The physical properties of the material drive the refining circuit, which typically includes incineration, direct melting, chemical stripping or chemical digestion.
The first stop for materials generated by the ceramic and decorating industries is typically incineration to remove valueless materials, such as paper and plastics, as well as VOCs. The loss of precious metals during the incineration process is a common misconception.
Once incineration is complete and the material is reduced to the consistency of fireplace ash, it moves on to crushing/ball milling. The ash is ground and crushed to the fineness of talcum powder and then screened for large items like steel rejects or precious metal tailings. Any precious metals that do not screen through are directly melted, sampled and assayed.
The crushed and screened material is then thoroughly blended to achieve homogeneity, and samples are taken. The samples are assayed to determine the percentage of precious metals contained in the sample, and those results are then extrapolated back to the lot weight for final settlement.
Refining fees are generally a combination of two factors. The first fee is directly tied to the value of the recovered precious metals. The refinery retains a percentage of the metal and pays the manufacturer the balance. The second fee correlates to the incoming weight; the refinery will assess a treatment charge per pound or a minimum lot charge.
The market settlement should be tied to an easily accessible market such as the London PM market, which is published daily through many readily available sources. It is wise to avoid spot market sales because the premiums applied to the sale are generally quite high. Since manufacturers own the material, they should help determine which market is used, as well as the day of settlement.
Finding the Right RefineryThe refining industry has shrunk over the past 10 years and very few companies remain. Manufacturers should look for a stable refinery that is committed to the industry. Precious metal scrap should only go to a qualified precious metal refinery.
Qualifications should include a plant visit, review of the refinery’s documentation for the U.S. Environmental Protection Agency (EPA), banking references, and reference discussions with fellow business owners within the industry. In addition, if a manufacturer’s materials are classified as hazardous waste, the refiner should have a clear understanding of hazardous waste classification rules, container labeling and storage, manifesting, and transportation issues.
For more information about refining precious metals, contact Geib Refining Corp., 399 Kilvert St., Warwick, RI 02886; (401) 738-8560; fax (401) 732-2841; e-mail firstname.lastname@example.org; or visit www.geibrefining.com.