Scrap sells

Markets for wastepaper and other scrap have been moving up for two years. Is your organization reaping the benefits?

By Rod Sherkin

Curiously, many companies spend little time making sure they get fair value for the scrap they generate, such as used paper and cardboard, plastic waste, pieces of steel or other metals. Not surprisingly, money gets left on the table.

Steel scrap markets have been moving up steadily for the past two years. The value of a no. 1 dealer bundle (a common grade of industrial scrap) has literally doubled since the end of 2001. (See graph below.)

The value of office wastepaper shows a similar trend, and the price of old corrugated containers, while volatile over this period, still shows upward movement.

If you're not sure whether your scrap dealer passed on the appropriate increase, ask the accounts receivable department for the payment history. That will tell you whether you need to get on the phone.

The plain truth is that purchasers (the people usually asked to sell scrap) are generally too busy with higher priorities (like purchasing) to pay much attention to the scrap market. So what's a financial professional to do?

The best defence against opportunistic scrap dealers is to negotiate deals that tie scrap payments to a published index, and insist each invoice show a photocopy of the relevant data.

Of course, it is also prudent to check the dealers' relevant data now and again against an independent source of pricing information (another trade journal or a website such as www.Propurchaser.com).

Finally, make sure you are being paid for all your scrap. Indexed pricing works only if the weights are correct. Here are two ways to check:

• Pre-weigh your scrap at your premises and check your numbers against the figures the dealer uses to calculate payment. If weighing each load is difficult, do it randomly, making sure the dealer does not know which loads are checked.

• If weighing in-house is not practical, use a public facility. Make sure you choose the public scale (and change it occasionally). Randomly ask the driver to get weighed on his way back to his yard. Have the stamped, signed weigh ticket sent directly to you. Of course, the dealer will know this particular load has been weighed, so catching irregularities means looking for longer-term trends, i.e., checking if pre-weighed loads are generally heavier than those that do not go to a public scale.

Beware the dealer who promises to give you higher than market prices: this simply cannot be done -- at least not without cheating.

Rod Sherkin (rod.sherkin@propurchaser.com) is president of Sherkin & Associates Inc., a Toronto-based management consulting firm that helps organizations drive down costs by optimizing purchasing processes.