Asset Based Lending Inventory Haircuts on Work in Process Scrap Inclusions
Asset based lenders apply steep haircuts to work in process inventory containing unseparated scrap to prevent standard cost card yield errors from inflating borrowing bases.
Turnings Segregation
Meaning
The practice of separating metallic chips and shavings by alloy type at the point of generation prevents contamination during recycling. Effective turnings segregation ensures that different materials, such as aluminum, steel, and brass, are collected in dedicated bins and processed separately. This division maximizes the market value of the scrap metal.
Operational Practice
Machinists clean the collection trays of CNC machines between production runs of different materials to prevent mixing of the shavings and chips. They label each scrap bin clearly with the alloy code, record the weight in the database, and move the bins to separate storage areas within the warehouse. This discipline prevents cross-contamination that would degrade the quality of the melted secondary metal and reduce the salvage value.
Value Protection
Contaminated metal turnings command a much lower price from recyclers, as separating mixed alloys is difficult and expensive. By maintaining clean, single-alloy batches, machine shops can negotiate higher rebate rates and lower processing fees. The financial return directly rewards the extra operational effort.
Auditing Standard
Internal auditors review the scrap management process quarterly to ensure that bins are correctly used and labeled. If they discover mixed batches, the scrap is reclassified as low-grade mixed metal, which reduces the expected recovery value on the balance sheet. Regular audits protect the program’s efficiency.