Shrinkage, Scrap and Sunk Costs: Finding the Hidden Numbers in Your Floor Operations

There’s a problem eating away at your margins, and it’s not rising material costs or supply chain delays. It’s the silent, daily drip of hidden waste on your production floor. Whether it’s scrap metal piling up in the corner, inventory that “walks off” or legacy equipment that’s draining your team’s efficiency, these losses don’t always show up on your balance sheet. But they’re costing you real money.

Too often, we find manufacturers relying on topline metrics like total output or revenue per unit to measure performance. Those are useful, sure. But they don’t tell the whole story. Your factory floor has a story of its own, written in scrap bins, downtime logs, rework tickets and broken parts. And if you don’t have a system to track and interpret those signals, you’re flying blind.

Let’s talk about what’s really happening underneath those topline reports and how we can help you uncover the numbers hiding in plain sight.

What the data says about manufacturing waste

Waste in manufacturing is far from rare. The U.S. manufacturing sector loses billions of dollars annually to operational inefficiencies such as rework, scrap, shrinkage, and unscheduled downtime. In fact, estimates show that up to 20% of raw materials in some facilities end up as scrap or unusable product.

That’s just the tip of the iceberg; the U.S. Census Bureau’s Annual Survey of Manufactures confirms a troubling trend. Many small to mid-sized manufacturers report ongoing issues with inventory shrinkage, process inefficiencies, and sunk costs that have become normalized over time.

What do these losses actually look like in practice? Here are a few examples:

• Excess raw materials ordered to “be safe” but never used
• Inventory miscounts that cause rushed reorders
• Product rework that consumes hours of labor but yields no new revenue
• Outdated machines that constantly require repair but are still in use because “they work well enough”

These waste streams are often seen as the cost of doing business. But that assumption eats away at your profit margins every single day.

Understanding and tracking the right floor-level metrics is the first step toward turning hidden waste into actionable insight. And with the right partner, you can create reporting that actually tells you what’s hurting your bottom line.

Scrap rates: The silent killer of margins

Scrap is one of the most overlooked and costly metrics on your production floor. It’s the material you paid for, moved, processed and maybe even inspected… only to throw it out. And it’s more common than most manufacturers are willing to admit.

In our experience working with manufacturers, scrap can account for anywhere from 3% to 10% of total material costs (depending on the industry and how well the floor is managed). That might not seem like much at first glance, but let’s run the math. If your annual materials cost sits at $8 million, a 6% scrap rate equates to nearly $480,000 lost per year.

Scrap often comes from a few key culprits:

• Improper machine settings or operator error
• Poor maintenance leading to downtime and rework
• Inadequate training or inconsistent processes
• Mismatched materials or outdated product specs
• Lack of real-time data visibility on the floor

Every one of these issues can be tracked, measured and addressed. But that only happens when leadership demands visibility and accountability — two things often missing when scrap gets normalized as “part of the job.”

At James Moore, we work with clients to uncover the full financial impact of scrap and translate it into operational language your team can act on. From implementing lean manufacturing principles to improving floor-level reporting, we help businesses stop writing off six-figure waste as business as usual.

For a deeper look at how we help manufacturers improve margins through smarter operations, check out our Operational Excellence services.

Shrinkage: Not just a retail problem

Shrinkage isn’t just a retail issue. On the manufacturing floor, it takes on a different shape. Materials disappear mid-process, tools go missing and work-in-progress inventory never makes it to the finished goods line. These losses may seem small on a daily basis, but they quietly erode profitability over time.

According to supply chain management company Ligentia, over 60% of manufacturers struggle with inaccurate inventory data. More than 50% experience operational inefficiencies tied directly to poor inventory control. These problems can increase carrying costs to as much as 41% of a product’s value, and many businesses don’t recognize the financial impact until it shows up in the books.

Common signs of shrinkage include:

• Inventory losses that aren’t explained or tracked
• Physical counts that regularly differ from reports
• Scrap that’s discarded but never recorded
• Equipment and parts that disappear from shared workstations
• Finished goods that don’t appear in shipment records

These events often get dismissed during monthly reviews or reconciliations. But if they’re not tracked and resolved, they can cost your business thousands of dollars every year.

To reduce shrinkage, start with weekly cycle counts and detailed reconciliation logs. Match physical inventory to production reports. Limit who can approve write-offs or adjustments. Audit your ERP system to make sure it flags suspicious activity or frequent manual overrides.

When you get shrinkage under control, you’re not just protecting your inventory. You’re also gaining stronger visibility, better cost control, and pricing accuracy that supports long-term growth.

Sunk costs: The habits that keep draining your profit

Sunk costs are one of the most common blind spots on a manufacturing floor. These are costs that have already been spent — usually on equipment, systems or processes that are no longer adding value. They continue to influence decisions simply because they are part of the status quo.

If you bought a machine five years ago and it now breaks down weekly, that machine is costing you more than it’s giving back. The same goes for outdated software, redundant processes, or staffing structures built around what used to work. These expenses may not stand out in financial statements, but they quietly drag down your margins and limit your ability to grow.

Some common examples of sunk costs include:

• Aging equipment that requires constant repairs
• Inefficient systems that create bottlenecks
• Software or tools that are paid for but unused
• Manual processes that could be automated but remain because “they’ve always worked”

Getting control of these hidden drains starts with a shift in perspective. Instead of asking how much something cost to implement, ask whether it is still earning its keep. That shift opens the door to making smarter operational and financial decisions.

To evaluate sunk costs properly, conduct a review of all major tools, systems, and processes on your floor. Track repair frequency, labor time, and output quality. Then identify what can be phased out, restructured, or replaced.

From messy to measurable: What to track and how to do it

Real improvement starts with clarity. Many manufacturers rely only on topline output or financial figures, but real cost drivers live in operational metrics that show where time, materials and money slip away.

Here are five critical metrics to track consistently:

1. Scrap rate: The % of raw material that becomes waste or unusable product
2. Rework rate: How often products need to be redone due to defects
3. Yield variance: The gap between expected output and usable output
4. Cycle time: How long it takes to complete one unit from start to finish
5. Inventory accuracy: The % of inventory records that match physical counts

These KPIs illuminate trends that help teams act quickly and decisively. For example, a spike in rework rate might indicate training gaps or machine wear. Inaccurate inventory can signal shrinkage or weaknesses in controls.

If you’re unsure where to begin, pick one or two of the metrics above that align with your most pressing floor-level concerns. Start a weekly review involving your supervisors or functional leads. This sets the foundation for smarter decisions.

For operational insight that links these metrics to your financial goals, explore our Business Advisory services, which guide manufacturers in building performance-driven reporting systems aligned with profitability.

Shrinkage, Scrap and Sunk Costs: Stop the Bleeding on Your Factory Floor

Margins in manufacturing are never guaranteed. They’re earned in the daily details, hidden in process inefficiencies and lost in decisions that go unchecked for too long. Whether it is scrap that quietly piles up, shrinkage that is never fully reconciled, or sunk costs that continue to drag on performance, these problems are not just operational. They are financial, and they are fixable.

We have seen firsthand how manufacturers unlock significant savings by putting the right tracking systems in place, reevaluating legacy processes, and addressing long-accepted losses with a fresh perspective. Small improvements in visibility can lead to big gains in efficiency, accuracy, and profitability.

You just need the right strategy, the right metrics, and a partner who can help you connect operational challenges to financial outcomes.

To find out how your business can uncover the numbers hiding in plain sight, contact a James Moore professional. The business advisory experts on our Manufacturing Services team works alongside manufacturers to create clarity, build smarter systems and turn overlooked inefficiencies into real opportunities.

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