This small town is located somewhere in New California or in the close neighbourhood of that region (its inhabitants mention Junktown and Necropolis). Scrapheap's walls are built with wrecked cars, much like the walls found in Junktown. According to the town name, one would expect to find a lot of scrap material there. The sole reason for its existence is the power generator that runs on brahmin excrement.
In 2161 it was dominated by a gang called the Crypts that controlled the only power generator in the town and therefore ruled over the small community. The leader of the Crypts was a man named Rayze. Their rival gang, the Fools, was led by a woman named Baka. She proclaimed herself to be the "Queen" of the gang.
It is not certain what eventually happened to the town. It is impossible to find it on either the Fallout (year 2161-2173) or the Fallout 2 (year 2241-2254) worldmap.
Scrapheap appears only in the Fallout demo. It uses an older Junktown area map from the full release version (JUNKDEMO.MAP), though it is populated by a different cast of characters with a different plot. With the exception of Phil and the dog, all of the characters appear only in the demo. Both of these characters can be found in the full release in Junktown. Phil's appearance changes, and the dog becomes Dogmeat.
One may also believe that the Crypts and the Fools could be prototypes for the factions that are present in the full release Junktown, and with a nod to the presence of Gizmo. However, Junktown is mentioned in Scrapheap, further leading to the opinion that it is just a whole separate location.
These may be reasons why Scrapheap might be considered a separate location in the Fallout semi-canon, placed somewhere east of New California, relatively close to Junktown, Necropolis and Vault 13.