Wall Street Journal Promotes Energy Management!

Finally! The Wall Street Journal has devoted attention—a whole special section in the September 27, 2007 edition—to energy cost control in the business sector. This is a major milestone, because the WSJ's historical energy focus has been limited to drilling, refining, and generating more supply. Coverage in the WSJ will inspire a lot of discussion, but how will industrial energy users actually follow through on this issue?

For any business leader that wants to do something about energy cost control, I ask you this: Where are you, and where do you want to be? To facilitate your thinking, I offer the following (click on image for full-size display):

Energy Cost Control in a Lean Manufacturing Environment

“Lean manufacturing” is widely espoused in the manufacturing sector. However, it’s not always implemented effectively. The literature describes lean manufacturing as a continuous improvement process for reducing defects, improving product quality, and reducing costs. Naïve adoption of the “lean” concept leads to simple cost cutting and doubling-up of roles. If not done right, these cuts can actually lead to a loss of control and greater production costs. A perfect example of this comes from facilities that refuse to embrace energy management.

Energy costs are most effectively controlled by an ongoing management process that coordinates technology, behavior, and procedures. For a variety of reasons, facility managers resist this approach. Many simply assume that the cost of controlling energy waste will always exceed the value of the savings. Other managers understand the potential benefits, but know that organizational complexity gets in the way. In other words, the costs and efforts are likely to be imposed on one department while the benefits accrue to another. When costs and benefits are scattered across departments, as is often the case, there’s simply no incentive to pursue improvements even if they benefit the organization as a whole.

In the absence of a "make-or-buy" energy management strategy, a facility simply justifies one energy "project" at a time. This now invokes the cost of time, since energy waste waits for no one. In the absence of a management standard, individual initiatives must be identified, documented, promoted, and deliberated one at a time. This is demonstrated by a simple example.

Let’s say a facility has conducted an energy audit that identifies a list of potential improvements, and let’s also assume that implementation can paced in a straight-line over time. If implementation depends only on simple logistical issues, the “run rate”—that is, the monthly pace at which those improvements may be implemented—may be 33 percent. In this example that means it takes three months to implement everything, as shown in the upper part of Figure A. However, even the initiatives with low risk and quick payback can be delayed because people in the decision-chain may disagree, not understand, or otherwise need to be assured of the benefits. Deliberation stretches out implementation to six months instead of three, as shown in the lower part of Figure A. The run rate becomes a slower 17 percent.

Fig. A:

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Meanwhile, the clock is ticking. All savings identified by an energy audit are forfeited until they are implemented. “Earnings at-risk”—the dollars lost by delaying energy improvements—add up with the passage of time.

Fig. B:

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How much extra cost is imposed by delay? Refer to Figure C.

Fig. C:

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Granted, energy cost control is one of many types of investment opportunities that manufacturers have at their disposal. But energy improvements can't be categorically rejected without proper investment analysis. When “lean” manufacturing philosophies are mis-applied, such analysis may be sacrificed in favor of "rule-of-thumb" decision-making. When energy improvements are dismissed or delayed, so are opportunities to reduce expenses, increase the reliability and productivity of production processes, and ultimately, the ability to generate greater revenue.

Applied appropriately, the lean manufacturing concept actually demands that facilities create an energy management plan. Such plans are the blueprint for identifying solutions and eliminating the delays that ultimately cost money.

Energy Management: Do the Right Thing!

Why does our facility have energy cost problems—again? We’ve been doing episodic energy projects for 35 years, but energy costs are still gobbling up our operating margins. Procurement and hedging schemes counteract energy price volatility, but they don’t lower the price we pay. We need to cut the waste... and stop frittering away money on energy we don’t need to buy.

Here’s the problem: we are so focused on “doing things right” that we fail to do the right things.

Our traditional approach is to “do things right.” It goes something like this:
• Like most companies, we are lean. People wear many hats. Fire drills can dominate our days, so we seek relief by establishing as much routine as possible.
• Like every company, we foster internal competition for resources, especially at budget time. Like it or not, we make decisions to optimize departmental performance, not business-wide performance. We avoid spending dimes today that would actually save dollars tomorrow.
• To survive professionally in a lean environment, do things right: don’t make waves. Stay “inside the box” that (we hope) gives us some routine. Need to solve a problem? Do it on your departmental turf with your own resources.
• Like everything else, energy is an issue to be delegated—usually to a technical person or department. Not only do we expect technical people to develop energy solutions, we expect them to do it inside THEIR box. This means capital projects.
• When delegating, you get what you pay for. The lower we delegate a task in the organization, the more localized and temporary will be the solution.

What will allow us to effectively control energy? Or in other words, how can we “do the right things?”
• First, understand that technical projects alone cannot solve problems rooted in management systems and culture. Management procedures, systems, and behavioral habits also determine energy performance.
• Second, re-read the first point. Accept it, but take heart because the total solution still involves technology.
• Delegation should not be the first step in solving energy problems. Instead, map the energy decision-process to identify the decisions, roles, and performance metrics that link energy inputs with performance targets. Tune up the system. Then develop accountabilities to keep performance on track.

In other words: learn to do the right thing. Then do it.