Friday, December 21, 2007

Economic Outlook 2008: Industrial Energy Efficiency

What kind of year will 2008 be for manufacturers and the rest of the U.S. economy? The business press sounds cautious, pointing to weak housing and credit markets. Regardless of what happens, wealth does not disappear—it simply awaits harvesting from alternative sources.

If the coming year’s economic growth slows as expected, it will be an ideal time to develop wealth from within. This means improving efficiencies that lower operating costs. Manufacturers can use 2008 to intensify the profitability of their existing assets and facilities.

Utility expenses are a prime opportunity for improving operating income. The market outlook for fuel, and especially electricity, anticipates escalating and volatile prices. Any investment that allows manufacturers to reduce energy consumption will reduce their exposure to energy market turbulence. If 2008 is not a good year for expanded output, it may very well be a good time to invest in efficiencies that will boost operating margins now and during the recovery that follows.

The economics for investment in efficiency are compelling: by comparison, think of the value of dollar-cost averaging when you purchase mutual fund shares. The shares purchased when fund prices are low will provide the most gains to your portfolio when prices go up again. The same profit leveraging awaits businesses that invest in operating efficiencies during slow growth periods. Your payoff will be in the form of higher profit margins per unit produced.

Energy procurement strategies are only one side of the coin. A robust energy cost-control strategy will develop a portfolio of potential improvements that cost-effectively reduce energy waste. Like any financial portfolio, an energy portfolio can be mobilized by the “strike price” concept—criteria that initiate energy improvements in response to energy market price signals.

For manufacturers, energy management is a multi-dimensioned strategy. The potential for utility cost control is obvious. However, there may be at least as much value in a marketing initiative—one that responds to consumers’ increasing awareness of energy costs and related environmental impacts. Customers, boards of directors, and shareholders increasingly demand products and production processes that minimize costs as well as environmental impacts. For this reason, 2008 may be the perfect year to develop a strategy both for energy cost-control and to engage growing customer demand for environmentally-beneficial products.



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