If you were to conduct a cost waterfall analysis of most manufacturers, you would find that their manufacturing-related costs are greater than their distribution costs. And in distribution, transportation-related costs outweigh warehousing costs. So, a one percent cost saving in manufacturing saves a lot more money than the same one percent improvement in warehousing. This is one key reason why at many companies supply chain personnel still have a lot less clout than their peers in manufacturing.
If you then dig into manufacturing costs, most manufacturers have more money tied up in raw materials than in labor or other manufacturing input costs. However, this differs by industry. In the heavy process industries, energy is often the largest component of a manufacturer’s cost structure.
ARC has been conducting research in this area. In a recent ARC strategy report titled “Energy Management at the Enterprise Level” (available only to ARC clients), my colleagues Tom Fiske and Allen Avery wrote, “The recent global economic downturn caused a drop in energy prices due to reduced consumer demand and industrial activity, but costs are still trending significantly upward over the long term, and the unfolding recovery is increasing demand and industrial utilization. According to the EIA Annual Energy Outlook for 2010, energy prices will increase substantially over the next couple of decades, and manufacturers’ energy costs are sure to rise along with them.”
And costs may be increasing even more quickly than this analysis suggests, at least in the short term. Some analysts are predicting heavy spikes in energy costs this summer due to the oil spill in the Gulf of Mexico.
Fiske and Avery go onto say:
Many manufacturers have already done much to improve the energy efficiency of their plants by repairing or replacing old or inefficient equipment, and through maintenance, instrumentation, and automation programs.
However, achieving energy efficiency is only the first step (albeit and important one) in building and maintaining an effective energy management program that can pay dividends over time. A dynamic energy market in which energy prices can change several times a day makes managing energy costs more complex. An expected tax or cap and trade system for carbon emissions will further complicate matters.
Organizations need to have a broader perspective, and take a holistic approach to energy management that goes beyond discrete projects at the equipment and plant level. Those that actively manage energy inputs and emissions on a daily basis and leverage automation and information technologies to address energy consumption in a systematic and consistent manner will have a competitive advantage going forward.
Companies that are able to accurately measure, monitor, predict, and control their energy usage have many other ways to lower their energy consumption, wastes, and costs.
The report goes on to analyze different energy management strategies and solutions available today.
The bottom line: Energy management is a huge problem for the heavy process industries, and a growing problem for other manufacturing industries. The transition to a low-carbon economy will only complicate this problem even more. But new strategies based on a more holistic approach exist, and new technology solutions to this problem are beginning to mature.