Unlocking opportunities in energy costs

Stanton McGroarty says conventional accounting points to high-percentage improvements.

By J. Stanton McGroarty, CMfgE, CMRP, senior technical editor

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In many companies, utility cost is an orphan. I remember one plant tour where the VP of manufacturing took me aside and said in a conspiratorial tone, “Here is where we actually make all our profits.” He was referring to the heat treatment department of the huge transmission plant he ran. “We run seven days a week here, regardless of how busy the rest of the plant is. We pull in work from all over the Detroit metro area and mark it up by several times our cost. Our total profit in the heat treat is more than the net profit for the whole plant.”

“That’s amazing,” I said. “Just so I understand — how is the cost of gas for heat treatment charged?”

“Oh, that doesn’t matter,” he replied. “It’s all in overhead.”

I wish I could relate that his face went white at this point and that he ran to accounting to see how much cost he was ignoring in his pricing model. I can’t, though. He had answered the question to his own satisfaction. His silo was secure.

Today most manufacturing managers have a better understanding of cost management than my Detroit friend did, but it’s not generally because of their accounting systems. The realization has come to management that energy is expensive, but limited help is available to answer questions about exactly how expensive it is and what can be done about it. In fact, most manufacturing managers don’t really know how much they spend on energy, despite the availability of tools to answer the question easily.

There are two general approaches to energy cost reduction. One is to engage a consulting or software organization. These groups have the capability to set up direct monitoring of energy and, to some extent, other utility usage. And they can directly control some of it. Most organizations aren’t ready to sign up for cost saving projects of this magnitude, though. Others don’t have the need for this level of technology. But many companies aren’t sure what they need.

The good news is that most organizations already have accounting tools to quantify utility spending and attribute it, at least roughly, to key functions where it can be controlled by management. The first part of the project, accounting for utilities, is easy.

Energy spending is usually confined to about half a dozen vendors. Which vendors they are depends on the specific plant, but the variety is limited. Electric power is usually supplied by one vendor. Gas, water, heating oil, sewage treatment, and vehicle fuel usually have one vendor each. A report of monthly utility cost by vendor should not take more than a day or two for most accounting groups to provide. Monthly values are important because they allow rough estimates of how much energy is split between seasonal expenses, usually HVAC, and process utilities, which should be uniform by month, unless production is seasonal.

The utility cost report will begin to provide a sense of how great the opportunities for energy cost reduction might be. Most vendors are available to provide some free help, as well. Electric utilities particularly are on the ropes for capacity in many areas. They are actually grateful when a customer comes to them to ask about conservation. The same is true of gas and water providers in many areas.

Once cost by energy vendor has been identified, the detective work can be divided up among available technical talent. In a one-engineer shop, it may only be possible to study one utility at a time. The new accounting report will determine which utility it should be. Given the cost information and the availability of talent to address it, the project manager can decide how many utilities to pursue and how to assign the work load.

Attributing utility use by areas and functions

From this point forward in the investigation, each utility or expense can usually proceed independently. There may be some exceptions, but, as a rule, the electrical effort can proceed independently of the gas investigation. By splitting the efforts, the project manager can assign different groups to different utilities, thereby limiting the amount of time required of each participant. Also, since each utility has its own vendor or set of vendors, the staff working with each utility can be different without causing any communication problems. There may even be an opportunity to institute some friendly competition between utility groups. To ensure uniformity of reporting and management’s acceptance of results, it may be that the project manager will wish to use the same accounting support across all utilities.

Identifying opportunities within usage areas

J. Stanton McGroarty, CMfgE, CMRP, is senior technical editor of Plant Services. He was formerly consulting manager for Strategic Asset Management International (SAMI), where he focused on project management and training for manufacturing, maintenance and reliability engineering. He has more than 30 years of manufacturing and maintenance experience in the automotive, defense, consumer products and process manufacturing industries. He holds a bachelor of science degree in mechanical engineering from the Detroit Institute of Technology and a master’s degree in management from Central Michigan University. He can be reached at smcgroarty@putman.net or check out his .

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The next step will be for each utility group to divide the use of its utility among primary users. Electric power, for instance, may be divided among areas like process heating, air make-up, HVAC, conveyor drives, pumping, and a few specific high-usage machines such as air compressors, Banburies, cold headers, resistance welders or paint ovens. Each list will be very industry-specific. When accounting data, electrical capacity, multiple meter readings and hours-of-use data are combined, it becomes surprisingly easy to attribute electrical power and expense to the places where it is consumed. With electricity, don’t forget to determine which operations are disrupting power factor, too. This can be a huge opportunity.

Similar reviews of water, gas, and other utilities can usually allow technical and accounting teams to determine where the other utility cost is generated. Once the utility attribution is done, it should be assembled into a single report and presented to the project manager and the project manager’s boss. For most companies, this will be the first time this major expense set has been laid out as a list of opportunities for cost reduction. It may be that management will be so shocked by the total that they will instantly want to bring a consulting firm in to start micro-analyzing usage and automating management of it. Usually, though, the next step will be to identify a few low-investment, high-return efforts that will put the power management initiative on a pay-as-you-go basis, using as much in-house talent as possible. After all, energy management is a marathon, not a sprint. Internal learning is the key to sustainability of the effort.

Typical cost management initiatives

Most of the opportunities that the organization elects to pursue will not be huge surprises. Well-known techniques are available to control power factor, move electrical usage to low-rate times of day, capture and use waste heat from equipment, reduce belt slippage, cool and reuse condensate, reduce compressed air leakage, repair steam traps, and make other mundane improvements. But when these opportunities are quantified and placed in a company-wide Pareto list, they suddenly become newsworthy, important, and urgent in a way they hadn’t been before. Not incidentally, the same attributes accrue to the manager who does the work to bring them into view. The fact that the fixes are well-understood, far from making them uninteresting, makes the improvements a low-risk shot at success.

Using project results to support good management decisions

Ultimately, you may find that your energy management opportunities warrant a consulting study and automation of utility management. If so, this drill will have provided the information you need to build a business case and select a vendor for the job. Meanwhile, the simple, real-world fixes you can apply today will almost certainly pay for the high-tech energy project.

Read Stanton McGroarty's monthly column, Strategic Maintenance.

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  • This column is brilliant. Building the business case is the first step toward full-scale funding, and the quick wins along the way also increase profitability.

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