A systematic cost-reduction plan saved $677,000 for one plant

A systematic cost-reduction plan led to saving $677,000 over two years for one plant. Read the details about how these savings were accomplished.

By Donald P. Fiorino, P.E.

Utilities, like labor, material, equipment, facilities, capital and other scarce manufacturing resources, are subject to waste. Any lean manufacturing roadmap must eliminate waste in every category, including utilities, to achieve the benefits lean operations promise.

We were able to do that using a systematic utility cost reduction plan at our 450,000-square-foot manufacturing facility. We reduced the consumption and cost of electricity, natural gas and water on an absolute basis in both 2002 and 2003 relative to the 2001 baseline year (see sidebars).

We not only reduced existing utility consumption, but entirely offset the new utility consumption associated with a 36,000-square-foot office addition in 2002, a 9,600-square-foot assembly and test area expansion in 2002, a 46,000-square-foot office addition in 2003, and a 96% increase in production in 2003.

The utility cost savings totaled $442,000 (32.6% reduction) in 2002 and $235,000 (17.4% reduction) in 2003 – a two-year combined total of $677,000 relative to the 2001 baseline year.

Readily repeatable in most manufacturing facilities, these outcomes were the result of a well-balanced portfolio of cost-effective utility-saving measures targeted at high-payoff opportunities.

Utility reductions ranged from no-cost, simple operation and maintenance improvements (turning off lighting and air-conditioning equipment during unoccupied periods) to low-cost improvements (polarized refrigerant oil additives) to more expensive, more complex capital projects (variable-speed fan drives, cooling tower replacements and water chiller replacements). In addition, utility-saving technologies, e.g., occupancy motion sensors, were successfully integrated into new building design and construction.

The plan

The first step in achieving and sustaining the savings was to prepare a systematic utility cost-reduction plan consisting of the following elements:

  • Objectives and strategy to achieve them.
  • Baselines and profiles of existing utility consumption and costs.
  • Audits and estimates of utility cost-reduction opportunities.
  • Measures and resources to implement the strategy.
  • Metrics to measure achievement of objectives.

Objective

In this case, our objective was to reduce and sustain overall utility costs below the 2001 (baseline) level of $1.35 million per year. It’s an objective that is simple, clear, achievable and measurable. Importantly, it references a fixed, historical baseline.

Strategy

Overall utility cost is the product of utility consumption and unit price. Because focusing entirely on one factor is not a well balanced strategy, we adopted a two-prong strategy that attacked both simultaneously.

Baselines and profiles

We reviewed past utility bills to establish a month-by-month historical baseline for each utility. We produced an energy usage profile that accounts for annual utility consumption by end-use (see Table 1). Energy usage profiles indicated the best targets for detailed audits. As will be discussed later, metrics measure progress against these historical baselines.

Audits and estimates

Audits identified specific utility reduction opportunities. Associated data collection and analysis established usage reduction estimates for each opportunity.

Correctly estimating utility usage and cost savings required two estimates. Annual utility usage savings and cost savings are the difference between the “before” usage/cost estimate and the “after” estimate. Because this is a multi-factor analysis that depends on before and after levels of equipment loading, efficiency, demand, hours of operation, utility prices and so on, there are many opportunities for error. The uncertainty in the utility usage and cost reduction estimates must be taken into account. The conservative approach is to discount the estimates by the associated level of uncertainty.

Measures

During 2002 and 2003, we developed and implemented a variety of well-targeted utility cost-reduction measures. These included (in priority order):

  • Efficient operation and effective maintenance of utility-consuming equipment.
  • Competitive procurement of utilities.
  • Cost-effective expense improvements.
  • Cost-effective capital projects and retrofits.
  • Energy-efficient designs for new buildings and plant expansions.

Each measure is built upon the one preceding it. In this case, our foundation is efficient operation and effective maintenance. Until these are mastered, performance issues, reliability issues, excessive repair costs and excessive utility consumption will dominate the agenda and expense budget of the facilities and maintenance department.

Resources

The annual facilities and equipment budget is what funds efficient operation and preventive maintenance, both considered as routine expenses. Efficiency makes preventive maintenance 50% to 75% less expensive than reactive maintenance, so PM reduces maintenance expenses concurrent with its implementation. Preventive maintenance need not be applied wholesale -– it can be implemented in stages or only for selected asset categories.

Likewise, expense improvements offset some of the annual expense budget. These non-routine expenses must be identified, quantified and justified during the annual expense budgeting period if they are to be included in the budget. A simple payback period of less than one year ensures that the reductions offset some of the same-year utility costs.

Capital projects and retrofits apply against the annual capital budget. These non-routine expenditures must be identified, quantified and justified during the annual capital budgeting period to be included in the budget. Capital assets are subject to depreciation and require formal rate-of-return analysis rather than simple payback calculations.

Energy efficiency measures must be part of the design of new buildings and plant expansions and included in the preliminary cost estimates that later become project budgets. Fortunately, many building codes now prescribe high levels of energy efficiency.

An important insight is to have expense improvement, capital and retrofit projects developed before starting the expense and capital budgeting process ordinarily conducted at mid-year for the following year. Otherwise, available resources will be allocated to other initiatives. Another opportunity for resources is unused expense and capital funds, which are typically available near year-end.

Metrics

Well-designed metrics measure progress toward the objective. Monitoring metrics monthly helps ensure that annual objectives will be met or surpassed. The monthly metrics include utility usage and costs. Intermediate-term corrective actions can then be identified and applied in time to affect the annual metric.

Likewise, we monitor daily metrics to ensure our monthly metrics are met or surpassed. These include daily utility meter readings, trending for air-conditioning system operating data and the like. Short-term corrective actions can then be identified and applied in time to affect the monthly metric.

Summary

The objective of reducing and sustaining overall utility costs below the 2001 baseline level of $1.35 million per year was achieved in 2002 and 2003 by systematic implementation of a comprehensive utility cost-reduction plan.

During a two-year period, cumulative utility cost savings totaling $677,000 were realized by a combination of utility usage reductions and utility price reductions. Our efforts prove that:

  • Significant utility cost reductions are achievable and sustainable in manufacturing facilities.
  • New utility usage related to office additions and manufacturing expansions can be entirely offset by steep reductions in existing utility usage elsewhere in the facility.
  • Lean utilities can contribute significant savings to a facility’s lean manufacturing initiative.

This article was originally published as a full-length case study in the Proceedings of the 26th National Industrial Energy Technology Conference in April 2004. It has been condensed for Plant Services.

Donald P. Fiorino, P.E., is the facility engineer at FMC Technologies in Houston, Texas. Reach him at don.fiorino@fmcti.com and (281) 405-4681.

 

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