Embedded energy

Calculating the costs of your energy management plan is not as simple as adding up your natural gas, electricity and fuel invoices. You can involve suppliers to minimize total cost.

By Peter Garforth

Management is fully engaged to manage energy strategically, the plan is written, and the factories are starting to improve energy procurement, invest capital in energy efficiency improvements and use low-cost/no-cost energy-efficiency initiatives. So far so good. But, is this really a comprehensive energy plan covering the company’s energy cost?

Most companies answer this question by simply adding up their invoices for natural gas, electricity, fuel oil and other fuels. Some items can get overlooked; most commonly fuel for company vehicles. This definition of energy is a good start, a necessary first step. Unfortunately, most companies don’t manage this number very methodically. And, it’s not even close to the true energy cost. You can influence a whole swath of other energy costs systematically.

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The most obvious are the industrial gases that enhance combustion efficiency. Oxygen used in glass melting is a good example. Water is similar. At least 70% of the cost of potable water and wastewater is directly related to energy via cooling towers and other energy-related applications. These costs can be tracked from invoices. Combustion gases, water and wastewater share many of the characteristics of traditional energy utilities and respond well to the same management approaches. Sweep them into the corporate energy plan at a fairly early stage.

Less obvious and tougher to measure and manage is the energy you buy as part of the cost of materials or services. Understanding this embedded energy can yield benefits. Your suppliers are under the same energy cost pressures and, sooner or later, will be forced to recover the increases. These pressures come at the same time that direct energy costs are pressuring the business as a whole. As an example, a 2% price increase on some part for which energy forms 10% of the cost can be nullified through a 20% energy productivity gain on the part of the manufacturer. The gain will make the supplier more competitive for the long term, which makes you more competitive. This is a win-win situation.

Adopting this mindset brings other benefits. As you pick the low-hanging fruit from your energy spending, your supplier’s low-hanging fruit may be cheaper and easier to pick. Assigning part of your energy management resources to make your suppliers more energy productive can pay off in avoided price increases and enhanced supplier relations and understanding. I’ve seen situations where managing both direct and embedded energy resulted in redesigned manufacturing or logistics processes. The Japanese and German automotive industry is beginning systematic management of the energy value chain not only of their operations, but also of their key suppliers. Sourcing large amounts of high-energy materials — plastics, metals, cement, glass, etc. — can result in an embedded energy cost that exceeds your direct cost of energy.

Another area to explore is the energy for transportation, including employee travel. Not understanding the energy make-up of these critical supplies or services can result in some unpleasant surprises.

Customers might use additional energy in the further processing or end use of your products. If you sell products that customers integrate into their finished products, their overall costs affect their competitiveness. If customers come under energy cost pressure, their first reaction will be to seek supplier discounts that will erode your margin at a time when you’re under the same energy cost pressure. Being proactive and using your energy team’s expertise to help customers manage their energy costs can reduce the need for discounts.

Energy management at companies like Toyota is seen as a holistic process for the lifetime of the product. The first step is to ensure the car is designed with minimum energy in materials and manufacturing, and that it will use the least energy necessary throughout it s operating lifetime. The second step is to manage the procurement and production process for continuous improvement in the energy productivity at both suppliers and plants. The last is to track the product’s lifetime energy performance in the market and ensure productivity improvements are incorporated in future designs.

Managing the total energy costs of your value chain can yield supplier and customer intimacy benefits. My recommendation is to take this a step at a time. First, get good at managing your own direct energy and then, step-by-step, move into teaming with critical suppliers and customers.

On a last note, we’re in a time of volatile and rising energy prices, and this might encourage counterproductive management reactions, a topic I’ll address in next month’s column.

Peter Garforth is principal at Garforth International LLC, Toledo, Ohio. He can be reached at garthforthp@cs.com.

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