Energizing continuous improvement
Focusing on electricity yields quick ROI and enlightens management about truly variable costs
By John Preston
The electricity and gas that are used to power a company’s operations also can be used to accelerate its continuous improvement program. Energy costs can provide direction to an organization’s largest opportunities for improvement. The resulting energy reduction projects can be used as the building blocks of a much larger initiative.
Energy is a common and easily quantifiable measure that can indicate an operation’s level of improvement opportunity. Operations that do not manage their energy costs effectively may not manage other major expenses effectively. It is common for management to think that energy costs are fixed. Managers surmise that their operations will incur similar utility charges each month regardless of any actions taken to reduce expenses. Management teams that believe this fallacy also will accept some labor, maintenance or other major expenses as fixed – expenses that in fact should be considered variable. It is these operations that will benefit the most from a continuous improvement initiative.
Why use energy costs as a guide?
Labor, maintenance and other major expenses are subject to qualitative rationalization within facilities with ineffective data management systems and processes. Justifications for off-standard expenses can be difficult to contest. These costs also are more difficult to track by a facility’s management. Operations with outdated or complex enterprise resource planning systems require substantially more time and effort to organize these expenses into meaningful analyses. Both direct and indirect labor can be shared among different assets and products. These charges can be spread from asset to asset and product to product, masking costs across the facility.
On the other hand, utility bills cannot be easily influenced. They are simple measures. They show how much energy the facility used, how much it cost the operation, and when the cost incurred. They can be compared to other monthly figures such as total direct labor hours or sales. Facilities that do not manage their energy costs will have similar monthly utility usage over time, even with variation in monthly sales or labor hours. The facilities that lack correlation between these figures are more than likely those with the most opportunities to reduce utility and other major expenses.
There are numerous advantages to using energy reduction as a catalyst for an organization’s continuous improvement program.
For one thing, energy cost reduction projects are easy to measure and analyze. The data is readily available. Finance departments typically store well-organized utility bills for four or five years. Finance also can assist by providing sales, labor hours or other figures to be used for comparison. It takes little time to create trend charts of these records. Some utility companies will help their customers by creating trend charts. A short phone call to the representative of the utility company could save time and improve the accuracy of the trend charts.
Once the data is collected, the analysis is straightforward. Simple linear regression is the most complex calculation used in the analysis. Because of their simplicity, these projects can be used as examples of structured problem solving, and they can be shared throughout the organization.
In addition, energy reduction projects usually have a fast return on investment (ROI). Most of the projects identified in operations that previously had no energy management program have payback periods of less than one year. In operations with significant opportunities, excellent projects exist that will have payback periods of less than a month. Most importantly, the resulting utility bills with decreased costs quickly demonstrate the benefit of these projects. The quicker the ROI and the larger the savings of the initial project, the more visibility the initiative will garner.
Successful projects also build trust. Without a doubt, energy savings projects can breed trust between employees and management. In a time where corporations are focused on controlling labor costs, these projects show that a company truly is interested in reducing all forms of waste. Any project that shows that the company is willing to invest in the facility’s future profitability builds confidence within its employees. Because these projects’ savings are so simple to quantify, they also build trust between executives and the facility managers. There are few arguments about whether a project reduces expenses. The trust that comes from these projects is more valuable than any other outcome, even the cost savings. The strengthened trust will help motivate other activities that are impossible to justify on cost alone, such as activities that support the organization’s ability to meet its customers’ needs.
The first step is deciding which facility has the most opportunity. Collect each facility’s utility bills for the last 12 months. Using simple linear regression, compare the monthly electricity bills to monthly sales or another common measure, such as labor hours. The facility with the lowest R² probably has the most opportunity to reduce energy costs. The closer R² is to one or negative one (1 or -1), the more likely the plant’s monthly sales are related to electricity costs and can be predicted by the model. As R² gets closer to zero, it’s less likely that sales correlate to energy costs, meaning the model cannot predict future outcomes.
As shown in Figure 1, this facility’s electricity cost has little correlation to its monthly sales. Electricity costs in February were slightly greater than those in September, even though September’s sales were 250 percent greater than February’s sales. If this facility does not have an active energy management program, chances are that a continuous improvement program will yield very profitable outcomes. After all, its R² value of 0.4 means the factory’s electricity costs will be the same no matter how much it sells per month, as electricity costs are related to some other variable.
Next is conducting an analysis of the chosen site to determine if the targeted facility effectively manages its energy costs. Investigate if and how the facility tracks its energy costs and usage over time. Note who in the organization has the data and how it is used. Ask the maintenance or engineering manager if they know which equipment or building uses the most energy and when the energy is used. Ask them if projects have been completed or planned to be completed that reduce energy costs. If there is little evidence of measurement, analysis or improvement, it is likely that there are significant opportunities to reduce energy costs.
A facility may show little correlation between its energy usage and sales and still have in place an effective energy management program. Some sites, such as factories that are making major changes in their product mix over the course of a year, will have little correlation between energy use and sales. These factories may be very good at controlling their costs, but it won’t show using regression on only 12 months worth of data. Expanding the study’s time horizon and removing some outlier months can show that the facility does manage its energy costs.
Measure what uses energy and when it is used. The targeted facility needs to have an energy audit performed. The energy audit will show what is using the most energy and when it is used. The energy audit of the targeted facility needs to be performed by an individual or group who have experience in that facility’s industry. In addition to industrial engineers, certified energy managers will have the capabilities and equipment to perform the needed analysis. The audit needs to yield quantitative data that provide direction toward the most wasteful forms of energy use within the facility. The analysis will provide hard evidence and improvement ideas to eliminate the wastes.
It’s best to create momentum with a quick payback project, particularly if this is the first energy cost reduction project in the organization or facility. Using the results of the energy audit and its recommendations, develop and implement a project that reduces energy waste without much investment. Popular quick payback projects include installing high-efficiency lighting, developing shutdown procedures and investing in auto-off controls. These kinds of projects carry little risk. They are inexpensive and significantly reduce electricity bills. After the project is completed, develop a presentation that documents the project’s success. Using structured problem solving to outline the project steps will make the project more replicable as a best practice.
A good initial project could focus on shutdown procedures. One factory that left on its equipment when production was not running developed basic shutdown procedures. These procedures included who was responsible for turning off equipment, how to turn off the equipment and what equipment was to be left on. The changes reduced the factory’s electricity bill by 12 percent, which saved the company approximately $60,000 per year.
Build and sustain the momentum from the success of your first project. The energy reduction initiative has proven its worth and created momentum with the first successful project. The momentum can be used to address other opportunities and replicate the project at other facilities within the organization. If the first project was well-documented, it will not take significant effort to convince other facilities of the project’s worth. For instance, replicating the above shutdown procedures at an additional five plants would save the corporation $300,000 annually. The momentum also can be used to complete a second energy savings project at the targeted facility. Following the recommendations, choose and implement a second project that also has a quick ROI. Having two effective energy-saving projects indicates that the effort will not expire quickly.
A good follow-up to shutdown procedures would be to analyze the efficacy of automatic shutoff controls. In one example, a large automotive factory left its stamping presses running continuously, even when production was not scheduled. The factory lacked accountability in its workforce. Even with shutdown procedures, it was not likely that the equipment would be turned off when not in use. The project led to the purchase of 86 programmable logic controllers, which were installed on the presses. These devices automatically shut down equipment after the machines have been idle for a period of time. The devices cost the company about $20,000, but they saved the business at least $260,000 per year in electricity. This project reduced the factory’s electrical usage by 5 percent, the equivalent of permanently turning off the power to 550 average homes in the United States.
A lighting upgrade is a more expensive project that also can yield positive results. One factory used inefficient metal halide high-intensity discharge (HID) fixtures and bulbs to light its floor space. The factory removed the HID fixtures and replaced them with high-efficiency T8 fluorescent lamps. The cost to purchase and install the new fixtures was about $55,000 after rebates. The project saved the company roughly $90,000 per year in electricity and bulbs.
The force of the first or initial set of projects can be transferred to another type of opportunity. Using the structured approach from the first projects and the trust it created, address other forms of waste that are evident within the facility. Organizations that do not control their costs typically lack experience using structured problem solving. The energy savings projects can be used as examples of how to solve other problems effectively.
Roadblocks to success
Energy cost reduction does not receive high priority in many organizations. Organizations with limited resources and funding use most of their effort to meet their customers’ primary needs. Because energy cost reduction can get little executive attention, it is important that the beginning of an initiative avoids the following common pitfalls:
Lack of direction from the energy audit. The energy audit needs to provide clear direction. The audit has to document the source of and solutions to the facility’s energy waste. The auditor needs to have an understanding of the company’s acceptable ROI. Knowing the acceptable ROI, the auditor will not recommend projects that do not meet the facility’s budget criteria. Finally, the audit needs to include interval trend data on the largest users of energy. Interval trend data will provide clear evidence of the energy use and waste. Without interval trend data, the results of the audit will not offer the quantitative proof necessary to request capital funding for improvements.
Lack of capable resources. Many facilities that do not manage their energy costs lack the capable resources to implement improvement initiatives. Their limited resources often are focused on addressing opportunities deemed more critical to the operation. Energy management simply is not prioritized. In these situations, the opportunities to reduce costs need to be well-documented and escalated to decision makers. For quick ROI projects, upper management may need to seek resources external to the facility.
Denial of a problem. Long-rooted management teams may disagree with the level of opportunity at their facility. They may rationalize the lack of correlation between the facility’s energy cost and sales. They may claim that the facility’s equipment needs to stay powered on or that the local utility charges them a fixed fee. In some types of businesses, their statements may be valid. Let the data from the energy audit reveal the truth.
In an ideal world, as an organization’s customer demand varies, so should its total operating cost. In reality, many operations have large fixed costs that vary little with customer demand. In some operations, energy is accepted as one of the largest fixed costs that has little correlation to customer demand. Expelling this myth with a data-driven, structured approach can create an environment where other myths are questioned and proven false. Energy reduction projects can be used as the catalyst to target and drive down operation costs across the organization. The energy reductions from this effort will provide the motivation to energize a continuous improvement program that can be used throughout the entire line of business.
John Preston is a corporate industrial engineer and president of IIE’s Greater Detroit Chapter. He is employed by Dura Automotive Systems in Rochester Hills, Mich. Outside of the automotive sector, he has served in the semiconductor, consumer goods, weapon systems and biotech industries. He graduated from the University of Michigan with a B.S.E. in industrial and operations engineering, and he received an MBA from Northwood University.