The real cost of natural resources

Jon Chorley, Oracle vice president of supply chain product strategy, offers interesting advice for businesspeople who are considering ways to reduce their company's investment in natural resources. Your comments and ideas are welcome.

The new big chunk of product cost is going to be the cost of natural resources in general, energy costs, in particular. Consider this:

- According to the U.S. Department of Energy, industries can achieve 20 percent energy reduction, resulting in $19 billion of savings per year.

- A full 30 percent savings can be achieved by procedural changes alone, without any capital expense.

- Most customers do not even know the extent of energy cost and the potential impact o on their businesses. This is because energy is considered and accounted for as an overhead expense.

- There is a potential for a large number of companies to go bankrupt due to a sudden jump in energy prices.

Cost reduction always has been a source of competitive edge for businesses. During the automation wave of 1980s, the focus was on labor cost. Businesspeople kept automating until they took out the last bit of manual labor from of the manufacturing process. Then came the enterprise resources planning (ERP) and supply chain planning wave of the 1990s, at which point, the focus shifted to material cost. Professionals realized that labor cost was only about 5 percent to 15 percent of the total cost in most industries; thus, they shifted their focus to its control.

With the turn of the century, there came a new focus on energy costs. The first level of cost efficiency and reducing environmental impact is monitoring and controlling commodity consumption. The basic requirement here is to track consumption of energy commodities, known as WAGES (water, air, gas, electric, and steam). This necessitates concentrating on consumption at the equipment level, with value roll-up through the equipment hierarchy model.

Oracle Manufacturing Operations Center (MOC) provides a foundation to build a hierarchy model for all the equipments in a facility. Customers can easily configure the solution to provide green key performance indicators related to WAGES consumption by seeding the data model with meter readings that would provide the data elements for these KPIs.

The first step in building green operations KPIs is to configure data elements that will track meter readings for equipment at different levels in the hierarchy. Once the raw data are captured, standard KPIs can be built by aggregating across the dimensions of equipment and time. Standard KPIs include total usage in a time period (shift, day, week, month, or year) and across equipment dimension. KPIs also should include total cost in a time period (shift, day, week, month, or year) and across equipment dimension.

There are several business benefits associated with tracking energy consumption. These include better control over profitability by ensuring that volatility in energy prices are kept under constant check. The very activities that provide energy efficiency also provide better control over plant assets and inputs.

Energy efficiency is not just about reducing utility bills; it’s about boosting revenue through greater productivity. Industry surveys indicate that the average plant can reduce its energy consumption by 10 percent to 20 percent, and a lot of that is just from procedural and behavioral changes. The cost of sustaining an energy-management program (operations and maintenance costs only, omitting capital expense) is around 1 percent to 2 percent of total energy expenditure. Investment in innovative technologies to achieve energy efficiencies can bring about substantial benefits, to not only the financial bottom line, but also corporate image and community relations.

Look for Jon Chorley's article in the March/April 2009 APICS magazine spotlight on sustainable business.

Jon Chorley, Oracle vice president of supply chain product strategy, offers interesting advice for businesspeople who are considering ways to reduce their company's investment in natural resources. Your comments and ideas are welcome.

The new big chunk of product cost is going to be the cost of natural resources in general, energy costs, in particular. Consider this:

- According to the U.S. Department of Energy, industries can achieve 20 percent energy reduction, resulting in $19 billion of savings per year.

- A full 30 percent savings can be achieved by procedural changes alone, without any capital expense.

- Most customers do not even know the extent of energy cost and the potential impact o on their businesses. This is because energy is considered and accounted for as an overhead expense.

- There is a potential for a large number of companies to go bankrupt due to a sudden jump in energy prices.

Cost reduction always has been a source of competitive edge for businesses. During the automation wave of 1980s, the focus was on labor cost. Businesspeople kept automating until they took out the last bit of manual labor from of the manufacturing process. Then came the enterprise resources planning (ERP) and supply chain planning wave of the 1990s, at which point, the focus shifted to material cost. Professionals realized that labor cost was only about 5 percent to 15 percent of the total cost in most industries; thus, they shifted their focus to its control.

With the turn of the century, there came a new focus on energy costs. The first level of cost efficiency and reducing environmental impact is monitoring and controlling commodity consumption. The basic requirement here is to track consumption of energy commodities, known as WAGES (water, air, gas, electric, and steam). This necessitates concentrating on consumption at the equipment level, with value roll-up through the equipment hierarchy model.

Oracle Manufacturing Operations Center (MOC) provides a foundation to build a hierarchy model for all the equipments in a facility. Customers can easily configure the solution to provide green key performance indicators related to WAGES consumption by seeding the data model with meter readings that would provide the data elements for these KPIs.

The first step in building green operations KPIs is to configure data elements that will track meter readings for equipment at different levels in the hierarchy. Once the raw data are captured, standard KPIs can be built by aggregating across the dimensions of equipment and time. Standard KPIs include total usage in a time period (shift, day, week, month, or year) and across equipment dimension. KPIs also should include total cost in a time period (shift, day, week, month, or year) and across equipment dimension.

There are several business benefits associated with tracking energy consumption. These include better control over profitability by ensuring that volatility in energy prices are kept under constant check. The very activities that provide energy efficiency also provide better control over plant assets and inputs.

Energy efficiency is not just about reducing utility bills; it’s about boosting revenue through greater productivity. Industry surveys indicate that the average plant can reduce its energy consumption by 10 percent to 20 percent, and a lot of that is just from procedural and behavioral changes. The cost of sustaining an energy-management program (operations and maintenance costs only, omitting capital expense) is around 1 percent to 2 percent of total energy expenditure. Investment in innovative technologies to achieve energy efficiencies can bring about substantial benefits, to not only the financial bottom line, but also corporate image and community relations.

Look for Jon Chorley's article in the March/April 2009 APICS magazine spotlight on sustainable business.