efficiency performance contracting a market-based approach to p2 thomas j. bierma, mba, ph.d.,...
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Efficiency Performance Efficiency Performance ContractingContracting
A Market-Based Approach to P2A Market-Based Approach to P2
Thomas J. Bierma, MBA, Ph.D., Thomas J. Bierma, MBA, Ph.D., Illinois State UniversityIllinois State University
www.ilstu.edu/~tbierma/sme.htmwww.ilstu.edu/~tbierma/sme.htm
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Alternate titleAlternate title
How to sell your untapped P2 How to sell your untapped P2 opportunities to your opportunities to your
suppliers!suppliers!
Thomas J. Bierma, MBA, Ph.D., Thomas J. Bierma, MBA, Ph.D., Illinois State UniversityIllinois State University
www.ilstu.edu/~tbierma/sme.htmwww.ilstu.edu/~tbierma/sme.htm
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Research since 1995Research since 1995
Overcoming barriers to implementing Overcoming barriers to implementing P2 technologies…P2 technologies…
through innovative, market-based through innovative, market-based approaches.approaches.
Funded by the Illinois Waste Management and Research Center Funded by the Illinois Waste Management and Research Center and the U.S. Environmental Protection Agencyand the U.S. Environmental Protection Agency
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Question…iSU
In many companies and other organizations, there are opportunities to improve energy and materials efficiency with a payback of under 3 years and an ROI exceeding 25%.
Yet these opportunities go untapped year after year…
Why?
ExamplesiSU
•An office building continues to use inefficient lighting…
•A manufacturing plant continues to dump its metalworking fluids monthly…
•An aerospace firm continues to loose 20% of its chemical inventory due to shelf-life…
A Major Cause…iSU
Core Competence
Core Business
“The key skills or knowledge needed to build and maintain a competitive edge.”
(Quinn 1994).
A Major Cause…iSU
The expertise needed to tap many P2 opportunities
is outside the core business of the company.
A Major Cause…iSU
Resources needed to develop the P2 expertise
must be diverted from core business activities.
It just doesn’t get done.
Typical outcomes…iSU
• lack the time or internal expertise
• doesn’t help “get product out the door”
• “important but not critical”
• can’t get capital funding
• can’t get management attention
A Second A Second Question… Question…
If 25%+ ROI investment If 25%+ ROI investment opportunities exist, isn’t opportunities exist, isn’t there a market for these there a market for these
investments somewhere?investments somewhere?
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A Third Question… A Third Question…
Who already has the Who already has the core core competencecompetence to take to take advantage of these advantage of these
investment opportunities?investment opportunities?
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One answer… One answer…
Suppliers!Suppliers!
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The Problem… The Problem…
Implementing P2 will usually Implementing P2 will usually reduce purchases from reduce purchases from suppliers, so why would suppliers, so why would
suppliers invest?suppliers invest?
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One answer… One answer…
Incentives!Incentives!
Create incentives that share the Create incentives that share the ROI, so suppliers make more $ ROI, so suppliers make more $ from investing in P2 than from from investing in P2 than from
ignoring P2.ignoring P2.
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Can it work?Can it work?
Absolutely!Absolutely!
Under the right conditions…Under the right conditions…
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Chemical Chemical Management Management Services (CMS)Services (CMS) iSU
Traditional Chemical Supply
Sales (revenue)
Chemicals Supplied
(costs)
PROFIT!
Increasing Chemical Volume
$
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Fixed fee (revenue)
Chemicals supplied
(costs)PROFIT!
$
Increasing Chemical Volume
Chemical Management Services (CMS)
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Chemical Management Services (CMS)
iSUCommon features:
User no longer "buys" the chemicals.
Supplier receives a fixed fee in exchange for chemical performance.
Supplier provides on-site chemical management, including comprehensive logistic, EHS/compliance, and chemical application services.
One supplier serves as a primary, or “Tier 1," chemical manager, overseeing the supply of chemicals from “Tier 2” suppliers.
0%
20%
40%
60%
80%
100%
120%
140%
1989 1990 1991 1992 1993 1994 1995 1996
Per
cen
tag
e o
f B
asel
ine*
Engine production
Coolant usage
Coolant waste haulage
Engine production, coolant usage, and coolant waste haulage, Navistar, 1989-1996.
Plus 93% reduction in engine head and block rework
0%
20%
40%
60%
80%
100%
120%
1994 1995 1996 1997 1998
Pe
rce
nt
of
1994
ba
seli
ne
Coolant Usage, GM-EMD, 1994-1998
Chemical Management Services (CMS)
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Common benefits:
• 20-40% reduction in chemical volume and costs in first three years.
• Improved chemical tracking and management.
• Improved EHS compliance
• Reduced downtime
• Improved product quality
It has worked for large It has worked for large accounts…accounts…
without a doubt!without a doubt!GM EMD (LaGrange) GM EMD (LaGrange) and D.A. Stuartand D.A. Stuart
GM Truck and Bus (Janesville) GM Truck and Bus (Janesville) and BetzDearbornand BetzDearborn
Navistar (Melrose Pk.) Navistar (Melrose Pk.) and Castroland Castrol
Ford (Chicago) Ford (Chicago) and PPG/Chemfiland PPG/Chemfil
Chrysler (Belvidere) Chrysler (Belvidere) and PPG/Chemfiland PPG/Chemfil
GKN Aerospace (St. Louis) GKN Aerospace (St. Louis) and AVChemand AVChem
Harley Davidson (Milwaukee.) Harley Davidson (Milwaukee.) and Henkeland Henkel
United Technologies Corp. United Technologies Corp. and Haas TCMand Haas TCM
Mercury Marine (Fon du Lac) Mercury Marine (Fon du Lac) and Castroland Castrol
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Energy Savings Energy Savings Performance Contract Performance Contract (EPSC)(EPSC)
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ESPCiSU
Common features:
Energy Service Company (ESCO) pays for energy improvements (HVAC, lighting, boilers, etc.)
ESCO receives energy savings for a set period of time.
Customer receives energy savings thereafter.
It works for large, non-profit It works for large, non-profit accounts… without a doubt!accounts… without a doubt!
Federal facilitiesFederal facilities
State and municipal facilitiesState and municipal facilities
SchoolsSchools
UniversitiesUniversities
HospitalsHospitals
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Washington State Government
Today’s ChallengesiSU
1.Can CMS be modified to work in SMEs?
2.Can ESPC be modified to work in manufacturing?
3.Can the success of CMS and ESPC be extended to other types of materials and products?
Efficiency Performance Efficiency Performance ContractingContracting
A generalized approach to A generalized approach to “selling” untapped P2 “selling” untapped P2 opportunities to your suppliers.opportunities to your suppliers.
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Our Current ResearchOur Current Research
with Dan Marsch of WRMCwith Dan Marsch of WRMC
Efficiency Performance Contracting Efficiency Performance Contracting
in SME metalworking facilitiesin SME metalworking facilities
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Alternatives for smaller Alternatives for smaller manufacturing plantsmanufacturing plants
Start with the Start with the biggest spends:biggest spends:
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Electricity32%
Nat. Gas12%
Wst&w tr5%
Chemicals6%
Tooling35%
Paint10%
Plant F - $1,009kTypical Spend in Key Non-Core Areas
Tooling ManagementTooling Management(“integrated supply”)(“integrated supply”)
Tier 1 tooling supplier.Tier 1 tooling supplier.
Tooling purchases, QC, delivery, inventory, Tooling purchases, QC, delivery, inventory, POU distribution.POU distribution.
Performance targets for savings, stock outs, Performance targets for savings, stock outs, product quality, etc.product quality, etc.
No tool switching without plant sign-off.No tool switching without plant sign-off.
Savings in price, administration, usage – with Savings in price, administration, usage – with most in usage.most in usage.
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HNAI and DCTHNAI and DCT
40% tooling cost reduction in first two years.40% tooling cost reduction in first two years.
Primarily from process improvement.Primarily from process improvement.
Dramatically improved tool tracking and data Dramatically improved tool tracking and data analysis.analysis.
Oversee 40+ tooling suppliers.Oversee 40+ tooling suppliers.
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Haldex and ETCOHaldex and ETCO
Constant $/standard machine hour tooling Constant $/standard machine hour tooling & MRO in last 5 years despite 16% & MRO in last 5 years despite 16% increase in productivity.increase in productivity.
Over $200,000 per year savingsOver $200,000 per year savings
Most from process improvement.Most from process improvement.
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Next stepsNext stepsExtend tooling management to Extend tooling management to metalworking fluids.metalworking fluids.
Possibly energy – motors and lighting.Possibly energy – motors and lighting.
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Electricity32%
Nat. Gas12%
Wst&w tr5%
Chemicals6%
Tooling35%
Paint10%
Plant F - $1,009kTypical Spend in Key Non-Core Areas
Energy Management?Energy Management?
Can a lease-to-own arrangement Can a lease-to-own arrangement work? – work? – Example…Example…
Replace HID lighting with fluorescentReplace HID lighting with fluorescent
$200k to install, $50k in annual savings$200k to install, $50k in annual savings
Researched, contracted, financed by supplierResearched, contracted, financed by supplier
5-Yr Lease-to-own at $40k/yr5-Yr Lease-to-own at $40k/yr
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Energy Management?Energy Management?Integrate opportunities for energy savings into Integrate opportunities for energy savings into overall packageoverall package
Electricity – lighting, motors, air compressors, Electricity – lighting, motors, air compressors, HVAC, building shell.HVAC, building shell.
Natural Gas – ovens, washers, pretreatmentNatural Gas – ovens, washers, pretreatment
Heat recovery – water heating, distillation, etc.Heat recovery – water heating, distillation, etc.
Lease to own – payments less than savings.Lease to own – payments less than savings.
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Paint Management?Paint Management?
Modeled on tooling managementModeled on tooling management
Tier 1 tooling supplier.Tier 1 tooling supplier.
Paint purchases, QC, delivery, inventory – but Paint purchases, QC, delivery, inventory – but also paint process improvement.also paint process improvement.
Performance targets for savings, stock outs, Performance targets for savings, stock outs, product quality, etc.product quality, etc.
No product switching without plant sign-off.No product switching without plant sign-off.
No pilot programs yet.No pilot programs yet.
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Electricity32%
Nat. Gas12%
Wst&w tr5%
Chemicals6%
Tooling35%
Paint10%
Plant F - $1,009kTypical Spend in Key Non-Core Areas
Growth to chemicals and Growth to chemicals and energyenergy
Pretreatment chemicals – help Pretreatment chemicals – help optimize painting processoptimize painting process
Oven efficiency – heat retention, Oven efficiency – heat retention, waste heat recovery, process control.waste heat recovery, process control.
Evolve to other energy opportunities.Evolve to other energy opportunities.
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Efficiency Performance Efficiency Performance ContractingContracting
Selling untapped P2 investments Selling untapped P2 investments
to your suppliers.to your suppliers.
We are looking for more pilot projects. We are looking for more pilot projects. Sound interesting?Sound interesting?
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ContactsContactsTom Bierma, Illinois State UniversityTom Bierma, Illinois State University
[email protected]@ilstu.edu
309/438-7121309/438-7121
Dan Marsch, Illinois WRMCDan Marsch, Illinois [email protected]@wmrc.uiuc.edu
309/671-3196 ext. 202309/671-3196 ext. 202
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