Industrial Productivity Assessment Or One ofthe best ways to save energy is to find ways to produce more product!

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1 Industrial Productivity Assessment Or One ofthe best ways to save energy is to find ways to produce more product! Daniel Welch, P.E. Process Engineering Consultant Advanced Energy Raleigh, North Carolina ESL-IE The success of an energy program is often judged by measuring the change in energy consumption over time. It can be argued that a more valid method would measure the change in energy consumption per pound (or other unit) of product since this takes into account changes in production output. If one accepts this method, the author's experience indicates that the most straightforward way to improve energy consumption per pound of product is to increase the number of pounds produced. Further, this approach will be better received by production persormel and upper management than will a more orthodox energy program. The author points out this approach has advantages for both manufacturers and utility providers making it a natural area of partnership. This paper also discusses how to implement this approach and some of the lessons already learned. While at Hrst that subtitle might not seem to make sense, I want to explain to you how we have come to this conclusion. And if I can convince you that it really does make sense, I want to explain how you can fmd ways to produce more product. First of all, just to let you know a Iinle about my backgrow1d and biases, I spent more than a decade from the early 80's to mid 90's working on energy projects and conducting industrial energy surveys (audits). What I learned from this was that you could usually point the way to energy saving measures with some fairly good paybacks. But getting clients to actually implement these changes was a challenge. So I came away from that experience a little jaded on the value of doing energy surveys for manufacturers. One of the energy projects I worked on involved energy modeling. I was working for the Institute of Textile Tectmology and was asked to put together an energy model for textile processing. For each process and then for the plant as a whole, the model predicted how many BTU per Jb of product would be used in processing. The idea was to use this as a benchmarking tool to let a plant know how much energy they should be using. And if they were above the benchmark, point to the areas where they were above the norm. What I found over and over again was that if a plant was operating under it's design capacity, it would show up as an energy waster. If a plant was operating at or above its design capacity it would be a very efficient plant. This intrigued me so much that I began to track some real data at certain plants from year to year. Sure enough, the plant's energy efficiency in BTU/lb would rise and fall depending on production levels. In fact, production levels had a much stronger relationship to energy efficiency than any energy programs or measures that were being implemented in the plant. In talking with several plant production people about this, their reaction was, "That's nothing new, we already knew that." J wish they would have told me! I used to joke that in every energy survey from now on I was going to suggest that they double their production rate - more energy consumed, but much less energy per pound. After thinking about this for just a little bit, I began to understand why production levels and energy efficiency are closely related. It makes perfect sense and I'll be glad to discuss this further with anyone who is interested, but it's beyond the scope of this paper to explain this relationship. The implications of this concept are pretty profound. It implies that actions taken to increase production are much more effective at saving energy than actions taken just to save energy. That was an eye opener for me! Let's hold that thought for a little bit. 59

2 ENERGY CONSERVATION OR PROCESS IMPROVEMENT? Another thing that 1 learned from my energy auditing days is that proposals to spend money for energy conservation were subject to much more stringent standards than proposals to spend money on process improvements. I often asked what were their corporate investment criteria? I'd hear things like, "For process measures we require a 4 year payback but for energy conservation measures we require a 2 year payback." What? Why is this? A little further inquiry might get responses like "Making product is our core business. Cutting costs is secondary..." or "Increasing production of first quality product is our number one goal. It's what captures the attention of the decision makers." After getting more involved with the financials of several manufacturers, I began to understand this a little better. Perhaps an example will help explain this. Table I contains a very simplified financial statement for a real company. 1 have taken the liberty of combining several lines to make the statement more readable, but the numbers are unchanged. At the bottom of the table is a breakdown of the Cost of Goods Sold. You will notice that energy costs (fuel and electricity) are only about 8% of their total cost. Although this number is variable, between 5 and 10% is fairly typical for a manufacturer. Table 1. Audited Statement of Cash Flows for Corporation XYZ - FY 1994 Sales Revenue Cost of Goods Sold (see breakdown below) General & Administrative Expense Other Expense 1000's of $ $ 77,000 $ (63,000) $ (4,910) $ (I 80) Net Income $ 8,910 Breakdown of Cost of Goods Sold Materials, tooling, supplies Direct Labor, Payroll Tax & Benefits Utilities Water Fuel Electricity Depreciation Maintenance, Shipping, etc. $ 39,000 $ 15,920 $ 500 $ 1,880 $ 2,000 $ 3,110 $ 590 $ 63,000 60

3 Now, let's say this company conducts a really successful energy audit. It identifies savings potential of 10% of their total energy cost. (That's pretty good.) If they implement all of the recommendations successfully (once again a really successful implementation), their financials will look something like Table 2 and they will realize a savings of$388,000. Not bad. Until you realize that this is less than 1% of their total cost. Hardly enough to make a big impact. And this is the upside! No wonder the CEO and other decision makers don't generally get very interested in energy programs. Table 2. Summary of Statement of Cash Flows (Thousands of $) Base Case 10% Energy Reduction Sales Revenue $ 77,000 $ 77,000 Cost of Goods Sold $ (63,000) $ (62,612) G & A Expense $ (4,910) $ (4,910) Other Expense $ (I 80) $ (180) Net Income $ 8,910 $ 9,298 Change in Net Income $ 388 Now, let's look at another project they're evaluating. Like most healthy companies, their sales have been trending upwards and they would like to produce more product from this plant. Table 3 illustrates the financial impact of increasing production by 10% (assuming they can sell the extra production). Their costs will of course increase since they need more raw materials, more labor and more energy to produce the extra product. What you'll find though is that most costs (labor and utilities in particular) will not go up linearly with production rate. This is the effect mentioned earl ier where a plant becomes more efficient as production rises. OUf experience indicates that on average you might expect these costs to increase by about 60 to 80% of the production increase. In other words, to produce 10% more product, you will incur about 6-8% more of these costs. This obviously is variable, but we have found this to be an average. Table 3. Summary of Statememt of Cash Flows (Thousands of $) 10% Energy 10% Production Base Case Reduction Increase Sales Revenue $ 77,000 $ 77,000 $ 84,700 Cost of Goods Sold $ (63,000) $ (62,612) $ (68,820) G & A Expense $ (4,910) $ (4,910) $ (4,910) Other Expense $ (180) $ (180) $ (180) Net Income $ 8,910 $ 9)98 $ 10,790 Change in Net Income $ 388 $ 1,880 61

4 Table 3 shows that a 10% production increase yields more than 4 times as much savings as a 10% energy reduction. No wonder management gets excited about production increases! And since 1 now work with plants to expand production capacity and in my former life I did a lot of energy audits, I can tell you from firsthand experience: It's much easier fmding ways to increase plant capacity by 10% than it is to reduce energy costs by 10%. And remember, as I mentioned earlier, the energy cost per Ib will generally go down as you raise production rates. This is a pretty good situation all around. So, let's look at how you can work towards raising production capacity in a plant. INDUSTRIAL PRODUCTIVY ASSESSMENT The first thing you have to do when seeking to improve production capacity is to fmd a focus. A manufacturing plant is a pretty complex system with lots of activity everywhere. You can collect reams of data and you'll be no closer to flnding the nuggets that will lead you to higher production capacity unless you know where to direct your limited time and energy. To focus our efforts, we utilize a method called the Theory of Constraints that was popularized in a book called The Goal written by Eliyahu Goldratt. It states that there is only one (or very few) critical areas that truly block the organization. In manufacturing, these constraints are often called bottlenecks and a search for the bottleneck(s) is a very useful exercise. It's important to realize that bottlenecks can be internal or external to the plant. For example, not being able to sell more product means that sales is the bottleneck and actions might be needed to improve sales effectiveness. We have seen instances where sales efforts are limited due to the perceived maximum manufacturing capacity of the company. In these cases, when Sales knows that they have the ability to make more product, they engage in more sales activity for that product. Alternatively, sometimes the supply of raw materials is a bottleneck. In this case, supply chain management efforts might be needed to allow increased production. An Industrial Productivity Assessment, which is the term we use to describe this effort, generally includes the following steps. Develop a Team It is important to form a team that includes key production and fmancial personnel from the plant. They will supply much of the input and having them on the team is an effective way of obtaining their buy in when it is time to implement fmdings. Track Product Flow A map of the product flow from receipt of raw materials to shipment offmal product is developed. For each subprocess, inputs & outputs and capacity constraints are identified. Once this information is gathered, the bottlenecks are listed and prioritized. It is important to realize that opening up one bottleneck will allow increased production until the next bottleneck process reaches its limit. It is important to recognize these interactions and plan accordingly. Bottlenecks often show up in surprising places and the production personnel often gain some real insight through this process. Develop Recommendations to Relieve Bottlenecks Some times these involve process changes, such as setup time reduction or changing processing temperatures. Other times they involve new technology such as utilizing infrared or microwave heating in the process. Evaluate Other Waste/Cost Issues Although the primary focus is increasing production capacity, inevitably these efforts lead to fmding labor or energy savings along the way. Obvious saving areas receive attention to document potential savings. Estimate Financial Impacts The cost of each recommendation as well as its impact on plant bottom line (net income) is closely evaluated. This analysis is largely what is used to justify the projects to management. LESSONS LEARNED Now I want to discuss some of the things we've learned along the way. First of all we have found that some of the most common bottleneck areas are: ~ Process Heating; ~ Drying and Curing (which mayor may not include heating); ~ Batch Processes Each of these items deserves extra attention from the learn. 62

5 We have learned to keep a close eye on inventory levels. Large Work-In-Process inventories are generally an indicator of trouble. Often they build up just before the bottleneck and help to highlight the problem. Large inventories may also be a buffer to make up for frequent process upsets such as off-quality batches. In this case they hide a problem that isn't readily apparent. Why are there enough off quality batches to warrant stocking excess inventory? What is the cause of the off quality? Once a bottleneck is identified, it should be treated as the top priority process in the plant...even if it is some grungy, dirty, nasty process that nobody gets excited about. The plant must ensure that the bottleneck is running whenever possible. The bottleneck should never be starved for input materials. It should be the top priority whenever it has a maintenance issue. It is important for everyone in the plant to know that the production of the plant is exactly equal to the production of that bottleneck process. Any time it is down, it is equivalent to the whole plant going down. Make sure that the bottleneck process only works on first quality product. This might necessitate an inspection step just before the bottleneck. And make sure that quality control is very good on all processes after the bottleneck. There is no sense having the bottleneck make parts that will later be ruined or wi.ll need to be reworked by the bottleneck. Minimize non-essential activity at the bottleneck. Setup time at changeovers should be worked on to reduce this time to a bare minimum. If there is any assembly or other activity at the bottleneck that might slow its speed, evaluate doing this at another step in the process. Fine tune the process itself... for example, often dryer temperatures can be raised quite high in the first zone ofthe dryer when the material temperature is well below target temperature. Lower temperatures can be maintained in later zones to prevent scorching. Simple, low cost steps such as this can often raise production capacity by 10 to 20%. Finally... consider new technologies or additional equipment. This should generally only be evaluated after you have considered how to maximize throughput with your existing equipment. After all, you should compare the economics of the new equipment against the best you can do with your existing equipment. FOR THE ELECTRIC PROVIDERS Since many of the conference attendees are electric providers, I want to take a minute to address how electric providers might use this information. For years electric utilities have provided energy audits and other services as a way to market by providing additional value to their industrial customers. The purpose of this marketing is to ensure a satisfied customer, build customer loyalty, reduce complaints and claims and ensure positive feedback to the utility commission or other regulatory body. Table 4 compares the effects of one standard marketing approach - conducting energy surveys with the approach ofproviding Productivity Assessment services. As indicated, both approaches will build customer loyalty through forming a partnership with your customer. However, Productivity Assessments are superior in enhancing customer intimacy since they involve the core business of the customer. Working on production issues will involve a cross section of customer personnel that is both broader and at a higher level, often involving Plant Managers, Manufacturing VPs and even CEOs. These people typically do not get involved around issues of energy conservation. As indicated earlier, Productivity Assessments generally have a more positive impact than energy surveys on customer competitiveness. Competitive manufacturers are important to the health of an electric utility. Our experience in North Carolina is that plants that are most profitable are the ones chosen to remain open in hard times and are the most likely to expand in good times. Finally, energy surveys erode utility revenue. Your industrial customers understand that it makes no sense for you to spend money to show them how to use less of your product. (They really do understand this, even if they say they don't!) Productivity assessments tend to be revenue builders even while they save energy on a BTU per lb. basis. This is a true win-win situation. 63

6 Table 4. A Comparison of the Utility Benefits Gained from Doing Energy Surveys versus Industrial Productivity Assessments Energy Productivity Assessments Comparison of Markcting Bcnefits Surveys Engender Customer Loyalty / Reduce Complaints + + Enhance Customer Intimacy + ++ Potential to Impact Customer Competitiveness + ++ Increase Utility Revenue - + Just to reiterate the key points: ~ Increasing production rates is a proven way to reduce energy use on a BTU per Ib basis. In fact, it appears to be more effective than undertaking an energy program. ~ Increasing production rates is much more likely than energy programs to get the attention and backing of management. ~ One must be able to sell the new production. However, most companies are periodically faced with the need for more production. Expanding production capacity at existing facilities is much more economical than adding or expanding plants. ~ Industrial Productivity Assessment is a method that helps manufacturers find the optimal way to increase production capacity. ~ For electric providers, Industrial Productivity Assessment may make much more sense than energy surveys to provide a valued service to your customers. 64

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