Strategies for survival

High energy cost is a painful fact of life for American manufacturers, and looks to remain so for the foreseeable future.

The U.S. Department of Energy (DOE) says costs are up 23 percent in the last year. The long-term trend is more alarming. From November 2001 to May 2006, natural gas prices doubled from $4 to nearly $8 per million BTUs, and oil prices quadrupled from $17 to $65 a barrel. Gas prices more than doubled in roughly the same period, though, like oil prices, have since fallen from their peak.

According to the annual Labor Day report from the National Association of Manufacturers (NAM), the situation results from “increased global demand, limited domestic supplies, natural disasters, and global instability.” Energy costs are one element of a 31-percent “structural cost disadvantage” faced by U.S. manufacturers.

“We are currently producing and shipping at record levels. However, our pretax profit will only be very modest—at approximately 3 percent of sales, compared with the 11 percent we should achieve at these sales levels,” said Chairman and CEO Fletcher Smoak of Salem, Va.-based Old Virginia Brick Co., testifying to Congress last year. “If it were not for the high volume of shipments, we could not operate our plants with these natural gas costs.”

When you have 100-percent cost increase in one area over five years, “you have to look at cutting costs in other areas,” says Bob Ferrari, program director of supply chain strategies for Manufacturing Insights, Framingham, Mass. Companies big and small are doing just that by applying plant-floor technology, reexamining supply chains and, long term, thinking about alternative energy sources.

Manufacturers are responsible for one-third of all U.S. natural gas consumption, making them especially sensitive to price shifts. Though the U.S. market enjoyed a significant cost advantage against foreign competition as recently as 2002, the U.S. Energy Information Administration (EIA) predicts demand for natural gas will increase 38 percent by 2020.

Chemicals and plastics sectors have been particularly affected by the change because they use natural gas and petroleum not just for electricity, but also as feedstock. After 50 years of making lawn-art pink flamingos, Union Products plans to close its plant in Leominster, Mass., on Nov. 1. The rising cost of natural gas was “a significant factor” in the decision, according to Keith Marshall, CFO. Union sold as many as a quarter-million pink flamingos annually, many of them to Wal-Mart.

Even liquidation of Union's assets, including plant equipment and molds, has been affected. Marshall says the majority of interest comes from Canadian companies, which pay approximately five cents per kilowatt hour of energy—two-thirds less than Union.

In the 2006 CEO Challenge report from The Conference Board, a New York-based business research organization, the rising cost of energy was most frequently cited as the “single greatest concern” of 650 global business leaders. Dow Corning President and CEO Dr. Stephanie A. Burns summed up the mood: “The downstream impact of high energy costs is huge. I think people are going to be shocked by high prices and that it's going to hurt everyone. Businesses and household consumers share a common concern about these rising costs.”

In response to rising energy costs, manufacturers apply a range of strategies, although most often raising prices isn't one of them. Near 80 percent of respondents to a 2006 survey by Boston-based Industry Directions say company management has become more focused on supply chain operations as a result of higher energy costs.

Fabrizio Brasca, director of solution consulting, transportation, and distribution practice for i2 Technologies, says the first step for those looking to the supply chain is to gain better and broader insight to total landed costs, as well as specific cost and operational constraints such as fuel surcharges and the length of the transportation chain.

“In the past, fuel surcharges were simply line items in contracts and invoices,” Brasca says. “But when taken into account during planning, they can mean the difference between choosing carrier A or carrier B.”

i2 is working with one global automotive OEM to create broad-based visibility through integrated data from inventory and transportation management systems. “Energy costs are just one driver, but overall we're seeing companies take a much more strategic view toward supply chain technologies,” says Brasca.

William Brandel, a principal with Industry Directions, sees the situation in terms of time and risk. “Manufacturers don't have enough time to make wholesale decisions about supply network design, so they have to be more tactical than strategic,” he says. “Right now the major focus is to choose suppliers which can provide goods at lower costs, but at what price level do you determine that you need to use domestic suppliers? All of these questions ratchet up the risk factor.”

Manufacturing Insights' Ferrari doesn't expect a major pullback of overseas sourcing or offshore manufacturing, but, “when coupled with wage inflation in China, there may be a shift to other Asian countries, like Vietnam, Cambodia and Thailand,” he says.

While lean methods have helped in the overall spectrum, they've also increased manufacturers' exposure in some ways. “The fact that manufacturers now order materials more frequently—or just-in-time—makes them more vulnerable to rising transportation surcharges,” says Ferrari.

Beyond better visibility into cost, Ferrari thinks manufacturers should add more flexible and powerful contract-management capabilities. “But there is risk that supply chain cost cutting will cause such strategic capabilities to take a backseat,” he says. One thing that seems certain is that suppliers and logistics providers will need more sophisticated fuel and energy hedging strategies to win business as manufacturers try to hold the line on prices.

Since 1980, the rising cost of energy was most frequently cited as the “single greatest concern” for 650 global business leaders, yet they are looking to get even more efficient—especially on the plant floor. Since motors consume 60 percent of the energy used in industrial settings, many companies use variable frequency drives (VFD), like those from Rockwell Automation, to reduce overall energy use.

“Many companies run their fans and pumps at full throttle, even when it's not necessary. Varying the speed of their drives can greatly reduce energy use, while still meeting output needs,” says Doug Weber, marketing manager with Rockwell's standard drives division. “Considering the huge size of many of these devices, it's no surprise that the savings are significant.”

Programmable controllers and energy-management software also contribute to the solution. The key is to gain insight to how well motors, fans, and heaters are running, and identify non-peak times when they can be cycled down or shut off. According to Rockwell, a food manufacturer used its solution to gather precise usage information. Then it renegotiated more favorable rates from its utility, saving 10 percent of its total costs.

At New Holland Tractor India, energy was wasted as motors ran at full speed when the compressor switched between load and no-load conditions. The company needed control and monitoring systems that would minimize energy loss and reduce mechanical and electrical breakdowns. Plus, air pressure variations had to be monitored constantly since different departments in the plant—including the paint shop, assembly line, and machine shop—had different needs.

Working with a local systems integrator, Rockwell Automation developed a solution that included the installation of a pressure transmitter and 125 HP Allen-Bradley VFD to vary motor speeds automatically. With the motors able to run at low speeds when more pressure was required, New Holland immediately saved energy and improved the power factor. Plus it could automatically adjust pressure during various operating conditions without losing efficiency.

Monitors and specialized software track critical parameters such as the power factor, harmonics, and demand load. The company monitors tripping, voltage dipping, and power failure, and can measure and correlate power consumption with production output.

The new system cut consumption by 35 percent, and paid for itself in 13 months. “The realization of savings by controlling our compressors has been a remarkable achievement,” says Plant Engineer Pawan Uppal.

As alternative energies mature, they hold out hope for lower-cost and cleaner power. Wind, solar thermal, and nuclear sources; hydrogen fuel cells; and photovoltaic (PV) solutions will play a greater role, and perhaps kick off a boom for certain manufacturing subsectors.

“There are no silver bullets for manufacturers,” says Dan Radomski, director of market development for NextEnergy, a Detroit-based nonprofit that works with businesses to accelerate alternative energy use and commercialize new energy technologies. “In fact, people who tell you that one energy technology is superior probably have an investment in it.”

From its headquarters in Detroit, NextEnergy operates a microgrid that combines multiple alternative energy technologies—a mixed approach likely to become common in the future.

Dr. Brian Bowen of the Purdue University Energy Center notes the near-term limitations of wind and PV cells in providing for the high-demand base load from large manufacturers, “though they will certainly be part of the long-term mix,” he says. One of several U.S. academic centers doing research for the post-fossil fuel age, Purdue's Energy Center studies the full range of energy sources likely to be used in the next 20 to 40 years—from clean coal to cellulosic fuels to nuclear.

“The high costs of development must be factored in, and our subsidy systems reworked, so that investments in new energy sources aren't lost if oil and natural gas prices drop again,” Bowen adds. “Whatever the combination of technologies and energy sources, new transportation fuels and power plants will need to be much more efficient than today.”

NextEnergy's Radomski says manufacturers don't have to wait for a revolution. They can take basic steps today, like simple maintenance on motors and HVAC systems, which can net immediate and surprisingly large gains. Also, “smart lighting,” like T-8 and T-12 fluorescent systems, deliver considerable savings. “We understand the reluctance to invest in anything that doesn't produce revenue, but the payback on smart lighting is compelling,” he says.