By Bob Hitch, Project Manager, Georgia Manufacturing Extension Partnership (GaMEP) at Georgia Tech
It’s well-known that the savings from waste reduction and energy efficiency projects go directly to the profit (bottom line) of the company. For example, a project that saves $5,000 after investment means $5,000 in additional profit for the organization. Another way to add profit to the bottom line is to sell more products. However in order to make the same $5,000 profit, a company with a Gross Margin of Profit (GMP) of 5% would need to sell $100,000 of additional product.
Based on the above calculations and the time, effort, and resources that would go into a waste reduction project versus selling $100,000 in additional product, it seems to me to be an easy decision. But, time-and-time again we see companies that decide against waste and energy projects in favor of projects that add production capacity, or a new product. First, let’s address why this happens, then let’s talk about how we can get approval to do waste and energy saving projects?
Why do manufacturers move forward on capacity or product projects?
I actually believe the answer is simple. It’s all in how we approach it. As engineers, we are trained to deal in terms of energy performance indicators and Kilowatt hour savings. We like to discuss material savings in pounds, and metric ton equivalents of carbon dioxide emissions – physical stuff. However the decision makers many times are the CEOs, COOs, and other upper management that have a financial stake in the company. Have you ever approached a financial person with the terms I mentioned and watched their eyes glaze over? I’ll admit it…I have! Here’s what I’ve learned…although they have an interest in the environment and reducing energy content of the operations, they are much more interested in making an informed investment.
So knowing this, what can we do to get approval on our projects?
1. Consider how the Financial Officers (FOs) think, and what their ‘hot buttons’ are.
We need to be able to convert our engineering talk into dollars and make financial sense. Sure, our managers are concerned about the environment and improving efficiency, but these are secondary to the business case made for the impact on the company. Many times, the more your proposal includes discussion of environmental and energy improvements, the more skeptical the financial folks become. So, include the physical impacts of your project, but emphasize the financial returns. Be sure to discuss the project’s benefits in terms of reducing costs and improving the ‘core’ business. Use measurements already in place for managing the company. For example, managers may be tracking your costs per unit of production output, or utility costs per month. Explain how your project will improve that current measure of company performance. Make it easy for the financial manager to see the effects in terms that are already being used to manage the business.
Here are some examples of how to reposition your points:
- Example 1:
- What you may want to say: We run the ovens in the facility 24 hours a day. Even when they are not in use we are only turning them down to low settings. If we were to shut them off during those hours, we wouldn’t expel as much energy and emit gasses into the environment.
- What you should say: We run the ovens in the facility 24 hours a day. We change them to low settings during times they are not in use. Our monthly energy bill is $10,000. If we were to turn them off during those hours, our energy savings would be $1,800 a month, resulting in a yearly savings of $21,600.
- Example 2:
- What you may want to say: Air compressors amount to 20% of the energy consumed at our facility. Our one air compressor is running at 110% of rated load. The outlet pressure is currently set at 115 psig, while systems in the facility only require 80 psig. We should reduce the pressure setting on our air compressor.
- What you should say: Reducing the compressed air pressure setting to what we really need will produce annual savings of about $6,000. And, we will avoid having to buy and install an additional compressor thus saving a capital investment of $45,000. It will cost nothing to change the settings, and production will not be affected. All the savings will be realized immediately.
- Example 3:
- What you may want to say: We use over 280 T12 and 69 Metal Halide fixtures. We need to change to newer T5 fluorescent fixtures. This will reduce our energy use by about 30%.
- What you should say: Our current light fixtures are reasonably efficient, but advanced systems can offer some incremental savings. We estimate that electricity needed for production lighting could be reduced for a savings of $10,000 annually. When considering the investment to change lighting systems, the simple payback for this improvement is 24 months. However, we have located two contractors who install and finance the project for that time at no out-of-pocket cost for us from the savings they guarantee.
2. Be prepared to compete with all the other investment opportunities already in process for your company.
Businesses always have to weigh and juggle investments. So it’s important to know what criteria are used to make financial decisions in your company and be able to make your stand. Discussing this with the FO, or staff, before pulling your proposal together is key. Look at using terms such as: Minimum Rate of Return, Internal Rate of Return, Net Present Value, Debt Coverage Ratio, Payback Period, and Return on Investment. Understand how your company uses these to screen projects for approval. In addition, your company probably has an approval process requiring signatures of key managers. Know when the budgeting process occurs, and the deadline for making new proposals to this year’s budget.
3. Do your homework on possible financing options for your project.
Asking your company to front a first time investment may be an uphill battle. It will get easier once you already have scored a successful project. For the first time proposal, see if there are suppliers who would be willing to finance the project – take monthly payments based on project savings. Look for State and Federal assistance for your project. One place to get started is http://www1.eere.energy.gov/manufacturing/states/state_activities/incentive_search.aspx.
Talk with your utility account representatives and check the State Energy Office (www.gefa.org) for funding opportunities.
Efficiency and waste reduction projects generate cash flow. This can be used for your next project, or diverted to other parts of the company to meet other needs. Show when your project will begin paying for itself. This is when the funds will be available for other uses.
4. Include a section in your proposal of what will happen if your company decides not to act on your project.
When improvement projects don’t happen, the company continues to pay for more material, services or energy than is really needed. This month-after-month expense compounds, and may be the most important factor in helping make the business case for efficiency projects. For example, equipment failure usually happens when the machine is most needed. What is the cost to replace it on an emergency basis? How much product is lost? How are customers impacted?
Efficiency and waste reduction projects are not seen regularly by your company’s financial group. Often your project will be diverted or denied just because they don’t fit the regular pattern for analyzing proposals. You need to know what they are looking for. Most will want to help you structure your proposal and understand the measurements and tools they use. A little effort up-front with the FO folks will make your proposal a success.
This is part of a series of articles for manufacturing improvement. Download a pdf of I have a great project. Now how do I get company approval?