Thursday April 29, 2010
THE Copenhagen Environment and Climate Summit of December 2009 shed new light on our planet, the global warming issue and the responsibility of every nation, company and individual towards reducing emissions.
Over the next decade, the United Nations and member countries are committing billions of dollars to work through many of the carbon emission challenges that burden our environment. Today, and closer to home, the green and sustainability trend appears to be infiltrating every aspect of manufacturing, consumer behaviour and new product designs as the attention turns towards this rising global issue.
In the manufacturing industry, analysts seem to be the most excited about the green and sustainability movement, followed by software vendors and manufacturers.
This seems somewhat unbalanced because manufacturers have the potential to reap the largest benefits. As good citizens, manufacturers should be leading the way rather than being guided by analysts or software vendors.
This doesn't necessarily mean that manufacturers are not aware of the benefits or aren't thinking about them. In fact, the number of manufacturers looking for software solutions related to green and sustainability has risen significantly in the last few months.
Unfortunately the majority of the inquiries are still externally driven and most of them relate to anticipated mandatory reporting requirements rather than reduction. There has not been a realisation that some of the trends emerging would warrant a fundamental shift in the way value chains are designed and managed today.
All the data points indicate that energy efficiency should be an obvious "must-have" solution for any manufacturing company embracing energy efficiency and sustainability initiatives.
Using an overseas example in a 2004 study the US Department of Energy pointed out that the manufacturing industry can achieve practical energy reductions of about 20%, worth almost US$19bil (RM65bil).
Coupled with the fact that the manufacturing sector consumes almost as much energy as the transportation sector, it is surprising that every US-based manufacturing company is not proactively embracing energy efficiency and sustainability initiatives.
To add to these data points, there is a compelling case for cost reduction:
• During the automation wave of 1980s, the focus was on direct labour cost. Companies automated operations, until they extracted the last scintilla of manual labour from the manufacturing and materials movement process;
• During the ERP (enterprise resource planning) and supply chain-planning wave of 1990s, the focus shifted to material cost. Manufacturers realised that labour cost constituted only about 5%-15% of total cost in many industries. It made more sense to focus on raw material cost which was the largest proportion of end product cost; and
• Extending this logic further, "Energy Cost" should be the next frontier of cost improvement as firms move to more sustainable platforms and the carbon-content of products gains prominence.
So what happens?
Where does the line of reasoning break down? First, based on the current accounting practices, energy cost most likely constitutes only about 5% of the product cost.
Second, there also exist numerous secondary cost factors involved in the "total energy" costs of a product - like the delivery and fuel costs to have raw materials, sub-component and subcontracted supplies delivered for final assembly.
These are all directly linked to the outsourcing trend and the relative "low" financial cost of transportation.
Third, consider also the petrol consumed for the workers to get to the plant as well as the rubbish, waste, water and sewage of massive factory facilities.
As a result, "all-inclusive" energy costs can be in excess of 10% with all the related overhead, hidden-secondary cost factors included.
Cost and margin pressures will continue in all sectors of the manufacturing economy. A real concern for green initiatives is that most manufacturers do not know the detail of current energy usage and the potential impact of those rising energy costs on their businesses.
This is because energy is considered and accounted for as an overhead cost. Product value chains are not typically viewed from an energy or carbon perspective today.
Currently, there are only scattered attempts to allocate energy cost accurately from department, cost centre or product perspectives. Energy directors and green executives still have a corporate perspective towards green and sustainability that is based on a facilities orientation.
Manufacturers that are serious about capitalising on green and sustainability as a competitive advantage - instead of just a reporting obligation - need to change quickly. There is an opportunity to move to the "next phase" that embraces the change instead of barely surviving it.
This next phase is critical and will decide the winners and losers in the new global carbon economy. Some of the steps needed in this phase are radical and will require strategic planning that needs to start now.
The same tools
Energy efficiency is the base-level requirement to qualify for the next phase. To achieve measurable savings in energy consumption, manufacturers must examine internal processes for efficiency gains.
Most energy consumption takes place inside manufacturing processes, where energy is consumed by heavy equipment and machinery.
That means, a company may change all the light bulbs in its buildings and paint the office buildings green, but that would only impact 18% of its energy footprint.
The good news is that the tools and technology required for equipment energy monitoring are the same ones that have been available in recent years for general operational efficiency monitoring and intelligence.
This provides further impetus to invest in an operational intelligence platform that assembles and contextualises live data from equipment and assets on the plant floor.
Once internal facilities and processes have been modeled and optimised, the next step is to migrate this energy perspective to the entire value chain.
Contextualising energy usage and identifying products that account for an enterprise's GHG (greenhouse gas) emissions is not enough. It is also important to account for suppliers' processes and their carbon footprint.
For example, if a manufacturer sells products through retailers or is part of a supply chain that does, it is likely to be hit sooner than others. Among reasons given for going green, is that large retailers are likely to mandate manufacturer labelling of products for their carbon footprint. This trend will likely spread to others.
After the value chain has been re-modelled to account for energy consumption and carbon footprint, the next step is to broaden the initiative to other aspects of sustainability.
Energy or natural resources that contain carbon is just the beginning, as true sustainability requires manufacturers to optimise their natural resources footprint in general, including water and landfill, etc.
Green and sustainability present both a threat and opportunity to industries in general and manufacturers in particular.
Energy efficiency is a necessary step for manufacturers, but alone it is not sufficient. Instead, to be successful and emerge as winners in the carbon economy, companies need to take a value chain model-based approach and continuously broaden and deepen that model to drive global and local optimisations in order to maintain and increase competitive advantage.
Further, companies need to broaden their approach to green and sustainability and account for all aspects of sustainability, not just energy consumption and carbon emissions.
K. Raman is regional managing director (Asean) of Oracle Corporation's Asia Pacific division. The multinational computer technology corporation specialises in developing and marketing enterprise software products.
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