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

tbierma@ilstu.edutbierma@ilstu.edu

309/438-7121309/438-7121

Dan Marsch, Illinois WRMCDan Marsch, Illinois WRMCdmarsch@wmrc.uiuc.edudmarsch@wmrc.uiuc.edu

309/671-3196 ext. 202309/671-3196 ext. 202

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