Efficiency Performance Contracting

1. iSU Efficiency Performance Contracting A Market-Based Approach to P2 Thomas J. Bierma, MBA, Ph.D., Illinois State University www.ilstu.edu/~tbierma/sme.htm

2. iSU Alternate title How to sell your untapped P2 opportunities to your suppliers! Thomas J. Bierma, MBA, Ph.D., Illinois State University www.ilstu.edu/~tbierma/sme.htm

3. iSU Research since 1995 Overcoming barriers to implementing P2 technologies… through innovative, market-based approaches. Funded by the Illinois Waste Management and Research Center and the U.S. Environmental Protection Agency

4. 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?

5. Examples iSU • 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…

6. A Major Cause… iSU • Core Competence • Core Business • “The key skills or knowledge needed to build and maintain a competitive edge.” (Quinn 1994).

7. A Major Cause… iSU • The expertise needed to tap many P2 opportunities is outside the core business of the company.

8. A Major Cause… iSU • Resources needed to develop the P2 expertise must be diverted from core business activities. • It just doesn’t get done.

9. 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

10. iSU A Second Question… If 25%+ ROI investment opportunities exist, isn’t there a market for these investments somewhere?

11. iSU A Third Question… Who already has the core competence to take advantage of these investment opportunities?

12. iSU One answer… Suppliers!

13. iSU The Problem… Implementing P2 will usually reduce purchases from suppliers, so why would suppliers invest?

14. iSU One answer… Incentives! Create incentives that share the ROI, so suppliers make more $ from investing in P2 than from ignoring P2.

15. iSU Can it work? Absolutely! Under the right conditions…

16. iSU Chemical Management Services (CMS)

17. iSU Traditional Chemical Supply PROFIT! Sales (revenue) $ Chemicals Supplied (costs) Increasing Chemical Volume

18. Chemical Management Services (CMS) iSU Fixed fee (revenue) PROFIT! $ Chemicals supplied (costs) Increasing Chemical Volume

19. Chemical Management Services (CMS) iSU Common 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.

20. Engine production, coolant usage, and coolant waste haulage, Navistar, 1989-1996. Plus 93% reduction in engine head and block rework

21. Coolant Usage, GM-EMD, 1994-1998

22. Chemical Management Services (CMS) iSU • 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

24. iSU It has worked for large accounts…without a doubt! • GM EMD (LaGrange) and D.A. Stuart • GM Truck and Bus (Janesville) and BetzDearborn • Navistar (Melrose Pk.) and Castrol • Ford (Chicago) and PPG/Chemfil • Chrysler (Belvidere) and PPG/Chemfil • GKN Aerospace (St. Louis) and AVChem • Harley Davidson (Milwaukee.) and Henkel • United Technologies Corp. and Haas TCM • Mercury Marine (Fon du Lac) and Castrol

25. iSU Energy Savings Performance Contract (EPSC)

26. ESPC iSU 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.

27. iSU It works for large, non-profit accounts… without a doubt! • Federal facilities • State and municipal facilities • Schools • Universities • Hospitals

28. Washington State Government

29. Today’s Challenges iSU • Can CMS be modified to work in SMEs? • Can ESPC be modified to work in manufacturing? • Can the success of CMS and ESPC be extended to other types of materials and products?

30. iSU Efficiency Performance Contracting A generalized approach to “selling” untapped P2 opportunities to your suppliers.

31. iSU Our Current Researchwith Dan Marsch of WRMC Efficiency Performance Contracting in SME metalworking facilities

32. iSU Alternatives for smaller manufacturing plants Start with the biggest spends:

33. Typical Spend in Key Non-Core Areas

34. iSU Tooling Management(“integrated supply”) • Tier 1 tooling supplier. • Tooling purchases, QC, delivery, inventory, POU distribution. • Performance targets for savings, stock outs, product quality, etc. • No tool switching without plant sign-off. • Savings in price, administration, usage – with most in usage.

35. iSU HNAI and DCT • 40% tooling cost reduction in first two years. • Primarily from process improvement. • Dramatically improved tool tracking and data analysis. • Oversee 40+ tooling suppliers.

36. iSU Haldex and ETCO • Constant $/standard machine hour tooling & MRO in last 5 years despite 16% increase in productivity. • Over $200,000 per year savings • Most from process improvement.

37. iSU Next steps • Extend tooling management to metalworking fluids. • Possibly energy – motors and lighting.

38. Typical Spend in Key Non-Core Areas

39. iSU Energy Management? Can a lease-to-own arrangement work? – Example… • Replace HID lighting with fluorescent • $200k to install, $50k in annual savings • Researched, contracted, financed by supplier • 5-Yr Lease-to-own at $40k/yr

40. iSU Energy Management? • Integrate opportunities for energy savings into overall package • Electricity – lighting, motors, air compressors, HVAC, building shell. • Natural Gas – ovens, washers, pretreatment • Heat recovery – water heating, distillation, etc. • Lease to own – payments less than savings.

41. iSU Paint Management? • Modeled on tooling management • Tier 1 tooling supplier. • Paint purchases, QC, delivery, inventory – but also paint process improvement. • Performance targets for savings, stock outs, product quality, etc. • No product switching without plant sign-off. • No pilot programs yet.

42. Typical Spend in Key Non-Core Areas

43. iSU Growth to chemicals and energy • Pretreatment chemicals – help optimize painting process • Oven efficiency – heat retention, waste heat recovery, process control. • Evolve to other energy opportunities.

44. iSU Efficiency Performance Contracting Selling untapped P2 investments to your suppliers. We are looking for more pilot projects. Sound interesting?

45. iSU Contacts Tom Bierma, Illinois State University • tbierma@ilstu.edu • 309/438-7121 Dan Marsch, Illinois WRMC • dmarsch@wmrc.uiuc.edu • 309/671-3196 ext. 202