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Focus: Manufacturing

Feature Article from Our Supply Chain Trends and Issues Subject Area - See All

From SCDigest's On-Target E-Magazine

July 25, 2012

 
Supply Chain News: Huge Savings Available to Manufacturers from Better Management of Input Materials and Energy, McKinsey Says

 

Companies Need to Think Outside the Four Walls of the Factory to Really Make Improvements; Adapting Lean to Energy and Materials Consumption

 

SCDigest Editorial Staff

Commodity and energy costs are increasingly dynamic, but in general rising for manufacturers, the consultants at McKinsey say, as manufacturing grows in developing countries, increasing demand for commodities. This is leading to an increase in the percent of total production costs that are variable, they say, driven by these rising material and energy costs. That trend represents both great challenges and opportunities.

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The authors say that there are real opportunities for manufacturers to partner with waste collection operators to to identify and develop opportunities for value recovery

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Such conditions are likely to "will persist, if not intensify," authors Stephan Mohr, Ken Somers, Steven Swartz, and Helga Vanthournout say. It is paramount that manufacturers focus more attention on reducing such material and energy costs, including stepping up their re-use of materials at the end of life where possible.

"Our experience suggests that manufacturers could reduce the amount of energy they use in production by 20 to 30%," McKinsey says. "They could also design their products to reduce material use by 30% while increasing their potential for recycling and reuse."

They say some companies have even begun to pioneer new business models that enable them to retain ownership of the materials used in the products they sell, establishing mechanisms that prompt customers to return a product to its manufacturer at the end of its consumer utility, enabling the manufacturer to extract additional value from it.

While of course manufacturers have always tried to minimize material and energy use, the opportunities, the authors say, is often viewed too narrowly, within the four walls of the factory.

In addition, "classic improvement approaches, such as Lean manufacturing and material-and-information-flow analysis, typically fail to fully address energy or resource costs and constraints. Because they lack a systematic approach that focuses attention on resources throughout the value chain, manufacturers have tended to think narrowly about what is actually a broad landscape of opportunity. "

McKinsey calls out four primary areas for resource productivity: production, product design, value recovery, and supply-circle management.

Production: While techniques such as Lean have driven great gains in labor and capital productivity, "Such efforts can improve resource productivity if they are adapted to include criteria for reducing the consumption of energy and raw materials," the authors say.

They recommend, for example, that companies adapt the methodology for Lean-value-add identification to map energy consumption at every step of the manufacturing process. "This will enable them to calculate the thermodynamically minimum energy required and evaluate actual consumption relative to this theoretical limit (an approach known as “pinch analysis”). The analysis reveals where energy is wasted and how losses can be avoided." The article cites examples of manufacturers that were able to reduce energy consumption by 5-15% from such efforts.

It also says Lean approaches can be used to reduce waste and capture savings by optimizing the interface between the producers of energy, such as steam-boiler operators, cooling-water-unit operators, and power suppliers, and consumers of that energy. It notes "One chemical plant managed to avoid a $2 million investment to increase its boiler capacity by improving consumption planning, specifically, ensuring that demand would not pass the threshold that triggered pressure drops during demand spikes."

Product Design: As most understand, most material usage and sometimes energy needed to make products is locked in from the product design. This is a very hot area in consumer packaged goods right now, as companies such as Procter & Gamble and Unilever, among many others, have launched major initiatives to reduce the amount of packaging materials required for most of their products, often by 20-30%.


(Manufacturing article continued below)

 

CATEGORY SPONSOR: SOFTEON

 

 

Companies in many industries can "conduct product teardowns, disassembling and analyzing competitors' products to identify opportunities to increase resource productivity; they can use linear performance pricing, which enables comparisons among product attributes that provide different levels of performance for users; or they can pursue "design for manufacturing," which involves optimizing product design to minimize the resources needed during manufacturing and assembly, McKinsey says. While that latter technique has been used for many years, it has generally focused on reducing labor costs and time in manufacturing, much less for material and energy consumption.

Such efforts can also be used to change a product's physical profile that reduce transportation costs, such as by getting more cases on a pallet, or reducing weight so that more units can be loaded on a truck before it "weighs out."

 

 

Source: McKinsey Quarterly


Value Recovery:
Many companies are finding ways to re-use and recycle materials, but these efforts can be taken to a whole new level, McKinsey says.

It notes that recent technology advances in waste handling enable modern, automated facilities to "recover much more material than was possible using manual systems, and they produce recyclates of a quality well above that required by most recycling protocols. These facilities can sort large volumes of varied waste, separating the valuable materials from those of less worth. They can also adjust sorting criteria to optimize selection based on scrap values in the spot market."

The authors say that there are real opportunities for manufacturers to partner with waste collection operators to to identify and develop opportunities for value recovery. For example, the waste processors might have ideas in how products could be designed to harvest more of the materials at their end of life, and provide logistics services that bring such recovered material right into the factory for use as part of the build process.

Supply-Circle Management: Rather than the linear notion of a supply chain, where materials enter somewhere upstream and end up somewhere far downstream, the concept of supply circles emphasizes that materials can be looped back into the production process after they have fulfilled their utility over the life of a product.
This requires a detailed understanding of their full supply chains - a level of understanding few companies currently possess.

"This involves considering not only which materials are used and in what volumes, but also how much energy is required to use them and what impact they have on the environment," McKinsey says. "The analysis enables companies to identify areas for improvement in internal, as well as supplier, operations."

Such analysis will often identify "hot spots" that are ripe for improvement. McKinsey cites the example of a beverage company that identified that more than 35% of the carbon dioxide emissions generated to produce a half-gallon container of juice came from producing and applying fertilizer to groves where the fruit was grown. It started an initiative to reduce the level of fertilizer used by its farmers.

This supply circle thinking could even be extended to manufacturers looking to maintain ownership of the product when it reaches end of life.

It says a battery manufacturer built a competitive cost advantage for itself by by controlling not only battery production but also post-use collection, disassembly, and reprocessing of batteries, giving it control of the lead cycle that created a low-cost source of raw materials. It also says some European manufacturers of household appliances and furniture are shifting their business models from customer ownership to lease agreements, so that they can control the materials at end of life.

Could such a model really thrive with consumers? Hard to say, but it is an interesting idea.

The current resource environment creates many challenges, but also huge opportunities, the authors conclude.

To capture those opportunities, "companies must embark on a journey to transform their operations and dramatically increase resource productivity, McKinsey says. "They will have to dedicate as much effort to optimizing resources in the future as they did to lean and other improvement initiatives in the past, while at the same time rethinking their business models to capture the value residing in resource ownership."

The full article is available here: Manufacturing Resource Productivity

Do you agree that there are major opportunities for manufacturers in better resource and materials management? Can you ever see consumers willing to buy products where manufacturers retain ownership, and can reclaim products at end of life? Let us know your thoughts at the Feedback button below.


 

Recent Feedback

I was working for the Multinational Companies as a Supply Chain Director in Malaysia for the past 33 years. After I retired I join a recycling company call Reclaimtek in Malaysia. Currently we have a partnership with Dell computers to take back all their end products for recycling to save the environment.

I fully agree with this article. Most consumers would like to dispose off their product when they purchase a new version. If the lease program works, it's "GREAT". It not only help manufactures to reduce, reused and recycle their products. It also help manufacturer to reduce cost of raw materials and at the same time, it helps to save the environment.

Thanks for the Great Idea.


Francis Seow
Vice President
Reclaimtek Malaysia
Aug, 03 2012
 
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