Efficiency Performance Efficiency Performance ContractingContracting
Reducing Wastes and Costs through Reducing Wastes and Costs through Innovative Supply ContractsInnovative Supply Contracts
Energy Management SeminarEnergy Management SeminarNovember 13, 2008November 13, 2008
Thomas J. Bierma, MBA, Ph.D., Thomas J. Bierma, MBA, Ph.D., Environmental Health ProgramEnvironmental Health Program Illinois State UniversityIllinois State University
iSU
Research since 1995Research since 1995
Change incentives for suppliersChange incentives for suppliers
to pay for performance and savings to pay for performance and savings rather than “stuff.”rather than “stuff.”
Does it work?Does it work?
Funded by the Illinois Sustainable Technology Center and the Funded by the Illinois Sustainable Technology Center and the U.S. Environmental Protection AgencyU.S. Environmental Protection Agency
iSU
Electricity32%
Nat. Gas12%
Wst&w tr5%
Chemicals6%
Tooling35%
Paint10%
Plant F - $1,009kTypical Spend in Key Non-Core Areas
Total spend: $0.5 – $2 million/yr
Manufacturing SME
Energy spend: $0.2 – $.9 million/yr
Question…iSU
How much could these costs be reduced by implementing projects with a payback period of….
1 year?2 years?3 years?4 years?
Electricity32%
Nat. Gas12%
Wst&w tr5%
Chemicals6%
Tooling35%
Paint10%
Plant F - $1,009k
Question…iSU
Yet these opportunities go untapped year after year…
Why?
A Major Cause…iSU
Core Competence
“The key skills or knowledge needed to build and maintain a competitive edge.” (Quinn 1994).
These technologies lie outside the core competence of the business, so time and money go elsewhere.
Question…iSU
Since suppliers have this core competence…
can we create incentives so suppliers apply that competence to increase customer efficiency rather than only sell them “stuff?”
Answer…iSU
For chemicals – Absolutely!
Electricity32%
Nat. Gas12%
Wst&w tr5%
Chemicals6%
Tooling35%
Paint10%
Plant F - $1,009k
Chemical Management Services (CMS)
Answer…iSU
For tooling – Absolutely!
Electricity32%
Nat. Gas12%
Wst&w tr5%
Chemicals6%
Tooling35%
Paint10%
Plant F - $1,009k
Tooling Management Contracts
Answer…iSU
For energy in the M.U.S.H market – Absolutely!
Electricity32%
Nat. Gas12%
Wst&w tr5%
Chemicals6%
Tooling35%
Paint10%
Plant F - $1,009k
ESCOs
Energy savings performance contracts
Question…iSU
Can we learn from these examples to create a market in energy savings outside the M.U.S.H. market? (for the rest of us?)
Electricity32%
Nat. Gas12%
Wst&w tr5%
Chemicals6%
Tooling35%
Paint10%
Plant F - $1,009k
What the customer (energy user) wants
iSU
1. Savings and performance – not “stuff”
2. Work with one, trusted supplier
3. Pay for it out of savings – if possible
What is the lowest-hanging fruit?
iSU• Lighting
• Waste heat recovery
• Compressed air
• Cooling
• What else?
One supplier?iSU
• Can one supplier handle all these?
• Would it require an alliance of suppliers?
• Who would lead the alliance?
Financial IncentivesiSU
Two models
• Pay-for-performance / Shared savings
• Sole supplier with targets
Capital Financing?iSU
• Delta Institute, Chicagonon-profit, member of CCX
• Will there be additional Federal incentives?
DiscussioniSU
• We have not found working examples of this yet in our research.
• Are there ideas about how to create it, or how to improve it?
ContactsContactsTom Bierma, Illinois State UniversityTom Bierma, Illinois State University
309/438-7121309/438-7121
Dan Marsch, Illinois STCDan Marsch, Illinois [email protected]
309/671-3196 ext. 202309/671-3196 ext. 202
iSU
Hitachi Metals and DCTHitachi Metals and DCT
0%
20%
40%
60%
80%
100%
120%
140%
1989 1990 1991 1992 1993 1994 1995 1996
Per
cent
age
of 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