Rising manufacturing production costs is a hot topic in business today. Prices for raw materials, energy, and water have seen sharp increases with a number of underlying factors, including a larger population, high growth rates of emerging nations, and a limited number of natural resources.
Throughout history, we’ve seen demand for many resources increase dramatically. For example, demand for commodities such as food, agricultural raw materials, metals, and energy increased from 600% to 2000% during the late 20th century. In this same time period the world also saw improved exploration, extraction, and cultivation technology which kept prices relatively stable. Over the next few decades, however, most experts expect to see higher demand than we can supply, which will continue to pressure prices. The evidence is everywhere:
- Global GDP has increased 188% since 1990.
- The cost of the energy needed to drive this kind of growth has increased 340% in just the past ten years.
- In a recent survey, 44% of global businesses surveyed identified raw material costs as having a major impact on cost pressures in the next year, while 37% of global businesses identified energy costs as having a large impact.
- For an average equipment manufacturer, around 15 to 20% of total costs come directly from raw materials, while a typical process manufacturer will see raw materials contribute to 50 to 60% of its total costs – and raw material costs are on the rise.
So how do manufacturers combat these problems which can soften demand and pressure margins? By looking at new ways to improve manufacturing resource productivity. A recent study suggests that better resource productivity alone can reduce forecasted demand for energy, steel, water, and land by 20% over the next two decades. In other words, companies could significantly reduce their energy consumption by simply using their resources more efficiently. But how?
We recommend conducting a heat map analysis, which is a multilevel assessment of the current energy and raw materials consumed against the minimum required for a set of products and processes. This analysis can help identify opportunities in a number of areas, including:
- Optimize energy integration in heating/cooling operations – Improving efficiency of heating and cooling systems to decrease processing time and consequently, energy input
- Process and equipment modification – Improving efficiency of processes and equipment to reduce maintenance, thereby lengthening life of the equipment and lowering energy consumption
- Product design changes – Changes to size and/or shape of the product or materials used
- Residual recovery – Superior material and component recovery/re-use
These activities can often produce a 20-30% reduction in product costs and up to 90% reduction in energy costs. What’s more, these steps can usually be done quickly and inexpensively, with relatively few people involved. The quicker companies actively take such steps, the sooner they can mitigate their exposure to fluctuations in energy and commodity pricing, thus protecting their profits and helping to lessen their impact on the environment. Truly a win-win.