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

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

3. 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 iSU

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

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

12. One answer… Suppliers! iSU

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

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

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

16. Chemical Management Services (CMS) iSU

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

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

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. 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 iSU

25. Energy Savings Performance Contract (EPSC) iSU

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

28. Washington State Government

29. Today’s Challenges iSU 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?

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

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

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

33. Typical Spend in Key Non-Core Areas

34. 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. iSU

35. 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. iSU

36. 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. iSU

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

38. Typical Spend in Key Non-Core Areas

39. 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 iSU

40. 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. iSU

41. 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. iSU

42. Typical Spend in Key Non-Core Areas

43. 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. iSU

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

45. 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 iSU