Stephan G�rner & Kaushik Das, For The Straits Times 1 Jun 10;
INCREASING productivity - creating more with less - is the only sure-fire way for businesses to gain a competitive edge. The same is true of countries, and Singapore's Budget 2010 and the recommendations of the Economic Strategies Committee have turned the spotlight back on the question of the country's national productivity. Rather than feeding the economy with more inputs of labour or capital, the Government is now seeking to renew the focus on productivity, and increase the quality and efficiency of Singapore's economic growth engine.
With global competition driving productivity increases for individual businesses, the productivity of labour inputs has increased some 250 per cent since the 1960s. New technology gets most of the credit, linked with better management and disciplines like lean manufacturing, which focus on improving processes and cutting waste. The productivity of material inputs has also doubled in the same period.
But new technology and better management have not helped improve the productivity of another essential economic input - energy. Energy productivity has improved by less than 50 per cent since the 1960s. From today's perspective, as we contemplate a future of higher energy prices and tighter resource constraints, this lack of focus on improving the productivity of our energy use seems short- sighted.
Now is the time to ensure that energy consumption forms part of our broader productivity agenda. Like labour or capital productivity, energy productivity measures the output and quality of goods and services generated with a given set of inputs. As demand for energy increases (as well as its price), companies that tackle this will have a bottom-line advantage. The size of the advantage will depend on overall reduction potential and the energy intensity of the business.
This is not to say gaining energy efficiency will be easy if we just put our minds to it. If it was easy, it would have been done already.
Companies, governments and consumer groups have sought for years to power more economic activity and residential consumption with less energy. There are innumerable barriers to these efforts, including relatively long periods required to earn back some energy efficiency investments. But there also have been some clear successes, such as the growing adoption of energy-saving appliances in many markets.
And as energy costs have risen, the return on efforts to optimise energy usage is now three times greater than in the 1990s, when oil traded for an average US$25 per barrel.
Companies with high energy productivity achieve gains by building on existing efficiency or waste reduction approaches. But we find that traditional lean programmes enable companies to realise only about one-sixth of their potential energy savings. To be successful, companies need an energy-first view of their processes. Then they can systematically identify energy waste and leakage, as they would in any other lean programme. Teams find that considerable energy savings can be achieved by simply changing the order of manufacturing steps, as you tap excess heat generated in one area to reheat elements at another point, or simply move the cooling processes away from the heat-generating ones.
We have found that most companies can reduce the overall energy efficiency of their operations by 10 per cent or more with relatively small investments and by up to 35 per cent when making substantially larger ones.
Savings vary by sector, of course. For example, integrated steel players in Europe or the United States can achieve 10 per cent to 15 per cent savings or more, and chemical companies 10 per cent to 20 per cent. What's more, all these savings can be achieved with limited investment and short payback periods of less than two years.
One European company, for example, estimates it can shave 6 per cent off its energy costs without any capital expenditure investments and an additional 5 per cent with capital expenditure expenses of less than US$20 million (S$28 million).
Few companies are making systematic efforts to holistically map out energy consumption at each step of their operating processes or to identify specific energy waste in their production systems and then to focus on opportunities to reduce it. They have not been setting concrete goals for improvement - the way they have in other areas where they have applied lean tools and thinking. As a result, few are realising anything near their energy-savings potential.
To some degree, you could argue that energy efficiency has been caught up in the wrong debate. It is often seen simply in the context of climate change, while it ought to be regarded as an essential part of broader productivity objectives. In many cases, it is an extremely attractive upfront investment that pays for itself over time, while providing the added benefits of reducing the cost of energy and increasing the productivity of the economy. Cutting carbon emissions is the added bonus.
The writers are partners with McKinsey & Company. Stephan G�rner is based in Sydney and Kaushik Das in Singapore.
