Rapid growth in emerging markets is causing a
dramatic increase in demand for resources, and supplies of many raw
materials have become more difficult to secure. Commodity prices are
likely to continue to rise and will remain volatile. Manufacturers are
already feeling the effects in their operations and bottom lines, and
these challenges will persist, if not intensify.
Consequently, manufacturers’ variable costs have increased. Between 2000
and 2010, for instance, the variable costs of one Western steel company
rose from 50 to 70 percent of its total production expenses, mainly due
to jumps in commodity prices. For one Chinese steel company, 90 percent
of production costs are now variable. And for a manufacturer of LCD
televisions, energy represents 45 percent of the total cost of
production.
But companies that take steps to increase resource productivity could
unlock significant value, minimizing costs while establishing greater
operational stability. Our experience suggests that manufacturers could
reduce the amount of energy they use in production by 20 to 30 percent.
They could also design their products to reduce material use by 30
percent while increasing their potential for recycling and reuse.
Indeed, companies could cut their product costs in half by reusing
materials and components. 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. This can involve 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.
A number of manufacturers have launched resource-productivity
initiatives that are already paying dividends. But most efforts focus on
operational slivers within the four walls of their business, and
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.
This article offers a practical set of tools to help manufacturers and
waste-management companies capture the resource-productivity prize.
Manufacturers are likely to achieve the quickest impact if they start by
focusing on their areas of core competency. But to secure the full
value of their efforts, companies must optimize their operations for
resource productivity in four broad areas that cut across their business
and industry: production, product design, value recovery, and
supply-circle management
(see exhibit, and visit the McKinsey & Company Web site for a
full infographic exploring opportunities for manufacturers to increase resource productivity).
1
By taking a comprehensive approach to resource productivity, companies
can improve their economics while strengthening their value propositions
to customers and benefiting society as a whole.
Prioritize areas of high impact
Companies should first focus on activities within their operations,
where they can exercise the most control; they can turn their attention
later to activities that require the cooperation of other organizations,
customers, or other stakeholders. Specifically, companies should
prioritize the activities that offer the greatest potential for impact
given their position on the production circle.
Upstream manufacturers. Companies that are
focused primarily on transforming materials into inputs used by other
companies should start by optimizing production for resource
productivity. Such companies have the most to gain by reducing the
amount of material or energy they use in production. Indeed, the
operations of mining companies are often as much as 10 times more energy
intensive than the operations of companies that use their products. As a
second step, manufacturers should prioritize waste recovery, which can
enable them to secure access to materials through activities such as
recycling and reuse.
Downstream manufacturers. Companies focused
primarily on making components or final products should start by
optimizing their products in order to use materials more efficiently.
These companies will gain most by designing products to reduce material
requirements, minimize energy consumed while using them, and ensure they
are optimized to be recycled or reused at the end of their life cycle.
Downstream companies can also benefit from reducing the energy required
to manufacture their products, but this may be a second priority, since
the operations of downstream players are not as energy intensive as
those of upstream players.
Waste-management companies. Companies that
handle waste materials—including those that collect, process, and manage
waste—should start by optimizing processes and developing new markets
for material reuse. They should develop the sorting and collection
technologies and capabilities necessary to mine the highest-value
materials from the general waste stream at the lowest possible cost.
They should also develop business models to help other companies with
their material-sourcing and reuse strategies.
Optimize for resource productivity
Depending on where they are located on the production circle,
companies should prioritize four broad areas for resource productivity:
production, product design, value recovery, and supply-circle
management.
Production
Most manufacturers have already made tremendous gains by implementing
programs to improve labor and capital productivity (for example,
through lean manufacturing). Such efforts can improve resource
productivity if they are adapted to include criteria for reducing the
consumption of energy and raw materials. Here we focus on energy—a
particular concern for upstream manufacturers, since energy costs can
account for as much as 20 percent of their overall production costs.
Manufacturers can take four steps to increase energy productivity.
First, companies can adapt the methodology for lean-value-add
identification to map energy consumption at every step of their
operating processes. 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.
One US surfactant maker that conducted a heat-value-add analysis found
that only 10 percent of its steam-heat inputs were thermo-dynamically
required to make its products; 90 percent were wasted. The manufacturer
implemented about 20 measures and captured steam savings worth 30
percent of its baseline energy costs, enabling it to recoup what it
invested to launch the effort within three years. One measure, which
involved implementing a new software algorithm to control the company’s
heating and cooling control loop, enabled it to reduce its need for
steam by 5 percent. Another company, a car manufacturer, reduced the
amount of energy it used in assembly by 15 percent by optimizing
ventilation processes.
Second, moving beyond pinch analysis, companies can extend their lean
programs to improve energy efficiency by optimizing energy integration
in heating and cooling operations. For instance, one chemical company
changed its process to release heat more quickly during polymerization,
allowing evaporation to start sooner, thus reducing the energy it used
in the subsequent drying stage by 10 percent.
Third, companies can use lean approaches to identify process-design and
equipment changes that can deliver greater energy efficiency. One
Chinese steel mill saved 8 million renminbi (about $1.2 million)
annually by lowering the leveling bar in a coke furnace an extra few
centimeters, which reduced the mill’s total energy cost by 0.4 percent.
The mill achieved an additional 5 million renminbi ($730,000) in annual
savings by adding an insulation layer to ladles used in steelmaking.
Fourth, lean-energy approaches can eliminate waste and capture savings
by optimizing the interface between producers—for example, steam-boiler
operators, cooling-water-unit operators, and power suppliers—and
consumers. 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
By incorporating energy and materials parameters into their
product-design approaches, companies could reduce the use of materials
that are hazardous, nonrenewable, difficult to source, or expensive.
Changes to product design could increase opportunities for recycling and
reusing components and materials at the end of a product’s life cycle.
And designers could prioritize the incorporation of sustainable features
into their products to reduce the impact products have on the
environment. These principles constitute a philosophy known as “circular
design,” which extends beyond products to systems and business models.
Companies that take these steps could reduce costs and facilitate
compliance with regulations while bolstering their reputation and
building relationships with consumers and other stakeholders.
Additionally, they can often expand existing “design to cost”
methodologies to quantify the financial or brand impact of incorporating
sustainable features in their products.
Several approaches touch on product design: for example, companies 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.
One manufacturer, for example, redesigned its shampoo bottles so that
they were thinner—but still met strength specifications—and reduced
material consumption by 30 percent. The bottle’s new shape enabled
higher packing density during shipping, and with a flat “hat,” it could
be stored upside down, allowing customers to more easily extract all of
its contents before disposal. The cap was redesigned to use the same
material as the rest of the bottle, thus eliminating the need to
separate materials before they could be recycled. The manufacturer also
optimized the bottle’s production process to reduce cycle time by 10
percent.
In another example, a vehicle manufacturer redesigned its forklifts to
reduce fuel consumption and total cost of ownership for customers.
Analysis showed that it could either redesign the power train or reduce
the weight of the forklift to achieve its goal, but the power-train
option was costly and complex. To reduce the weight of the forklift, the
company increased the leverage of the cast-iron counterweight used to
provide stability during lifting. This removed 200 kilograms (almost 450
pounds) of cast iron with no sacrifice in stability, which in turn
allowed the manufacturer to reduce fuel requirements by 4 percent and
cut material costs by $200 per vehicle.
And a home-appliance manufacturer analyzed its competitors’ coffee
makers and discovered an opportunity to improve heating efficiency by
adjusting the insulation of hot pipes and optimizing the flow of water.
It also changed the mounting of the heating system, using springs rather
than screws, to make it easier to separate materials during recycling.
Combined, these adaptations resulted in a product with an improved
footprint at a lower production cost; such “win win” opportunities are
not uncommon when focusing on resource productivity.
Value recovery
Companies may find they can satisfy their resource needs by recycling
and reusing materials historically discarded as waste. Those involved
in waste management have an opportunity to pave the way by developing
services that allow manufacturers to capture value from materials left
over after production or after a product has reached the end of its life
cycle.
Great technological advances have been achieved in recycling, organics
processing, and waste- to-energy conversion, and these have revealed
opportunities in material and component recovery. Modern facilities
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.
Waste-collection operators and recyclers should focus on building new
business models by working with manufacturers to identify and develop
opportunities for value recovery. This could involve helping
manufacturers design products and production processes to facilitate
material reuse; it could also involve helping develop logistical
solutions that allow manufacturers to incorporate recovered material in
their production cycle. Companies such as Veolia Environnement and SUEZ
ENVIRONNEMENT have already begun to transform themselves from waste
operators into raw-materials and energy suppliers, in part by advising
other companies on how to design products that can more readily be
recycled and reused.
Supply-circle management
Many of the activities that affect resource productivity and
sustainability—such as acquiring and transporting raw materials,
assembling parts used in the manufacturing process, and using and
disposing of final products—take place outside the walls of
manufacturers’ facilities. Although companies do not have exclusive
control over these activities, they can exercise their influence to
increase the productivity of their supply chains.
To that end, companies could transform their supply chains into supply
circles. Whereas the phrase “supply chain” may evoke an image in which
materials are collected in one place and ultimately disposed of in
another, the phrase “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.
Companies looking to make this shift should first develop a complete
understanding of their supply footprint. 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. The analysis enables companies to identify areas for
improvement in internal, as well as supplier, operations. Companies can
use the analysis to manage suppliers, reduce costs, and mitigate the
risks posed by potential regulatory changes, supply scarcity, and
volatile commodity prices—and to help initiate conversations with
suppliers that could result in strategic relationships that enhance the
capabilities of each party.
In most cases, a footprint analysis will reveal “hot spots” for
manufacturers to prioritize to achieve environmental and economic
impact. For example, one beverage producer realized that more than 35
percent 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 became clear that
working with farmers to reduce fertilizer use was one of the most
important steps to take to minimize the company’s carbon footprint.
Companies will benefit from adopting tools to monitor and manage their
supply circles. Supplier scorecards and environmental profit and loss
(EP&L) statements can be used to place a monetary value on
environmental impact. Puma, for instance, developed an EP&L
statement and pledged that by 2015, half its international product lines
would be manufactured according to its sustainability standard. One
objective is to ensure that its suppliers use more sustainable
materials, such as recycled polyester. Desso, a European carpet
manufacturer, substantially increased its market share and profits after
it received Cradle to Cradle Certification for its entire product line.
In a resource-constrained world, value creation moves toward the owners
of the resources. Companies should therefore consider developing new
business models that enable them to retain ownership of the materials
used in their products so that they can recycle or reuse the product at
the end of its life cycle. This could enable companies to reduce supply
risks while creating high-margin profit centers. The Ellen MacArthur
Foundation championed this approach in a recent report, calling on
companies to evolve from selling products to selling the services those
products provide.
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Chemical-catalyst manufacturers have done this for decades, essentially
selling the functionality of catalysts to customers without
transferring ownership of the materials themselves.
One lead-acid-battery manufacturer built a competitive cost advantage by
controlling not only battery production but also post-use collection,
disassembly, and reprocessing of batteries; control of the lead cycle
gives the company access to a low-cost source of raw materials. To take
an example from another industry, European manufacturers of household
appliances and furniture are shifting their business models from
customer ownership to lease agreements.
3
Upstream extraction and processing companies could play the same game.
Steel mills could retain ownership of the steel they sell and thereby
reduce their exposure to prices for iron ore and coal. And
waste-management companies may have opportunities to form joint ventures
with manufacturers to retain ownership of the materials they sell back
into the supply circle.
Over the past decade, supplies of various natural
resources have become scarcer, and thus more expensive and subject to
price volatility, increasing manufacturers’ costs and risks.
Nevertheless, the changing resource landscape also creates
opportunities. To capture them, companies must embark on a journey to
transform their operations and dramatically increase resource
productivity. 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. If
they get it right, the effort will enable them to increase the stability
of supply and manage their costs while developing new products— and
even lines of business—that generate sustainable bottom-line value.
About the Authors
Stephan Mohr is an associate principal in McKinsey’s Munich office, Ken Somers is a consultant in the Antwerp office, Steven Swartz is a principal in the Chicago office, and Helga Vanthournout is a consultant in the Geneva office.
Notes
