How much is this waste costing us?

Nowadays, waste disposal costs usually have a place in the accounts.  Standard landfill tax costs £56 per tonne (set to rise to £80 per tonne by 2014), and waste disposal services have their fixed and variable fees on top.  Recycling may provide some relief, but still typically involves some cost.  However, waste has hidden costs as well, and these can be considerably more than the disposal or recycling cost.

There are two big hidden costs in waste: the materials, and the production cost.  The first is easier to spot – if you purchase a tonne of steel, and sell products containing 990g of steel, you know you have wasted 1% of the material.  Production managers are usually aware of this, but the finance department may not be.

The second cost is less obvious – the cost of the facility.  Let’s say that a manufacturing firm has operating costs of £100m per year, and is working fairly near its current capacity, so waste products displace products that could be sold.  If the reject rate is 0.1% of products, then the operating cost of producing that waste is £100K per year (0.1% of £100m).  Alternatively, consider this from a time perspective.  If a typical production line in our hypothetical facility spends just 10 minutes of a 16 hour day producing product that can’t be sold, that would be 1% of the time – or £1m cost per year.  Move to another perspective: the opportunity cost of the goods not produced because the line is at capacity.  If gross margins are just 10%, then waste at 1% of production is equivalent to £100K of foregone profit, displaced by waste.

These hidden costs of waste are rarely part of any management accounting system, and may be difficult to pin down.  However it’s worth the effort – keeping track, even at the “guestimate” level, can help companies work out the value of investing in waste elimination initiatives.  Putting a price on waste helps to focus attention on a big win for both the environment and the bottom line.  Recycling may deal with the waste that can’t be eliminated, but the biggest win comes from avoiding waste entirely.

What to do about high energy prices

As oil prices reach a new sterling high, and experts cast doubt on a significant price fall in this decade, there are few words of comfort for British businesses. The low oil prices in the 1990s now look like a temporary reprieve.  Electricity prices are likely to rise as coal plants close and the UK invests in new capacity.  What does this mean for UK business? 

The UK faces the combined threats of inflation and a return to economic recession.  This is “stagflation”, and can occur when inflation due to commodity price rises (like energy) result in lower productivity in the economy.  There is no certainty about what energy costs and productivity will do, and this uncertainty is far from reassuring.

Small businesses can be particularly hard hit because they lack buying power, often cannot risk buying fuel on long term forward contracts, and face having their increasingly price-sensitive customers consolidate their purchases with the “big box” stores (for B2C) or with large suppliers who can reduce their transaction costs (B2B).  However, this is also a time of opportunity for agile SMEs who can negotiate the uncertainty of these economic conditions.

The solution to the energy squeeze is clear: reduce dependency on energy and increase productivity.  Britain is already doing this, though the 5% drop from 2000 to 2008 hides wide variation between firms, even in the same industry.  As a second option – become an energy producer.

Office space can consume energy when not in use.

The first solution, reducing dependency on energy, essentially means eliminating waste.  If a firm reduces its use of unneeded resources – anything from heating empty office space  to producing goods and services too poor to sell – then it reduces its consumption of energy.  Firms often have unnoticed waste, from the unused space mentioned above to the waste of material that is considered “just part of the way this industry does business”.  Successful waste reduction efforts start by identifying all the resource consumption that does not create value for customers, and then working with employees, suppliers, customers, and other organisations to find ways to eliminate this waste.

The second solution – becoming an energy producer – works best when a firm identifies a resource it already has in excess which can be turned into energy.  As a simple example, some firms in suitably windy locations install wind turbines.  Others turn their waste into energy, either directly (for example wood waste becomes biomass), or indirectly, by selling their waste to a firm that can produce energy from it.  It is often surprising how many waste streams contain energy that can be released cost effectively as a fuel.

The critical message for SMEs is not to stand still.  Although no one can predict future energy prices, recent history does not encourage complacency.  To avoid being trapped between rising energy costs and downward pressure on margins, firms should act to cut waste in all its forms – this is a tried and tested route to reducing energy consumption.  With whatever excess resources are left, look for smart ways to turn these into energy.

How deeply should you cut your energy consumption?

This week’s Economist argues that decarbonising developing economies matters much more than reducing emissions in the developed world.  Although emissions from production in developing countries is now greater than in the industrialised nations, there is in fact no excuse for complacency about energy use in the wealthier economies.  Just over a month ago, DECC released their provisional estimate for UK greenhouse gas emissions for 2010.  They showed the first year-on-year increase in two decades.  As major consumers of energy, businesses need to play their part in turning this around, both because it’s right and also because it makes business sense.

The ideal energy consumption for any company is zero – in a perfect world we would have no energy costs at all.  But putting aside idealism, how do we set an emissions target for our business that is both desirable and realistic?

One way for a firm to set a target is to look at the governments' targets in the countries in which it operates.  For example, the UK has an emissions target for 2020 of 34% below 1990 levels.  In 1990, emissions were much higher than today – as of 2010, emissions were down by about 25%.  That leaves another 9% to go – or to put it another way, about 11% of 2010 emissions need to go by 2020.  This has to happen even as the economy grows – in other words, emissions per unit of output need to fall even faster.  A company that can cut its emissions by 11% over the current decade while growing at the same pace as the economy can feel that it has done its bit to help meet these targets.

But is this a good target for your company?  It’s a fair share in UK terms, but what about global terms?  If we are trying to be equitable, and just use our fair share of global emissions, we need to aim higher.  A UN Environment Programme report estimates that the world needs to peak at 44GT of greenhouse gas emissions in 2020 to avoid exceeding 2 degrees C of global warming.  If we take into account the estimated populations of the UK and the world now and in 2020, we’d need to reduce our emissions by 34% from 2010 levels in order to be making only our share of emissions.  In other words, we need to cut emissions by about a third over the coming decade in order to be equitable.

Is it realistic to cut a firm’s emissions by 11-34% by 2020?  In a word... yes.  Others have managed it.  For example, Interface Inc, a maker of commercial carpeting, reduced absolute GHGs by 71% from 1996 to 2008, while increasing sales by two thirds.  They didn’t do this by moving into a less energy intensive line of business.  They accomplished this remarkable reduction principally by reducing waste.

This is not to say that massive reductions in emissions are easy.  They need belief and determination.  However, the payoff is substantial – in good profits, good morale, and good reputation.  In the words of Ray Anderson, CEO of Interface Inc, “sustainability... has proven to be the most powerful marketplace differentiator I have known in my long career”.