Does UK manufacturing need more patriotism?

"Make it in Great Britain"  Credit: bisgovuk

At the EEF Manufacturing Conference in London today, Ed Miliband spoke about a need to be more patriotic about manufacturing in the UK.  Unfortunately for the Labour Party leader, protectionism isn’t as easy as it used to be – so how can we be more patriotic without violating our international trade agreements?

Suggestions from Mr Miliband and others include wider use of the “Made in the UK” mark, a greater effort to find acceptable ways for the government to give manufacturers more money (e.g. greater capital allowances), and even better education for the next generation’s workers.

The last suggestion holds considerable promise, though as it stands it is too simplistic.  Education focuses too often on learning what is already known.  Worse still, engineering is considered irrelevant to the country’s success by many, and anti-capitalist protests suggest that among the young, the whole idea of gaining personally by bringing innovation and growth to UK’s manufacturers and services is highly suspect.  By failing to educate young people effectively about the opportunities for social, cultural, and economic advancement for all (as well as individuals) that engineering, innovation, and enterprise bring, we are letting them down.

I recently visited a highly respected and academically league-topping independent school for girls whose syllabus in Design & Technology incorporated only cookery and sewing – not even covering food safety or textile engineering.  The idea that bright young people will somehow learn about innovation, engineering, and related subjects outside the curriculum is fanciful.  A few may be so lucky, but most will not stumble across the right sources of inspiration, and will presumably grow up considering technology to be wholly irrelevant to them.

What should we be doing?  First, young people need to learn about the mechanics of capitalism, and how money is used for investment, which can drive innovations and advancements that create jobs, better and cheaper products and services, and benefits of all kinds touching every part of our lives.  This sounds like a very basic lesson, but it is one that is clearly missing in the discourse of many young people today.

Second, young people – as early as possible in their education, i.e. primary school – should be introduced to innovation as something that they can get involved in, and where they can have impact.  First Lego League does this for children from the age of 9, involving them not only in Lego robotics (a good draw), but also in product and service innovation projects which have nothing to do with plastic bricks.  An engineer involved as a referee remarked to me recently that the youngest teams are often the best – and it’s important to capture their interest while they are still young enough to “think outside the box” relatively easily.

Third, and perhaps most difficult of all, we need to teach teachers about manufacturing and industry.  How can we expect them to impart an enthusiasm for an activity of which they have little or no direct experience?  How do we think they will answer their pupil’s questions?  They are no more likely to absorb this understanding by chance from their private reading and hobbies than their students are.

These days, many young people who go into manufacturing learn everything they know on the job, from their colleagues and superiors.  While this is an excellent way to learn, it is not adequate on its own – it ensures that firms carry on doing things exactly the same way they always have.  In order to innovate and compete effectively, manufacturers need employees who have a wider experience and understanding than they can get solely from studying traditional methods and practices.

What does this have to do with sustainable business, the subject of this blog?  For business to be sustainable, it must not rely on government support or protection.  It needs to be able to survive on its own, and to adapt to new conditions.  Ultimately survival depends on the ability to change.  Firms will not be able to do that if their staff think innovation is something other people do, growth is something legislated by governments, and that design and technology are about copying best practices that their elders pass down to them.  UK manufacturing has a proud tradition of radical innovation, risk-taking in investments, and visionary change.  If there is anything to be patriotic about it is this – as a cultural entity, UK manufacturing has led the world, and with capable people, can continue to do so.

Electric vans - does the £8000 grant make them a good buy?

The UK government has just announced grants of up to £8000 to support sales of electric vans.  Will the take-up on these be better than the take-up of electric cars?  Arguably yes.  Businesses tend to make decisions based solely on economic criteria, and the economics support the purchase of an electric van under the right circumstances.  However, the truth is that very few firms would currently benefit from buying an electric van.  This is because of current technical constraints – they won’t last forever, but they will dent the growth prospects of EV vans in the short term.

Range: who will be able to use an EV van?

The first question everyone asks about electric vehicles is range.  Take for example the Renault Kangoo ZE, with a range of 106 miles.  Assuming no power infrastructure, that gives a return range of 53 miles, the distance from Bristol to the M50 junction with the M5.  At the moment, the UK network of EV charging points is underdeveloped, although Ecotricity is working on this.  The Ecotricity charge points are currently slow (6-8 hours for a full charge on a Renault Kangoo van), making their use for commercial transport impractical.

This means that at present, electric vans are only suitable for businesses that mainly serve their local area, or which have a fleet of more than one van, where at least one (electric van) could be dedicated to local service.

The typical charging time means these vans are also mainly going to be used only by firms that need the van intermittently, rather than driving all day.  For all day driving one would need either several vans, or a fast charge point, and while the prices of these are coming down they are still prohibitively expensive.

Running cost: who will gain financially?

Even at today’s high electricity price levels, running an EV is cheap compared to either diesel or petrol – about one fifth the cost.  On the other hand, the van itself is more expensive.  How many miles would you need to do to make the EV worthwhile?

This depends on your firm’s economic circumstances, of course, because the cost needs to be paid up front, while the savings will come over a number of years.  Let’s compare two firms – one drives about 115 miles per week, or 6000 miles per year, using the van for only about ¾ of an hour each weekday.  The other firm does 15K miles per year, or about 288 miles per week, using the van for nearly 2 hours per day on average.

First, the lower-mileage firm:

	Kangoo EV	Kangoo diesel	Difference
Price after subsidy	13,592	8,950	-4,642
Miles per gallon		54
KwH / mile	0.21
Battery lease £/month	60
cost per mile	0.02	0.11
miles per year	6,000	6,000
Road tax		115
Running cost per year	844	788	-56

In other words, for the low mileage firm it’s actually more expensive to run the electric van, even before we look at the up front cost.

Now let’s look at the higher mileage firm:

	Kangoo EV	Kangoo diesel	Difference
Price after subsidy	13,592	8,950	-4,642
Miles per gallon		54
KwH / mile	0.21
Battery lease £/month	105
cost per mile	0.02	0.11
miles per year	15,000	15,000
Road tax	-	115
Running cost per year	1,570	1,798	228

Unlike the other firm, this one gets an annual saving from driving the electric van, but the payback time is only about 20 years.  This means that even for the high mileage firm, which generates the most savings from driving, the electric van is still not currently worthwhile.

So will anyone benefit from buying an electric van?

There are some additional considerations on the financial side.  First, a central London-based firm will save on the congestion charge, which could mean that the choice to go electric pays for itself in a couple of years.  A firm with just one van delivering every weekday for 50 weeks of the year would save £2600.  Combined with the good EV charging network in London, this makes EV vans an excellent choice for firms that deliver within the London congestion charge zone.

Another consideration is the capital allowance – firms can claim 100% of the van’s cost in the first year.  Of course, SMEs with low capital spend may be able to do this anyway.  Whether this benefits your firm depends entirely on your circumstances.

Last but not least is the marketing benefit of driving a green vehicle.  Whether your customers are private sector bodies, socially conscious urbanites, or commercial firms looking to green their supply chain, driving an electric van can send out a useful marketing message.  It is difficult to quantify this but plenty of firms will no doubt use this argument to tip an uncertain financial decision in favour of the electric van.

Does this mean electric vans will never dominate?

No.  Many of the drawbacks depend on things that will change.  Range will improve.  The differential between electricity and petrol / diesel prices may widen.  EV charging will get faster, cheaper, and more ubiquitous.  So the economics of electric vans will change, and they will undoubtedly change for the better.  Of course, by that time there may be hydrogen powered vans competing for our business buck, but that blog entry will have to wait until 2015. 

How much energy can your company save?

Lights are often left burning in offices at night.  Photo: caribb

With no end in sight to our tight economic times, companies are redoubling their efforts to reduce costs.  The continued high cost of energy makes this a favourite area to target.  Just how much can a company actually save on its energy bills?

Savings from equipment

Anything that uses power – electricity or process heat – should be your number one priority.  Lighting uses about 40% of a building’s power and is a top target, with savings of 40-70% of lighting energy within reach.  The Carbon Trust estimates that investing in better lighting equipment can reduce electricity consumption by 20%.  Motors and drives are another area with great potential for savings – up to 60% according to ABB – and payback periods are usually very quick for switching to variable speed drives.

Virtually all machines have potential for improvement, either through replacement of less efficient technology, or introduction of controls to make the best use of the technology you have.

Savings from buildings

Buildings are great wasters of energy.  The principle problems come from heating and cooling.  Older building stock often suffers from inadequate insulation – the standards and practices set in the past were based on lower energy costs.  Even newer buildings designed with high energy efficiency in mind may not perform as expected if commissioning was rushed, or if building use differs from what was initially envisaged.

Savings from waste

Waste costs far more than most firms realise.  The cost of disposal is a tiny fraction of the true cost of waste.  Consider the cost of producing that waste in the first place – not just materials but also the labour and facilities time.  Even worse is the waste that slips past quality controls and isn’t identified as waste until it reaches a dissatisfied customer.

Figures on waste vary dramatically, but most firms waste considerably more than they realise.  In the food industry it totals around 30% of production – in developing countries most is lost at harvest and storage, and in the developed world it is lost most through consumers and distribution.

Much waste is actually visible to employees, but often considered unimportant, or impossible to eliminate.  The source of these attitudes is often in a failure to realise just how much waste costs.  Also, it is difficult to tackle waste that is unintentionally designed in to agreed processes and systems.

Savings from behaviour change

How often have you passed an empty office building at night and seen all the lights blazing?  For those of you who have worked in production facilities, how many times have you seen refrigeration unit doors left open, or machines left idling between shifts?  In the service industry, have you ever seen an open plan office where all the computers and printers were shut off at night?  Who has seen windows opened because the air conditioning or heating was set too high?

We need control over the equipment that serves us, but often in the rush of work people make choices that waste energy.  Replacing equipment may mean that the waste is reduced, and in some cases controls can help, but an even better solution is to eliminate this waste altogether – and without capital cost – by changing behaviour.  Of course this is no easy task – but there are approaches to educating and motivating the people that really work.

How do you know how much you can save?

There are three essential steps in estimating how much you can save.  First, you must footprint your firm – find out how much energy you use, in what forms, when, and for what purpose.  This takes time to set up, but it is well worth it in terms of the savings it prepares you for.

Second, you need to estimate the potential to change each area of energy consumption.  This can be done at a high level, through benchmarking and similar comparative exercises, or at a more granular level by looking at technology alternatives or proportions of energy wasted.

Third, you need to pull together this analysis to show the big areas of energy spend, and the top areas of potential improvement.  Bring together the key people from across your organisation to examine the results.  Chances are that any area of potential savings is going to involve many departments – this is one of the reasons energy efficiency opportunities are often not spotted.

If you need help with any of this, please contact us: enquiries@jlsbm.co.uk.  We offer unbiased advice and expert consultative assistance to UK firms.

Which retailers are most efficient?

Retailers are under considerable margin pressure, so you would expect them to take any measures possible to reduce cost.  Much work has focussed on labour productivity, or getting more sales per staff person, for example by introducing self-checkout.  However there is still much to be done on resource productivity.

A recent data set on leading retailers’ greenhouse gas emissions, sales, and employee numbers shows a wide variation in labour productivity and sustainability.  Interestingly, the most labour efficient retailers are also the most emissions efficient – no company is just “green” or solely focussed on automation or scale.

CVS (a pharmacy retailer) and Costco (a warehouse club) exceed their peers on both measures, but amongst the others there are some interesting differences.  Walmart and Tesco do not achieve the labour productivity of Kroger (a leading US supermarket), but both are significantly more efficient on greenhouse gas emissions.  This is probably no accident – both Walmart and Tesco have made bigger commitments to reducing emissions.  

Tesco aimed to reduce energy use by 50% from 2000 to 2010, versus Kroger’s target of a 30% reduction over the same period.  Walmart gave themselves just 4 years to achieve a 30% reduction (from 2005-2009), and they aspire to supply their stores with 100% renewable energy.

There are big savings for retailers who make efficiency their priority.  Improved lighting systems, daylighting, energy controls, heat recovery, behavioural change, and many other approaches can reduce costs significantly, often with a 2-3 year payback period.  For any firm in the retail sector, sustainability in terms of a reduced carbon footprint should have a leading role in their effort to thrive in these challenging times.

Why your waste costs 20 times more than you think

Waste disposal costs are rising.  Heightened attention is being turned to dealing with it cost-effectively, diverting it from landfill and getting the best possible income stream from recycling or re-using it.  This attention to waste is a good thing.  We want to reduce the cost of it, to make our businesses more competitive.  However the truth is that most managers are missing 95% of the cost of their waste.  If your facility’s waste costs were 20 times higher than you thought, what action would you take?

The answer is obvious – you would stop trying to maximise the recycling and re-use value of your waste stream.  Instead, you’d try to stop producing it in the first place.

Let’s look at a hypothetical manufacturing company[i].  Imagine a firm that produces high quality ready meals.  Our firm has operating costs of £50 million a year, and runs two shifts a day.  They produce 500 tonnes of waste per year, and it costs them £100 per tonne to dispose of it (fees and handling costs).  So this firm believes that its cost of waste is £50,000 per year.  This is significant enough to get attention, but at just 0.1% of total cost, it is not the highest priority.

Now, imagine that each day, an average of 10 minutes of each 8-hour shift produces waste.  This takes two main forms: 

• Occasional quality failures (e.g. too little product in one tub, or a run with wrong dates)
• Planned waste, while a new run is started, and the machines are adjusted to get the machines aligned perfectly

So for an average of 20 minutes per day (10 minutes for each of two shifts), the facility is producing waste.  That’s roughly 2% of a 16 hour day.  In other words, 2% of the operational time, and therefore 2% of the operational cost (electricity, people, facilities costs, materials, etc) is waste.  In a facility that costs £50 million per year to run, that’s a cost of £1 million, spent on producing product that will never be sold.

This is just a hypothetical example.  Is it typical?  In fact, this is close to the average for the UK economy as a whole.  As I’ve reported elsewhere, DEFRA estimates there are £23 billion of resource efficiency savings with a year payback or less, just waiting for firms to take advantage of them – about 1.6% of GDP.

A million pounds of a £50 million budget is a substantial sum – it could be better spent holding off the next round of unwanted redundancies, investing in new capital equipment, or developing new products.  If this were your firm, wouldn’t you do whatever you could to stop the waste?

So... just how much of your operational time each day is spent producing waste?

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[i] This could apply just as well to a service company.  For example, in a call centre, it might include outbound calls to wrong numbers, and times when the computers or phone lines are down.

Do more with less – and save £23 billion

That, at least, is the conclusion of a DEFRA study published in March.  It found that for very little cost, UK businesses could produce just as much as they do today, while saving £23 billion in costs.

Given our current economic troubles, it is surprising that this hasn’t been headline news.  The topic is called “resource efficiency.”  The UK government has been trying to encourage firms to improve their resource efficiency by providing advice and grants, and even the European Commission has urged firms on, claiming that “Increasing resource efficiency will be key to securing growth and jobs”.

These claims are entirely realistic.  There are multitudes of case studies available through government agencies and in business school texts, and of course many cases have never been documented.  Just tackling the production of waste products alone – without considering any other efficiency savings – could produce big savings to the bottom line.

The fact is that the funding interventions from the government have so far been very small – less than £100 million per year of the Business Resource Efficiency and Waste scheme.  However, they indicate big potential – every £1 spent by the government achieved an average £1.64 in additional sales and £3.20 in cost savings – and those are the benefits in just one year.  Unfortunately, the budgets for this work are now being cut.

As the ENDS Report has observed, “government will have to depend on businesses stepping up their own efforts independently, without relying on public funds for advice and support.”  Increasing landfill taxes are meant to encourage firms to address their inefficiencies, but waste handling costs represent only a tiny fraction of the true cost of waste.  Moreover, there are many more inefficiencies that have nothing to do with the waste stream.

When so many companies have tackled their waste stream, why have so few put the same energy into efficiencies – that is, into not producing the waste in the first place?  It’s often no one’s job – we assume our employees will identify and eliminate waste if they can, but no one is tasked or measured on this.  And why not?  Well – since the cost of producing waste, or working inefficiently, is almost never measured, those in charge don’t realise it deserves an explicit place in their management structure.

For those companies that grasp the opportunities in resource efficiency, the prize will be higher profits, greater security, and growth.  The government will no longer take the lead, though it is a wonder that it was ever necessary.  Given the size of the prize, it is time more firms put resource efficiency on the CEO’s agenda.

Why your business customers want you to cut carbon

Recent research from The Carbon Trust reveals a potentially unsettling truth for the B2B market: multinationals are not just addressing their own greenhouse gas emissions.  They are also increasingly including carbon in their selection criteria for suppliers.  Within three years, the vast majority will do so – only 10% say otherwise.

Why this move – is it part of these multinationals’ attempts to look green?  The report ascribes the trend to “shareholder pressure”.  Are these shareholders investing in an increasingly ethical way, or are they looking for financial value?  I would suggest the latter - in other words, this isn't a fad.  It's part of a trend towards shareholders actively looking after the value of their investments.  Suppliers should take note.

It is not only shareholders who know that low carbon can translate into good value.  Sourcing professionals look for signs of quality and efficiency to ensure that they are getting the best goods at the best price.  Low carbon emissions signal efficiency – that a supplier is using less inputs for the same output.  That will translate into a sustainably lower cost structure, from which the buyer hopes to benefit.  Multinationals are sourcing low carbon because it’s often cheaper, and is likely to get even more competitive if fossil fuel costs rise further.  Shareholders and management want to know that their companies are managing for value.

A quote from Chris Harrop of Marshalls plc is particularly revealing: “By choosing suppliers of responsibly sourced goods not only do we cut carbon emissions but invariably there are cost and efficiency gains to be had, which all adds up to a strong competitive advantage.”  Perhaps it’s nice to be green, but it’s good business to be cost competitive, and paying attention to carbon in the value chain helps firms solidify this advantage.

So, suppliers now have another reason to address emissions, if cost competitiveness itself were not enough.  Multinationals will be expecting suppliers to report on, and compete on, greenhouse gas emissions.   Their suppliers will be asking the same questions right down the supply chain.  If your business customers are not already asking you to reveal to your carbon footprint, they soon will.

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.