Efficiency Performance Efficiency Performance ContractingContracting

Reducing Wastes and Costs through Reducing Wastes and Costs through Innovative Supply ContractsInnovative Supply Contracts

Energy Management SeminarEnergy Management SeminarNovember 13, 2008November 13, 2008

Thomas J. Bierma, MBA, Ph.D., Thomas J. Bierma, MBA, Ph.D., Environmental Health ProgramEnvironmental Health Program Illinois State UniversityIllinois State University

iSU

Research since 1995Research since 1995

Change incentives for suppliersChange incentives for suppliers

to pay for performance and savings to pay for performance and savings rather than “stuff.”rather than “stuff.”

Does it work?Does it work?

Funded by the Illinois Sustainable Technology Center and the Funded by the Illinois Sustainable Technology Center and the U.S. Environmental Protection AgencyU.S. Environmental Protection Agency

iSU

Electricity32%

Nat. Gas12%

Wst&w tr5%

Chemicals6%

Tooling35%

Paint10%

Plant F - $1,009kTypical Spend in Key Non-Core Areas

Total spend: $0.5 – $2 million/yr

Manufacturing SME

Energy spend: $0.2 – $.9 million/yr

Question…iSU

How much could these costs be reduced by implementing projects with a payback period of….

1 year?2 years?3 years?4 years?

Electricity32%

Nat. Gas12%

Wst&w tr5%

Chemicals6%

Tooling35%

Paint10%

Plant F - $1,009k

Question…iSU

Yet these opportunities go untapped year after year…

Why?

A Major Cause…iSU

Core Competence

“The key skills or knowledge needed to build and maintain a competitive edge.” (Quinn 1994).

These technologies lie outside the core competence of the business, so time and money go elsewhere.

Question…iSU

Since suppliers have this core competence…

can we create incentives so suppliers apply that competence to increase customer efficiency rather than only sell them “stuff?”

Answer…iSU

For chemicals – Absolutely!

Electricity32%

Nat. Gas12%

Wst&w tr5%

Chemicals6%

Tooling35%

Paint10%

Plant F - $1,009k

Chemical Management Services (CMS)

Answer…iSU

For tooling – Absolutely!

Electricity32%

Nat. Gas12%

Wst&w tr5%

Chemicals6%

Tooling35%

Paint10%

Plant F - $1,009k

Tooling Management Contracts

Answer…iSU

For energy in the M.U.S.H market – Absolutely!

Electricity32%

Nat. Gas12%

Wst&w tr5%

Chemicals6%

Tooling35%

Paint10%

Plant F - $1,009k

ESCOs

Energy savings performance contracts

Question…iSU

Can we learn from these examples to create a market in energy savings outside the M.U.S.H. market? (for the rest of us?)

Electricity32%

Nat. Gas12%

Wst&w tr5%

Chemicals6%

Tooling35%

Paint10%

Plant F - $1,009k

What the customer (energy user) wants

iSU

1. Savings and performance – not “stuff”

2. Work with one, trusted supplier

3. Pay for it out of savings – if possible

What is the lowest-hanging fruit?

iSU• Lighting

• Waste heat recovery

• Compressed air

• Cooling

• What else?

One supplier?iSU

• Can one supplier handle all these?

• Would it require an alliance of suppliers?

• Who would lead the alliance?

Financial IncentivesiSU

Two models

• Pay-for-performance / Shared savings

• Sole supplier with targets

Capital Financing?iSU

• Delta Institute, Chicagonon-profit, member of CCX

• Will there be additional Federal incentives?

DiscussioniSU

• We have not found working examples of this yet in our research.

• Are there ideas about how to create it, or how to improve it?

ContactsContactsTom Bierma, Illinois State UniversityTom Bierma, Illinois State University

tbierma@ilstu.edu

309/438-7121309/438-7121

Dan Marsch, Illinois STCDan Marsch, Illinois STCdmarsch@wmrc.uiuc.edu

309/671-3196 ext. 202309/671-3196 ext. 202

iSU

Hitachi Metals and DCTHitachi Metals and DCT

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Engine production, coolant usage, and coolant waste haulage, Navistar, 1989-1996.

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