Faced with rising energy costs, the entire industrial and service sector is facing an unprecedented situation of declining performance, and even financial danger. This situation also offers a historic opportunity to reduce the energy footprint of our economy, through a range of technical, organizational and financial measures. Find out more from our experts about the 5 essential steps you can take to generate cashflow gains in just a few weeks.
ENERGY PRICE CRISIS: A THREAT TO THE FINANCIAL HEALTH OF MANUFACTURERS
The energy price crisis is now hitting the industrial world hard. Visit energy-intensive industries such as food processing, chemicals, metallurgy, plastics and paper will be heavily impacted. In the agri-food sector, the rise in electricity prices represents 3 to 5 times the net income of certain companies. For manufacturers in the metallurgy, chemical and food industries, maintaining an activity is often more expensive than stopping production.
Beyond rising energy prices, raw material-intensive industries whose production is highly energy-intensive also find themselves in difficulty. Indeed, the price of all raw materials has risen sharply in 2022:
- glass: +20%
- metals: steel +40%, aluminium +30%
- chemical compounds: +35%
Visit production costs of companies dependent on these raw materials. In the utilities sector, the cumulative impact of energy and the pass-through of higher chemical prices is comparable to net income in 2022.
So.., companies in all sectors and of all sizes are affected by these increases. Yet market demand is not diminishing. Some manufacturers are partially able to pass on these cost increases in their sales prices. Others are governed by an international market price, and feel the full impact of these increases on their bottom line. Several weeks of shutdowns are therefore scheduled from 2022, or at the very least a reduction in production of up to 30%.
THREE COMPLEMENTARY STRATEGIES TO REDUCE CORPORATE ENERGY DEPENDENCY
Faced with these challenges, manufacturers must significantly reduce their energy consumption. They must also rethink their value creation process by integrating their suppliers and/or internalizing part of their energy production. Energy is thus no longer simply a commodity reflected by a cost line in an income statement, but rather a cost of production. a structuring asset for corporate strategy.
Depending on the proportion of energy in the cost structure, whether purchased directly or from energy-hungry suppliers, the energy strategy will not be the same. Three complementary solutions are available to help manufacturers reduce their dependence on energy. The combination of these strategies will enable companies to increase their impact and profitability.
FOCUS ON ELECTRO-INTENSIVE COMPANIES
When the consumption of energy and/or energy-intensive products represents over 20% of sales of a company, it is considered electro-intensive. In these structures, rising energy costs have a major impact. An increase of 5 to 10 times the usual energy prices generates monthly losses that can represent several times the profit usually generated.
Implementing an energy efficiency program can help reduce this impact in a temporary crisis situation.
However, this approach is essential but not sufficient to absorb the shockwave of the current energy crisis. It must be accompanied by a more profound approach to energy transformation.
STRATEGY 1
Energy efficiency
With a view to reducing energy consumption at every stage of the production process, energy efficiency is based on 3 families of complementary levers.
Structural levers, acting on the business process
- Install sensors to automatically switch on lights or energy-consuming appliances
- Check for compressed air leaks or insulation losses
- Change heating or cooling settings by a few degrees
- Run rotating machines at optimum power
- Use buffer stocks to smooth just-in-time operations
Approach results
Energy efficiency (best practices or OPEX) :
- Industrial process: -7% to -10%
- Real estate: -15% to -20%
Lead times :
- 2 months
P&L, cash flow and GHG impact :
★ ☆ ☆ ☆
Organizational levers: raising awareness and formalizing best practices
- Awareness-raising and training in ways to reduce energy consumption
- Adapt production (nights and weekends) to match the optimal operation of certain equipment
Cyclical levers to introduce flexibility into the production process
- Adapting production rates to market prices
- Set up measurements and monitoring indicators for energy-intensive items
STRATEGY 2
Energy transformation
Several levers can be activated to rethink the entire production value chain, considering energy not as a commodity, but as an asset. They are complementary to energy efficiency, but have a longer internal rate of return (IRR).
Process reengineering or the global value chain
- Replace inefficient equipment with more efficient equipment
- Carry out major CAPEX on energy-consuming equipment to recover heat
- Designing new uses for the pooling and reuse of by-products
- A circular economy approach to the production process
A new energy purchasing strategy
- Internalize your electricity or heat production
- Long-term contracts
- Subscribe to specific electricity suppliers for electro-intensive industries
- Make production flexible in order to adapt it to energy market prices, hourly or seasonally
Approach results
Energy transformation (CAPEX) :
- Industrial process: -40%
- Real estate : -65%
Lead times :
- 6 months to 1 year
P&L, cash flow and GHG impact :
★ ★ ★ ☆
Use substitute products
Involving suppliers as partners in a comprehensive approach
Minimize total energy costs
- Raw materials suppliers are also affected by the energy crisis. It is essential to involve them in the evolution of the manufacturing processto find an optimum across the entire value chain in relation to a functional requirement.
- For example: Rather than reducing the thickness of a glass container, is there an alternative material that can meet the same needs but at a lower energy cost?
Approach results
Energy efficiency (best practices or OPEX) :
- Industrial process: -7% to -10%
- Real estate: -15% to -20%
Energy transformation (CAPEX) :
- Industrial process: -10% to -20%
- Real estate: -40%
Lead times :
- 2 months to 1 year
P&L, cash flow and GHG impact :
★ ★ ☆ ☆
OUR 5-STEP APPROACH FOR CASH FLOW GAINS IN JUST A FEW WEEKS
STEP 1
Diagnosis and roadmap
- Identifying sources of savings and their impact on company results
- Leverage our expertise, feedback and databases
- Short, medium and long-term roadmap
Duration : 1 month
STEP 2
P&L and cash flow impact
- Modeling the impact of energy efficiency projects on P&L and cash flow
- Scenarization of the impact of decarbonization subsidies
Duration : 1 month
STEP 3
Design
- Co-construction of projects with your teams
- Budgeting, prioritization, risk and opportunity analysis, internal organization and partners/suppliers
- Discounting of P&L and cash-flow impact
Duration : 2 months
STEP 4
Financing
- Identify sources of financing to leverage financial resources
- Support for the creation and presentation of files
Duration : 1 month
STEP 5
Support
- Implementation, monitoring (operating model) and operational management system
- Awareness-raising and change management
Duration : 3 to 6 months
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EMM (Operational Excellence and Mid Market) is Eurogroup Consulting's cross-functional practice in charge of operational excellence. It comprises some 50 consultants, managers, directors and associates, and operates in all the sectors covered by the firm, along 3 lines:
- Operating performance : new production systems, maintenance 4.0, supply chain, lean management
- Durability and performance: energy efficiency and effectiveness, CSR, sustainable performance, operating model
- Sustainable financial performance : asset management, zero-based budgeting, strategic and financial diagnostics
