Is energy cost really the biggest impediment to lower production cost ?

Here commonsenseja goes again swimming upstream.

Higher energy cost is no doubt part of the problem facing Jamaicans, which makes goods manufactured in the country less competitive that other country both in the region and overseas.

Energy cost however is not the major problem why our manufacturing cost is so high, so what is it?

The main reason for high manufacturing cost in Jamaica is WASTE !

I know many reading this may be wondering ” what is wrong with this guy”, the minister is saying if we don’t get energy cost down to the teens, we can never become competitive, so what is Jay speaking about waste.

What is waste, simplified equation

Sales Price = Profit +  Cost

Lets assume Profit is fixed.

If you reduce input cost you can reduce sale price while still maintaining your profit, correct ie sales price is directly proportional to cost.

Waste is a cost built into the production process, if waste is reduced or eliminated it   allows you to maintain your profits while reducing the sale price of your product or another way , offering lower prices to the consumer.

So what is Waste.

Waste is defined as anything in your process that does not add value.

Let’s look at efficiencies for example, how is this defined

Efficiency is = Input/Output.  A higher level of efficiency in your operations means lower waste, which is lower cost. Note no process is ever 100% efficient, so waste cannot be completely eliminated in all areas.

Question.

You are a General Manager in an organization and your engineer indicates that you need to replace a 100HP motor, which is close to end of its useful life.

The engineer has given you two options

Option 1

A standard efficiency motor with a rated efficiency of 92.5%  ( your old motor was 87.5%)

Option 2

A premium efficiency motor with a rated efficiency of  95.4%  but cost 20% more than the standard efficiency motor above. This motor will however save you  10% per annum of electricity cost.

Other data

• Both motor runs 16 hrs per day
• Load Factor 75%
• Operates 6 days per week for 52 weeks per yr.
• Expected life of the motor is 20 yrs
• Cost of capital for the company is 15%.

Most managers will opt right away to go with option 1, which is the lowest first cost, without even “batting” an eye, but would that be the correct decision.

The answer on the correct option requires further analysis and a decision on the purchase should only be made after that process has been completed, by the engineer or someone who is capable of completing that analysis.

A big part of the reason why many persons jump up and down about high energy cost, is the poor energy conversion or energy efficiency of their process, the energy that becomes “lost” in the process is clearly waste and comes at a heavy price, when you have to pay US$0.42 per kwh.

So if we can control waste in all aspect of our operations, we can reduce manufacturing and operational cost, but are we willing t0 do what is necessary to first understand where the waste exist and then go after it, or are we going to wait on Mr Announcement to give is US$0.18 – us$0.22 /Kwh

It like a person replacing an incandescent bulb with a LED buld and then wonder why he is not seeing the expected  70 – 80% reduction in his cost for lighting.

The individual would term off all incandescent bulbs when they were not in use, but when he changed out to LED’s they were on all the time even when not in use.

As far as he was concerned they are energy savings lamps and so should do the trick.

Energy saving lamps does not mean it consumes no energy, all it means it uses  significantly less energy that the comparative unit it replaces, when used for the same period of time.