Energy costs: It is not a spike
October 19, 2009 | 7:00 pm CDT

Q: Many upholstered seating manufacturers are taking a hit from the spike in fuel prices. What steps do you suggest these manufacturers take in both the short and long term to ease the pain of this volatile and unpredictable cost?

A: As you might be aware, I live close to Houston, the energy capital of the world. I follow the energy business because it is a major determinant to manufacturing and consumer spending. You might not want to hear what I'm about to say. It is not a spike! The price of energy will not be much lower in the foreseeable future than what it is today.

Our congressional energy solution, stated by Rep. Maxine Waters from California, is to "nationalize the oil companies." Sounds like another assignment for Homeland Security to me.

Our "free trade policy" has China spending its trillion dollar hoard for consumption and storage of fuel and other commodities, thus driving up the costs. They believe that the inflating dollar is best used to purchase tangible commodities.

In addition, ethanol has proven a bust, causing more hunger among the poor. Now, the big idea is to open the coastal areas for drilling. The problem is that there are few available offshore drilling rigs. These have been sent to other areas of the world under long-term contracts. The price of natural gas has doubled in the past year and is expected to double again in the near future. Natural gas will fuel power plants as coal, abundant in America, is also politically unacceptable.

Alternate energy sources

This means that your electric bill will probably double as soon as your contracts expire. Wind, solar and tidal generation are interesting ideas, but will not provide an immediate cost relief. In addition, the best wind generating areas are not located in proximity to heavy enough power grids to handle the loads. Development of heavy power transmission is not quick or cheap, and none are presently under construction. Litigation, such as the one stopping a wind farm construction in South Texas for potentially killing birds, also slows development.

I am also told that a disruption in the gulf will yield massive shortages quickly due to low reserves. Consequently, the near-term prospects for stability are nonexistent. So what to do?

Do it now

Negotiate long-term contract you can get with your power and gas vendors and, if possible, shop around. I also encourage you to ensure that power vendors are stable financially, as we have had bankruptcies in Texas. The change to a new vendor has cost companies dearly.

There are normally two parts to a power bill. The demand part acts as a multiplier to the usage part. To keep the demand down, stage large motor startups. Power invoiced by the day and time of use is coming.

If you have not gone to a four-day week, do so. It will enable you to cut power usage as well as aid your employees in saving gas. Consider four nine-hour days. You get nothing for the tenth hour anyway. You might also vary start times to conserve power for heat and air conditioning.

As I'm sure you've done in your home, insulation, double pane windows and new fluorescent bulbs can reduce power, along with ensuring that all computers, printers, coffee pots, etc., are completely shut off when not in use.

Encourage car pooling. It would certainly pay to appoint an in-house energy czar to ensure the energy use policies in your company are well defined and followed.

Travel is now a huge expense. My costs have doubled this year. Consequently, if you must travel, schedule as much face time with various customers as possible in a single trip. Out and back in a day is over. Now, if you go, plan a week or so. There is also NetMeeting and Skype's Internet meeting solutions for non-travel "face-to-face" communication.

Inbound container costs have doubled this year and are expected to double again before the end of the year. Consequently, furniture manufacturers must plan to increase your selling prices by 10 to 15 percent at the October market. A retailer not getting its prices up substantially won't be in business much longer anyway, so don't take its comments to heart about your increase. Your job is to survive and thrive.

In the long term

I would suggest you plan to burn your waste wood and scraps to generate some heat in the winter and power in the summer. There are some very efficient systems on the market. You should also investigate solar roof panels, better insulation for your plant and perhaps wind turbines, depending on location.

I would suggest you consider ways to have office employees work from home by networking your systems and employees using the Internet. The "Paper to PDF file idea" discussed in previous articles would make this work in all administrative areas, freeing space and energy.

The cost of logistics will far eclipse labor in the future. I would also suggest you figure how to ship your products KD to a "white glove" delivery service that would perform final assembly, then deliver directly to the customer's home. This exercise is most important when you start exporting. (I say when because the "if-ers" won't be in business in five years.)

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About the author
George Koeninger

George Koeninger wrote a regular column for FDM and also Upholstery Design and Manufacturing magazines. He offered his experience and opinions on manufacturing management and product engineering.