It was budget season. Dan Fitzsimons, chief financial officer at Dunn & Lloyd Chemical Inc. looked back and forth between the budget draft on his desk and Gerald Jones, plant manager and author of spreadsheet.
Among the document’s minutia, it told a big-picture story that was both good news and bad: While the process manufacturing company’s sustainability initiatives were starting to succeed at reducing seasonal spikes in energy costs, raw material costs of Dunn & Lloyd’s primary product had not only continued to rise – they were becoming more volatile than ever.
“Let me make sure I get what you’re telling me,” Dan said. “Through the sustainability initiative we’ve introduced alternative fuels to heat the mix, which we buy on the spot market when electricity costs rise or we know we’re going to exceed our contracted amounts.” Gerald nodded. “But that’s resulted in varying heating times, which hurts process stability and affects our quality. So operators are upping the emulsifier to maintain the 99.5% target rate for stability.”
“Not always,” Gerald said. “But yes, that’s the gist of it. They make other adjustments too. And it’s working; despite the stability issues, our defect rate hasn’t budged.”
“I thought the process was automated, and that operators weren’t supposed to be making adjustments on the fly.”
“These guys are like craftsmen,” Gerald said. “It’s not unusual at all for any number of sub-processes to run in manual mode; particularly if they see changes in the process. That’s the nature of this business.”
“If that’s the case, it makes me wonder why bother with automation at all,” Dan said. After a pause, he went back to the real issue: “Are you saying the best way to fix the stability problem is to stop using alternative fuels?”
“That’s the basic tradeoff,” Gerald said. “We either pay more for heat, or we accept reduced quality in the process.”
Dan wondered aloud: “Then maybe the answer is in the target stability rate. Maybe the cost of the changes we make to maintain process stability is higher than the savings we were hoping to achieve. Our quality control is fine. Do we always need to hit 99.5%, or are there times when we can accept a higher risk of defect in order to keep raw material costs down? ”
“I’m pretty sure that’s true,” Gerald answered. “But I don’t know how we’d know which goal to shoot for on a case-by-case basis. The folks in finance might be able to figure it out, but when stability drops in the middle of the night, there’s no time to wait for someone to run it through the ERP.”
What can Dan do to manage raw material costs without backing away from the commitment to the successful sustainability program? Is there any way Gerald can provide his operators with the information they would need to make good business decisions while managing the manufacturing process?