Managing energy risks and costs can be challenging, given those responsible for the commodities often oversee other products and services needed to fill orders and generate revenue
—Sponsored article by NACC
Managing electricity and natural gas costs and risk can be challenging, given those responsible for the commodities often oversee other products and services needed to fill orders and generate revenue.
But close attention to energy spend is essential. Electricity and natural gas costs change hourly and forward-looking costs take weather, inventories and various unpredictable factors into consideration.
We know the best price on the wrong day costs the manufacturing sector hundreds of millions of dollars every year. Access to accurate information and updates can often make the difference between profit and loss. After all, when the majority of companies entered into five-year fixed price contracts in 2005/2006, then watched the market drop by more than 70 percent during the term, the practice of reactive management of these two costs should have been eliminated throughout North America.
Here are four suggestions to help you tap into energy savings:
1). Don’t take such a volatile cost and decide it can be managed once per year. There are a handful of reputable firms out there that can help you to understand your corporate objective and provide regular updates. Today’s cost challenges require ongoing strategies, floating market and fixed-price combinations with contracts that allow you to be nimble and act upon opportunities.
2). If you want to take action because you’ve heard rates are increasing or you notice budgets are forecast to fail, it’s likely the worst time to look into fixing your rates. Be patient, and move from the media to expert advice. Look at inventory reports, supply and demand information prior to making any decisions. Pay attention to Isaac Newton’s quote, “What goes up must come down,” and don’t follow Chicken Little.
3). Never fix your price for next year based on the previous year’s volumes and costs. To make a point, electricity is purchased based on hourly prices and hourly consumption. It’s impossible to assume all 8,760 hours in the coming year will have exactly the same usage as the previous year. Plus, you buy wholesale electricity in blocks, not designer products, and your usage profile will look more like a wave. Have you ever tried to get a square through a round hole? Companies fix rates thinking they’ve bought 100 percent of their volume and we often find it was actually 115 percent after balancing consumption against the product.
4). Assess where you get your information and understand how the supplier business model generates revenue. Did you know the majority of suppliers work with independent representatives? While the rep may hold a company card, or seem like an employee, most manufacturing companies find out they’re independent when the products don’t perform as promised and legal action is taken. The majority of suppliers like keeping their risk at arm’s length for obvious reasons, as the products were never designed to save you money and effectively manage your costs. By adding layers, you move further from the true cost of wholesale supply.
These four points, along with timely reviews of your rate structures, contract demands and other areas of your bill are important details for Canadian manufacturing companies aiming to manage their costs.
Companies should always focus on what they do best and the areas that impact their business. Expert advice can be hard to find, but it is available.
This article is part of the Financial Management Success Centre, which showcases leading strategies for cost control and preservation of working capital in manufacturing.
The views and opinions expressed in this article are those of the author and do not necessarily reflect or represent the views and opinions held by CanadianManufacturing.com