Industrial-resource productivity and the road to sustainability

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We both have spent much of our working lives helping companies reduce waste, boost efficiency, and improve the performance of their activities. During that time, it became clear to us that operational excellence and environmental sustainability are closely aligned. The most efficient companies are those that generate the most value from the fewest resources, whether those resources are labor and capital or energy, carbon emissions, scarce materials, and clean water.

A decade ago, we sat down to summarize our experience on paper. The resulting handbook, Unlocking Industrial Resource Productivity: Five Core Beliefs to Increase Profits through Energy, Material, and Water Efficiency (McKinsey Publishing, February 2016), set out five core beliefs for resource-productive operations, or RPO (Exhibit 1). It also offered readers a guide to analytical approaches and improvement measures that could unlock more business value while reducing the impact on the planet.

The five increasingly relevant core principles of resource-productive operations focus on both value and sustainability.

A lot has happened in the intervening years as sustainability issues—particularly those driven by climate change—have become far more urgent. Since the COVID-19 crisis started, sustainability and resource productivity have returned to the very top of the agenda for governments, investors, and customers. The European Union has put climate-change response at the heart of its postpandemic economic-recovery plans. BlackRock, the world’s largest asset manager, has told companies in its portfolio that it will vote against the reelection of directors at companies that fail to step up their efforts to protect natural resources and cut carbon emissions. Consumers have become more vocal about sustainability issues and more likely to act on their views. One recent survey of US apparel companies found that almost half feared they would lose customers if they didn’t live up to sustainability commitments.

Over the past year, an extraordinary number of companies have made public commitments to ongoing reductions in carbon emissions and resource consumption, for example to achieve 100 percent renewable-energy use or major carbon-footprint reductions per employee. Increasingly, the targets encompass not just the operations of these companies—reflected in the Greenhouse Gas (GHG) Protocol’s Scope 1 and Scope 2 emissions—but also the entire value chain, as envisioned in Scope 3. That’s putting extra pressure on thousands of suppliers to reduce their own environmental footprints as well. And it illustrates the role a resource-productivity approach can play as part of a broader set of solutions to help industries grow sustainably.

Resource productivity’s sustained impact

For manufacturers, especially in process industries ranging from energy and mining to pharmaceuticals and packaged food, there’s still much to achieve in reducing Scope 1 and 2 emissions. As in other sectors, these companies are realizing that the journey to sustainability requires a holistic approach, combining actions both in the boardroom and on the shop floor (Exhibit 2). Frontline actions can be especially powerful, often taking an organization a third of the way along the path to net-zero carbon emissions—with a 10 percent reduction coming from cost-free changes to operating procedures and the rest from further localized investments in technologies with a payback of less than two years. For example, one European chemicals company has been running a shop-floor-driven energy-efficiency program for a decade, and its teams are still finding new improvement opportunities every year. Those results give leaders room to make boardroom-level “moon shot” investments in entirely different products, processes, or geographies.

Environmentally sustainable operations require companies to act tactically and strategically.

How have our five principles of RPO stood the test of time? We are happy to say that the fundamentals still hold. In recent years, there has been significant growth in the number of companies applying these approaches as they develop sustainability-driven production systems in their own operations.

Moreover, developments in other areas—notably the rapid evolution of digital manufacturing approaches and Industry 4.0—have supercharged some RPO tools, making them more powerful, more flexible, and easier to use. Let’s take a walk through the five principles to see how far they have come and where they are going.

Think lean

Our first core belief is that resource-productivity strategy should be based on lean principles, making use of existing lean expertise within the company. Lean principles and sustainability are highly synergistic: both require organizations to eliminate waste and losses relentlessly wherever they find them and to strive to incrementally improve the performance and efficiency of their operations. And lean thinking’s focus on equipping frontline teams with the skills and tools to improve their own workplaces is a perfect model for the detailed, granular work required to improve resource productivity.

This approach also allows industrial companies to make use of their existing strengths. If lean thinking doesn’t receive the public attention it once did, that’s because lean principles have long since become part of the operational DNA of many organizations. And more recent management innovations, such as agile, incorporate many of lean management’s core concepts.

Traditional lean improvements often result in sustainability benefits as a byproduct. Eliminating quality deviations also saves the energy and materials needed to repair or replace defective parts, for example. However, getting the most from the approach will mean extending the lean tool kit to incorporate sustainability-specific concepts, such as energy recovery or waste-material reuse. Incorporating these concepts allows an existing lean production system to evolve into a true sustainability-driven production system.

Perhaps lean thinking’s significance for sustainability also receives less public attention because it relies not on one or two big technological shifts but on the rigorous implementation of many small changes. Those changes are often beguilingly simple, such as repairing leaking steam traps, adjusting excess oxygen levels to optimize boiler combustion, or enforcing the correct settings on machines.

Each of those steps may only make a tiny difference to an organization’s carbon footprint or resource consumption. But companies in every sector have found thousands of improvement opportunities. One chemicals company put lean principles at the heart of a worldwide effort to reduce greenhouse-gas emissions. It established an energy-efficiency center of excellence, tasked with helping sites identify new improvement opportunities and apply measures found effective by colleagues at other plants. Over a three-year period, the company rolled out the approach across its production network, applying anything from ten to 30 initiatives at each site to cut energy consumption by between 7 and 13 percent. The project has accrued almost $50 million in annual savings so far.

Beyond the direct impact on resource consumption, lean thinking also provides an essential foundation for other RPO tools. Lean thinking encourages companies to develop robust, streamlined processes, an important prerequisite for further improving efficiency by digitization or the application of advanced analytical tools.

Today, the transfer of benefits between lean principles and digital is a two-way flow. Leading companies are taking advantage of detailed databases containing hundreds of energy-efficiency levers, for example. These tools help them find opportunities they hadn’t previously considered and can automate the calculation of a detailed business case for each lever.

Think limits

The “think lean” principle helps companies make incremental improvements to energy and resource efficiency. The “think limits” principle is about setting ambitious goals that foster creative thinking and deliver significant leaps in performance. The limits here are determined by the theoretical maximum efficiency of a process. And the “loss bridge” (the gap between current performance and this limit) is a strong indicator of improvement potential.

The theoretical-limits approach helps companies move beyond the benchmarking trap. Rather than merely comparing their performance with peers or checking off a list of established efficiency-improvement measures, loss thinking encourages companies to understand the fundamentals of their processes and the issues that drive inefficiency. That step becomes a catalyst for innovation, encouraging the development of novel approaches that deliver big efficiency improvements.

Loss thinking encourages companies to understand the fundamentals of their processes and the issues that drive inefficiency. That step becomes a catalyst for innovation.

In glass production, a furnace’s energy consumption usually accounts for about 20 to 25 percent of total operating costs. Glass furnaces typically operate at very high temperatures (1,200ºC to 1,700ºC) and process large volumes of material (300 to 600 metric tons per day). The theoretical-limit approach has helped one glassmaker understand the gap between actual and theoretical performance—which turned out to be a delta of 20 to 40 percent in most cases. The company went on to define improvements to furnace load, operation, condition, and design that cut those losses by up to half, saving around €1.5 million per year at two pilot furnaces. The project also identified longer-term opportunities to save even more through improvements to furnace condition and design.

A North American midstream oil and gas company used the theoretical-limits concept to identify energy savings of 15 to 25 percent across its operations. Comparing actual energy consumption with ideal energy consumption over a full year of production showed that the improvements could be achieved through a combination of measures, including selecting the right assets for each task, fine-tuning equipment speed, rethinking storage capacity, and minimizing pressure losses. The changes required only limited capital investment, with a payback of two to five years.

Think profit per hour

Optimizing the performance of industrial processes is a complex endeavor. Operations teams must manage trade-offs among throughput, yield, energy consumption, and environmental impact. And the various levers at the disposal of these teams may reinforce or undermine one another.

The resolution for this challenge was based on two innovations that are still novel for many businesses. The first was the identification of a single metric that could account for the impact of multiple variables on overall process performance. That metric, we found, is compellingly simple: profit per hour. Crucially, the profit-per-hour calculation incorporates a comprehensive set of revenue and cost drivers relevant to sustainability, such as potential revenue from selling excess energy, as well as costs from emissions, waste disposal, water usage, or carbon offsets. Moreover, because time is truly a nonrenewable resource, the overall performance of a process can be determined by how effectively it uses the time available to generate value.

Lighthouses unlock sustainability through 4IR technologies

Lighthouses unlock sustainability through 4IR technologies

The second essential innovation was the development of tools that could enable the real-time optimization of profit per hour in an industrial system. This has been an area of significant progress in recent years. Advanced-analytics approaches and AI technologies, such as neural networks, are now being applied to the control of industrial assets. Compared with traditional manual control, these systems can respond faster and make better decisions. They also learn as they work, continually improving their own performance. At one cement company, for example, the introduction of AI control improved process throughput by 11.6 percent over a period of eight months.

Elsewhere, companies have transformed the performance management of their plants using the profit-per-hour approach. One chemicals company found that more than 90 percent of its process variability could be explained by external factors, such as differences in temperature, humidity, or feedstock. Building these factors into the profit-per-hour model allowed the plant’s management team to focus exclusively on the remaining efficiency gaps. That extra capacity led them to identify important operational and reliability issues, such as recurring equipment failures, that could be addressed by targeted improvement initiatives.

Think holistic

Too often, sustainability transformations run aground for the same reason other major change programs fail: too much focus on creating the perfect technical tools, such as cost curves, and too little on the humans who will use them. Technical improvements to production systems need to go hand in hand with changes to management systems and to mindsets and behaviors across the organization. The importance of this holistic approach has only been reinforced during the more recent waves of industrial digitization. It applies to sustainability as well—a radical reordering of priorities in many organizations.

As companies strive to address resource productivity, it is essential that their people have the skills and motivation to identify opportunities, select appropriate solutions, and deploy them across the organization. For most organizations, that will require systematic reskilling at scale. It will also require changes to performance indicators and management systems so that teams are provided with incentives to meet resource-productivity goals. One chemicals company has introduced new control-room technology in its ammonia plants so operators can optimize energy efficiency in real time, depending on the required production rate.

A large-scale ten-year operational energy-efficiency program at another chemicals player focused on capability building among frontline process engineers. Hundreds of staff across the organization developed the skills to understand the root causes of losses and process inefficiencies. They were aided by new analytical tools that helped them identify and evaluate the impact of detailed process changes. The program has reduced carbon emissions by 10 percent, while generating savings of €100 million per year.

Think circular

The last of our five principles might have the most significant impact on the way industrial companies run their businesses in the coming years. The transition from linear to circular economic models requires companies to consider the products they make today as resources for the future and to find ways to optimize the value generated by those resources through multiple life cycles.

In the years since we published our handbook, the circular economy has moved from the radical to the mainstream. In 2018, the CEOs of eight major technology companies signed a pledge to incorporate circular principles into their business models. Among other things, they promised to take back from customers products at the end-of-life stage and to develop second-life markets and remanufacturing programs. New “right to repair” legislation in Europe requires manufacturers of home appliances to offer spare parts for at least ten years after the date of original sale.

In some markets, such as consumer electronics, trade-in programs and markets for second-life and refurbished goods are already enjoying considerable success. New business models, such as bike- and car-sharing schemes and fashion-rental shops, are challenging traditional concepts of product ownership. The use of recycled materials has become a marketing point for sportswear brands and car companies. And automakers are looking at ways to boost the use of recycled steel and aluminum in structural applications too.

Other industries are embarking on their own circular-economy journeys. One medical-device manufacturer applied life-cycle analysis to reduce the carbon footprint of its insulin-pump design. Through changes that included an improved circuit-board layout to make the product smaller, the use of recycled material, and optimization of logistics processes, it was able to reduce the carbon footprint of the device by more than one-quarter.

There is still much to be done, however. To achieve their full potential, circular-economy concepts require collaboration across the full value chain, from the design of safe, easily recycled materials and of products that support repairs, upgrades, disassembly, and remanufacturing to the development of an ecosystem of providers to deliver those services.

RPO is a fast, powerful, and profitable way for companies to make significant progress on the journey to industrial decarbonization and sustainable production. For many organizations, RPO offers a way to reduce carbon emissions by up to one-third in three to five years, with only limited investments in new equipment or technologies. After a decade of real-world experience across multiple companies and industries, the five principles described above have proved to be a robust, practical framework for any organization seeking to maximize the value generated from the resources it consumes.

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