Energy Efficiency And Manufacturing Performance
Since energy is vital for eradicating poverty, improving human welfare and raising living standards (Vera and Langlois, 2007), energy consumption is giving increasing concern as the twenty-first century unfolds. Lea (2007) claimed that the world consumes in six weeks the amount of oil that was consumed in an entire year in 1950. Although energy is an indispensable input in every sector of an economy, industrial sector has emerged as the largest consumer of energy among different sectors (Bala-Subrahmanya, 2006A). It accounts for almost 32% of the total energy use at the global level (Nagesha and Balachandra, 2006).
At the company level, energy represents a significant variable cost item of manufacturing processes and thus has a considerable impact on product prices and marketability (Al-Ghanim, 2003). Therefore, energy saving can play a significant role in reducing direct production costs and the sales price which, in turn, increases the corresponding profit and strengthen the competitiveness of the products in the market (Mizuta, 2003). However, energy conservation programs are not implemented on a significant scale both in developed and developing countries (Nagesha and Balachandra, 2006). This implies the existence of many barriers that inhibit firms to successfully implementing projects to enhance their energy efficiency as highlighted in several studies (Weber, 1997, Wang et al, 2008, Rohdin and Thollander, 2006, Kablan, 2003 and Nagesha and Balachandra, 2006).
Moreover, international competition and customer demands are forcing companies to search for operational methods to increase their competitive power (Rawabdeh, 2005). As a result, organizations direct their investments and efforts towards production-, quality- and marketing-related improvement programs in order to realize improvements in their manufacturing performance. Such programs have been given higher priority over improving energy utilization (Rohdin and Thollander, 2006).
2.1.1 Statement of the problem
The previous discussions reveal two problematic issues that challenge companies to improve utilization of their energy resources. First, the existence of financial, behavioral and organizational barriers which prevent many companies from applying practices for enhancing energy efficiency. Second, the severe competitive market which forces companies to spend most of their efforts and time in improving productivity and quality of their products and, in turn, give relatively little attention to energy efficiency improvements.
The above mentioned problematic issues arise questions about the types of barriers and how they affect companies' ability to tackle energy efficiency projects. Also, the different strategies / methodologies applied to improve energy efficiency are questioned in order to determine its role in overcoming these barriers. Moreover, there is a need to investigate the association of energy efficiency with other manufacturing performance measures with the aim to explore whether energy efficiency improvement can be linked to other performance improvement programs.
2.1.2 Research Objectives and methodology
With the aim to clarify and answer these questions, the main objective of this chapter is to propose a model linking energy efficiency with manufacturing performance. Such a model is intended to provide a strategy for companies to improve their energy efficiency while overcoming the different types of barriers.
In an attempt to develop the desired model, this study presents an overview of current literature on the issue of energy consumption and efficiency in manufacturing organizations. At first, the importance of improving energy utilization at both firm and economy levels and the issue of measuring energy efficiency will be declared. Then, the barriers to achieve energy efficiency improvements in the industrial sector will be explained. Also, the study will discuss the strategies / methodologies that were mentioned in literature to improve energy efficiency. Finally, the relationships between energy efficiency, at one hand, and different manufacturing performance indicators, at the other hand, will be explored in order to provide the intended model.
2.2 Energy consumption in manufacturing organizations
Energy consumption has been considerably increased in both developed and developing countries due to major developments in several sectors such as residential, commercial and industrial (Al-Mofleh et al., 2009). However, Vera and Langlois (2007) denoted that many areas of the world have no reliable and secure energy supplies, which limits economic development, while environmental degradation from energy use in other areas inhibits sustainable development. To tackle this issue, Al-Mofleh et al. (2009) suggested two possible options; adding capacity in the generating sector and implementation of energy conservation and management programs in the consumption side. Regarding the first option, Throne-Holst et al. (2008) highlighted that most primary energy resources (such as crude oil, natural gas and other conventional fuels) are limited resources and energy production requires large investments. Thus, energy conservation will definitely save investment of generating energy thereby enhancing the current economy of the nations (Al-Mofleh et al., 2009).
At the firm level, Rawabdeh (2005) stated that companies worldwide that are realizing the importance of being part of the global market are searching for operational methods to increase their competitive power through the use of innovative production systems. Bala-Subrahmanya (2006B) affirmed that the competitiveness of a firm can be improved by improving the efficiency of the major factor inputs of production.
In addition to production factors like capital, land and labor, Nagesha (2008) demonstrated that energy has been considered a key input of the industrial production output which advocated a KLME (capital, labor, material and energy) model for analyses in most of the applied economic theories. Thus, the more the industrial production, as a result of economic development, the higher the levels of energy consumption and the more the exploitation of energy resources (Al-Ghanim, 2003). In addition, Nagesha (2008) also proved that energy accounts for a much higher share in the variation of the value of output, even if it has a modest share in this value.
Besides, energy represents a significant variable cost item of manufacturing processes and thus has a harmful impact on product prices and marketability (Al-Ghanim, 2003). Moreover, Bala Subrahmanya (2006A) claimed that higher energy intensity leads to higher share of energy cost in total variable cost. In this context, Christoffersen et al. (2006) investigated the motives for energy savings for a sample of Danish industrial firms and found that "reduction of costs" is considered the prime motive for enterprises to work with energy efficiency. Similarly, Mizuta (2003) agreed that the prime aim of energy saving is the reduction of costs.
In conclusion, energy saving, at the firm level, can play a significant role in reducing direct production costs and the sales price which, in turn, increases the corresponding profit and strengthens the competitiveness of the products in the market (Mizuta, 2003). Therefore, Bala-Subrahmanya (2006A) stressed that the competitiveness of small enterprises in energy-intensive industrial sectors could be enhanced by improving their energy efficiency.
Furthermore, energy efficiency improvement will have benefits at the aggregated economy level, in addition to its benefits at the firm level, as it will bring down or curtail the growth of industrial demand for energy (Bala-Subrahmanya, 2006A). Therefore, Al-Ghanim (2003) mentioned the importance of improving energy efficiency as a trend towards reducing energy consumption for the same industrial output and thus achieving same or even better economic return.
2.3 Energy efficiency
Energy efficiency as a concept has a range of interpretations. At a strictly technical level, energy efficiency is a measure of useful energy output compared to energy input (Dasgupta, 1999). Energy efficiency refers to using less energy for the same amount of useful output or service (Salta et al., 2009). Thus, improvements in energy efficiency can be achieved either by decreasing total energy use for the same output or by increasing the production rate per unit of energy consumed (Onut and Soner, 2007).
Energy efficiency or productivity (P) can be determined as: P = useful output of a process (O)/energy input into a process (E) (Bala-Subrahmanya, 2006B). A number of indicators can be used to monitor changes in energy efficiency. Measuring energy efficiency is typically handled by comparing measures of energy intensity, the energy/output ratio (Boyd and Pang, 2000). Energy intensity is often used as a measure of the efficiency with which energy resources are being used. Typically constructed as the ratio of energy input to useful output, energy intensity provides a single, simple, easy-to-compute, summary measure of the efficiency with which energy is utilized (Freeman et al., 1997).
Given a measure of energy input (E), and a measure of useful output (O), energy intensity (I) can be defined as: I = E/O (Bala-Subrahmanya, 2006A and Freeman et al., 1997). Energy input (E) is often measured in thermodynamic units (e.g. Btus of delivered energy consumed in the production), while useful output (O) is often measured in volume of output (e.g. tons of products) (Freeman et al., 1997). Moreover, Economic indicators can be used to assess changes in energy efficiency / intensity by measuring both energy input and output in terms of market values. That is, both energy input and output are enumerated in monetary terms (Patterson, 1996).
The higher the level of industry aggregation, the more desirable is the use of market value of output relative to volume of output in a measure of energy intensity. This is due to the difficulty of sensibly measuring the volume of output across very diverse products (Freeman et al., 1997). On the other hand, when dealing with an industry producing a homogeneous product, the volume of output would seem to be a more desirable measure of output to use in the construction of an energy intensity indicator than value of output (Freeman et al., 1997).
2.4 Barriers to improve energy efficiency
It is clear that improving energy efficiency becomes a crucial objective for organizations that seek to sustain in highly competitive environment. However, energy conservation programs are not implemented on a significant scale both in developed and developing countries (Nagesha and Balachandra, 2006). This implies the existence of an energy efficiency gap, explained by the existence of barriers to energy efficiency (Rohdin and Thollander, 2006).
For this, several studies highlighted the existence of many barriers that inhibit firms to successfully implementing projects to enhance their energy efficiency. Nagesha and Balachandra (2006) identified relevant barriers to improving energy efficiency and categorized them into five groups; (1) awareness and information barriers, (2) financial and economic barriers, (3) structural and institutional barriers, (4) policy and regulatory barriers and (5) behavioral and personal barriers. In addition, these barrier groups were prioritized based on the perceptions and experiences of entrepreneurs and the main stakeholders. Rohdin and Thollander (2006) investigated the existence and importance of economic, behavioral and organizational barriers to the implementation of energy efficiency measures in the Swedish non-energy intensive manufacturing industry.
Terming the phenomenon of not exploiting technically feasible and economically viable efficiency measures as ‘energy gap’ or ‘energy paradox’, Weber (1997) attributes it to institutional, market, organizational and behavioral barriers. With the aim to provide a guideline for implementing energy management, Kannan and Boie (2003) reviewed the difficulties encountered during the introduction of a methodology for energy management in a German bakery. Through discussing the energy conservation status at the industrial sector in Jordan, Kablan (2003) outlined some types of obstacles (such as technical obstacles, extended time and extensive efforts and cost of implementation) that hinder the implementation of energy-efficiency projects. In a recent study based on reviewed literature and opinion of experts from energy industry and academia, Wang et al. (2008) identified different barriers that obstruct energy saving in China.
2.4.1 Financial and economic barriers
The most critical barrier cited in literature is the financial limitations. According to (Nagesha and Balachandra, 2006), financial and economic barriers were ranked at the top among the five groups of barriers defined in their research. Financial barriers may arise mainly due to lack of investment capability (Nagesha and Balachandra, 2006). Rohdin and Thollander (2006) stated that limited access to capital may prevent energy efficiency measures from being implemented. In addition, high initial investment is required for better technology and equipment to improve energy efficiency (Nagesha and Balachandra, 2006). Although it is an efficient way to apply high technology and equipment to save energy, Wang et al. (2008) alleged that the high cost of such technology is a prime challenge that hinder the utilization of energy-saving facilities. Likewise, Bala-Subrahmanya (2006B) claimed that financial constraints would prevent many of the small enterprises from achieving energy efficiency by means of up-grading technology.
Moreover, Wang et al. (2008) declared that the large amount of capital needed to buy new equipments and develop high technology, as well as the longer investment cycle increases the level of risk of investment in up-grading technology. This, in turn, leads companies of all sizes to stay away from initiating new energy-efficient technologies in their production.
Kablan (2003) clarified that companies thought that the cost of implementation of an energy conservation project might result in a higher price of their products which might lead to reducing their competitiveness. Therefore, organizations consider other priorities for capital investments, in specific, production-related investments had a higher priority than investments in energy efficient technology (Rohdin and Thollander, 2006). Further, severe competitive market forces organizations to spend most of their time and effort in marketing their products instead of considering energy efficiency issues (Nagesha and Balachandra, 2006).
2.4.2 Behavioral barriers
In addition to financial and economic barriers, behavioral barriers are considered crucial to energy saving (Nagesha and Balachandra, 2006). Behavioral barriers focus on individuals with their values and attitudes towards energy conservation (Weber, 1997). The lack of initiative, information availability and expertise as well as the lack of knowledge about the underlying principles involved in energy management are some of the barriers in introducing energy management in manufacturing plants (Alhourani and Saxena, 2009).
Besides, Nagesha and Balachandra (2006) mentioned that companies resist to change and are happy in maintaining "status quo" as they consider adopting new technology / process to improve energy efficiency as a risky endeavor. In the same vein, Kablan (2003) affirmed that top management at some industrial establishments are resistant to change because they don’t know how to start an energy conservation project and how to implement it effectively.
Other obstacles that are related to this group include; lack of attention towards energy consumption, lack of control over attitudes and actions (Weber, 1997) and lack of incentives (Kablan, 2003). Moreover, social norms and lifestyle patterns may also hinder individuals to use energy more efficiently (Weber, 1997).
2.4.3 Other barriers
Other barriers to energy efficiency in organizations may result from asymmetry of information, a trade-off with non energy specific goals or missing responsibility with regard to energy consumption (Weber, 1997). Kablan (2003) and Alhourani and Saxena (2009) considered that shortage in know-how and in trained professionals and lack of technical knowledge or shortage in labs and inspection apparatuses, as technical obstacles for achieving high and consistent energy efficiency. Thus, Wang et al. (2008) stressed that education and training are prime requirements for achieving success in any organization.
In addition, old machines or second-hand machines is considered an obstacle especially if these machines are not regularly maintained or calibrated (Kablan, 2003 and Alhourani and Saxena, 2009). Kablan (2003) added that the nature of management style that inhibit delegation of responsibility is considered an obstacle to implementing energy management.
2.5 Methods/strategies for energy efficiency improvement
Regarding the significance of improving energy efficiency to the economic performance of different firms, Davies and Chan (2001), Al-Ghanim (2003), Mizuta (2003) and Al-Mofleh et al. (2009) identified three generic methods/strategies for improving energy efficiency and sustaining energy saving in industrial sector. These methods/strategies were classified according to the level of investment into large-scale, medium-scale and small-scale investment.
The large-scale investment in energy efficiency may take the form of energy retrofits in which existing installations are improved through the replacement of inefficient components with energy efficient components (Al-Mofleh et al., 2009). Accordingly, Al-Ghanim (2003) asserted that energy can be dramatically saved through a complete overhaul of the production system by introducing new processes, using new technologies, or installing large energy-saving devices.
In some cases, this strategy may bring much benefit or even better productivity or quality of products, if the operating process or facilities were extremely old or ineffective ones (Mizuta, 2003). Generally, as these methods require much investment, a precise study for “return on investment”, which is realized by reduction of energy cost and other benefits, is necessary (Mizuta, 2003 and Al-Ghanim, 2003). However, Al-Mofleh et al. (2009) declared that not all energy savings that are technically possible are also economically viable. The limited financial capabilities, as previously discussed, may obstruct the implementation of such strategy in many organizations, especially in small ones.
The second strategy / methodology encompasses realizing improvements and/or replacements of some selected equipment and operations (Al-Mofleh et al., 2009). In which, medium-level investments are required to make some minor improvements in the equipment (Mizuta, 2003) and to modify certain processes within the framework of the given technology of the manufacturing plant (Al-Ghanim, 2003). These improvements should be accompanied with the efforts of every operator towards energy savings in an attempt to raise the interest and commitment of workers towards their own work (Mizuta, 2003).
The last and lower-scale strategy is the deployment of active or efficient in-house energy management of energy efficiency (Al-Mofleh et al., 2009). According to (Al-Ghanim, 2003), energy can be saved with no additional investment, mainly by acting management initiatives to improve manpower competencies and management systems and practices. This means that all employees as well as management people participate in energy saving promotion activities and do their best to reduce energy consumption in their sites (Mizuta, 2003).
Kannan and Boie (2003) defined energy management as the judicious and effective use of energy to maximize profits and to enhance competitive positions through organizational measures and optimization of energy efficiency in the processes. Christoffersen et al. (2006) declared that energy management is not just a technical monitoring and measurement system, it should be viewed as a management system with more focus on information, communication, internal and external audits and employee involvement. Thus, energy management in organizations should be regarded as a composite set of activities combining human and technological resources (Kablan, 2003). Moreover, Kannan and Boie (2003) believed that energy management should be a permanent activity, not just an energy saving campaign.
It is obvious that manufacturing organizations are supposed to apply managerial initiatives to optimize energy utilization instead of investing in upgrading technologies and/or modifying its processes and equipment. This will facilitate achieving efficient utilization of energy resources while keeping investment at lower level as possible. In accordance, Mizuta (2003) claimed that the different methods for energy management in Japanese industries achieved about 20 to 50 percent reduction in the total amount of energy per unit of product without affecting the production output or quality.
In this regard, previous studies revealed different practices to be included in implementing this strategy. For instance, Alhourani and Saxena (2009) cited that 50 percent of all savings could be carried out without investment when implementing actions such as adequate operation of processes and equipment and satisfactory maintenance practices. Similarly, Nagesha (2008) agreed that implementing activities such as better housekeeping, improved awareness and knowledge levels of entrepreneurs, skill level of labor, operation and maintenance of plant and machinery, and capacity utilization, will achieve additional energy-saving potential. In addition, Davies and Chan (2001) stated that energy management includes such actions as accounting, audit and control efforts, and encouraging an energy conscious attitude among staff.
2.5.1 Energy management practices
A firm commitment by the top management is essential for the energy management program to be successful (Kannan and Boie, 2003). Mizuta (2003) considered top management commitment and support to be the primary requirements for energy management activity to make good progress. Similarly, Kablan (2003) claimed that top management has the primary responsibility for the implementation of the energy conservation project because this project requires allocation of resources and close monitoring of the implementation.
Different researches (Mizuta, 2003, Christoffersen et al., 2006, Kablan, 2003, Putnam and Price, 2004 and Kannan and Boie, 2003) highlighted the importance of all employees participation in the energy management activities. Christoffersen et al. (2006) considered employees' involvement as a minimum requirement for the energy management system. In this context, Kannan and Boie (2003) indicated the need to create awareness among the operators as a part of implementing energy saving measures. With the same aim, Kablan (2003) recommended organizing an awareness campaign among all employees to provide a brief explanation of the advantages of energy saving and its impact on the company and on the employees and, in addition, conducting seminars and issuing periodical newsletters as means for disseminating awareness among employees. Likewise, Christoffersen et al. (2006) found that Danish industrial companies are seeking to actively involve the employees in the work of energy saving by means of passive information and motivation. Accordingly, Kablan (2003) declared that empowerment of projects teams might be an effective method to motivate creativity and encouraging effective employee participation.
Energy activities should be organized within the company by clearly allocating responsibilities and tasks (Christoffersen et al., 2006). Kannan and Boie (2003) claimed that the introduction of a comprehensive energy management program implies a new management discipline. Mizuta (2003) agreed that a particular organization for energy saving promotion should be created to support all members’ activities. In the same vein, Kablan (2003) proposed restructuring of the organization or creating of new departments to be held during the implementation of energy conservation projects. The new organizational structure and delegated responsibilities will generate a wider interest and commitment to the energy saving effort (Kannan and Boie, 2003). In addition, different energy saving projects should be carried out by teams (Kablan, 2003). Mizuta (2003) confirmed that some "small groups" should be formed to discuss, analyze and propose and implement countermeasures for essential energy consumption problems.
In order to set clear targets for energy saving, Mizuta (2003) affirmed that all energy consumption levels and its variations must be identified and analyzed for each production line or piece of equipment. Kannan and Boie (2003) revealed the role of energy auditing in identifying and quantifying energy saving possibilities of the enterprise as the outcome of an energy audit provides information about the present energy use of the enterprise.
Alhourani and Saxena (2009) considered scheduling as one of the common energy saving opportunities and mentioned that rescheduling plant operations or reducing the load can help in avoiding peak times during the day. In their case study, Kannan and Boie (2003) recommended scheduling the processes in a manner that ensure the equipment is operated on full load.
Furthermore, Christoffersen et al. (2006) considered implementing specific energy-saving projects as one of the minimum requirements for energy management systems. Energy-saving projects should be classified as short-term or long-term projects, and the projects in each subgroup should be prioritized according to their logical sequence and importance (Kablan, 2003).
Although energy management practices could overcome some of the financial barriers (i.e. most of the aforementioned practices do not require high investment), behavioral and organizational barriers may play a significant role in hindering efforts towards applying such practices. For instance, resistance of change and focus on production-related improvements and marketing issues decrease the top management commitment which is fundamental for energy efficiency improvements. Therefore, it is important to study the association of energy efficiency improvement with enhancing other manufacturing performance indicators in order to redirect management commitment towards improving energy efficiency and to intensify the benefits of improvement programs.
2.6 Energy efficiency and manufacturing performance indicators
Through reviewing the literature, Al-Ghanim (2003) indicated that most research activities, concerning the issue of energy in manufacturing enterprises, have focused on examinations and analyses of energy factors that are directly related to energy consumption or generation. Even though, some researches (Al-Ghanim, 2003, Bala-Subrahmanya, 2006A,B, Boyd and Pang, 2000 and Nagesha, 2008) examined and estimated the relationships between energy efficiency and different manufacturing performance indicators that are indirectly-related to energy consumption such as productivity, value of output, gross value added and failure rate.
Productivity is one of most cited factors to be associated with energy consumption. Boyd and Pang (2000) alleged that improvements in the overall productivity of a process are likely to reduce energy use, hence productivity is associated with higher energy efficiency. Al-Ghanim (2003) investigated and empirically proved the existence of statistically valid negative relationship between electrical energy consumption rate (the consumed electricity to produce a unit of production) and the production rate. This relationship implied that the increase in the production rate, measured by the amount of production per month, will lead to reductions in the energy consumption rate.
Other studies explored the linkage between energy intensity and factors productivity. Boyd and Pang (2000) confirmed that productivity differences between plants are important determinants of energy efficiency. However, it appears that the link between energy efficiency and productivity is industry specific. Nagesha (2008) observed the negative correlation between economic energy consumption (as it measures the inverse of energy efficiency) and the joint productivity of labor and capital. In particular, Bala-Subrahmanya (2006B) mentioned the negative correlation between energy intensity and capital productivity, which implies that an increase in energy intensity is linked with a fall in capital productivity. Accordingly, Bala-Subrahmanya (2006A) indicated that those enterprises, which utilize energy more productively, are likely to utilize the two factors of labor and capital more productively as well.
Furthermore, Boyd and Pang (2000) demonstrated that when output decreases energy use decreases less than proportionally, hence intensities rise which confirmed that higher value of output will be accompanied by lower energy intensity and vice versa. Besides, a high negative correlation between energy intensity and the value addition as a percentage of value of output has been evidenced (Bala-Subrahmanya, 2006A). Value addition referred to gross value added, which is the difference between the values of the output and the material inputs including energy inputs (Bala-Subrahmanya, 2006B). Nagesha (2008) demonstrated the negative correlation between economic energy consumption and the gross value added. Likewise, Bala-Subrahmanya (2006A) declared that when energy intensity decreases, value addition as a percentage of value of output increases and vice versa. Thus, energy intensity can make a substantial difference to value addition in value of output (Bala-Subrahmanya, 2006B).
In addition to production-related factors, Al-Ghanim (2003) emphasized that repetitive failures of production machines lead to increased machine worming and re-startup energy, which in turn increases energy consumption rate. As the failure rates are dependent on the quality of the maintenance system in general, Al-Ghanim (2003) revealed a clear linkage between maintenance quality and energy consumption rates.
The above discussed studies revealed the correlation between some performance indicators, on one hand, and energy consumption (whatever represented by energy efficiency, energy intensity or economic consumption rate), on the other hand. However, the concern here is to detect the performance indicators that have direct influence over energy efficiency in order to propose a model that linking energy efficiency with other manufacturing performance programs. Through reviewing literature regarding the relation between energy efficiency and organizational performance, reviewed studies (such as; Bala-Subrahmanya, 2006B, Boyd and Pang, 2000, Al-Ghandoor et al., 2008 and Nagesha, 2008) revealed that both labor efficiency and capacity utilization factors, which represent the utilization of production resources in the manufacturing processes, have significant positive influence in enhancing energy efficiency. Therefore, this research will use these factors as manufacturing performance indicators with the aim to find out how the efficient utilization of production resources can affect energy efficiency.
2.6.1 Labor efficiency
Labor efficiency is represented by labor productivity. Labor productivity is a measure of how many products are produced relative to the amount of labor required (Chapman and Al-Khawaldeh, 2002). Wang and Shyu (2008) affirmed that labor productivity is a crucial organizational outcome which indicates the extent to which a firm’s labor force was efficiently creating output.
Rohdin and Thollander (2006) highlighted the need for people with real ambition as a key driving force that have an effect on the implementation rate of energy efficiency measures. Likewise, Bala-Subrahmanya (2006A) argued that inefficient labors may utilize energy inefficiently. This implies that labor efficiency has an influence over energy consumption and efficiency. Hence, Bala-Subrahmanya (2006B) agreed that more efficient labor indicate less energy intensity, or alternatively, more energy efficiency. In the same vein, the existence of a negative relationship between energy intensity and labor productivity has been proved by different researches (Bala-Subrahmanya, 2006A,B and Nagesha, 2008).
In addition, Bala-Subrahmanya (2006B) proved that labor productivity has a statistically significant positive relationship with capital productivity which implies that higher labor efficiency will lead to higher productivity of capital, which, in turn, is associated with higher energy efficiency. Furthermore, Bala-Subrahmanya (2006B) indicated the strong negative influence of labor efficiency on energy cost, which means that higher labor efficiency will lead to lower energy cost and vice versa.
2.6.2 Capacity utilization
Capacity utilization is defined as the actual production capacity used divided by the installed production capacity (Nagesha, 2008). Capacity utilization is a clear indicator of how efficiently the industry uses its resources (Al-Ghandoor et al., 2008). As capacity utilization increases, the industry uses its resources more efficiently.
Bala-Subrahmanya (2006A) asserted that, with other things remaining the same, energy intensity depends on rate of capacity utilization and size of output. Boyd and Pang (2000) declared that capacity utilization has a strong negative effect on energy intensity. Likewise, Nagesha (2008) proved that economic energy consumption, as an indicator of energy efficiency, is negatively correlated with capacity utilization. Moreover, Al-Ghandoor et al., (2008) developed an empirical model to identify the main drivers behind electricity consumption changes from one year to another and proved that the most significant factors are the capacity utilization and the gross output. In the same vein, Bala-Subrahmanya (2006A) underscored that a consistent increase in capacity utilization and size as well as value of output would enable an enterprise to realize lower energy intensities.
To conclude, it is obvious that previous studies revealed that improvements in both manufacturing performance indicators; labor efficiency and capacity utilization will play a major role in increasing the level of energy efficiency. Thus the relationship between organizational performance, as represented by labor efficiency and capacity utilization, and the efficient utilization of energy resources is conceptually illustrated as shown in the following model (see figure 2.1). This conceptual model demonstrates that energy efficiency is influenced by the changes that have been occurred in these two manufacturing performance indicators.
Figure 2.1 – The proposed model
2.7 Summary and conclusions
Recently, it is clearly observed the increasing concern that has been given to the issue of energy consumption in different economic sectors and more particularly in the industrial sector which represents the largest consumer of energy resources in any economy. In addition, there is a general agreement between researchers and practitioners on the substantial need for utilizing energy resources more efficiently as its significant influences at both firm and economy levels have been confirmed. However, literature revealed the existence of some problematic issues that obstruct many firms to be engaged in energy efficiency improvement programs. It is noticed that financial limitations, on one hand, and the great attention that management give to productivity, quality and marketing issues which reduces the interest in energy consumption, on the other hand, are considered the most salient obstacles that hinder the implementation of improvement programs / projects for energy efficiency.
Therefore, the present study addresses these concerns in an attempt to provide a strategy / methodology for companies to facilitate improving their energy efficiency while overcoming these barriers. Based on existing literature, the current research develops a conceptual model that demonstrates the influence of organizational performance over energy efficiency in order to redirect management interest towards the efficient use of energy resources. The organizational performance is represented by two indicators; labor efficiency and capacity utilization, which represent how an organization utilizes its resources. The value of the developed model is that it represents a starting point for further empirical studies that are needed to investigate the extent to which implementing manufacturing improvement programs affect the utilization of energy resources.
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