The cost of energy has become a growing concern for manufacturers. COVID-19 and Russia’s war against Ukraine have brought the impact of geopolitics on energy costs to the forefront for many companies. Meanwhile, interest in renewable energy sources has surged, spurred in part by the fight against climate change.

As a result, manufacturers are weighing potential strategies for reducing energy costs amid the shift in availability and the push for clean sources. These strategies include simple adjustments, like ensuring that facilities are properly sealed, but also more ambitious goals, like securing government grants to install solar panel technology.

Some of these strategies are easier to pursue than others, and, as Kevin Krot, the head of mobility and industrial products at Maine Pointe, explained, sometimes require much more advanced planning.

“When considering energy-related projects or partnerships, manufacturers should assess the reliability and long-term viability of their suppliers,” Krot said in an email. “Dependence on specific energy-saving solutions or providers should be evaluated to ensure long-term sustainability.”

Another critical caveat is that energy costs can vary depending on the type of manufacturer, and they’re not necessarily a major expense for some firms, said Nick Pinkston, a manufacturing entrepreneur who currently serves as the founder and CEO of Volition, a marketplace for industrial components. Supply chain-related costs, might be a particular focus for some manufacturers.

“A bridge is all steel and concrete, which [require] extreme amounts of natural gas and coal to complete — and maybe electricity,” Pinkston said. “That's not true of say, a fine watch where there's barely any energy put in, but there's a lot of capital equipment cost.”

Conduct an energy audit

Manufacturers should first perform an energy audit to better understand a facility’s energy usage, said Patrick Penfield, a professor of supply chain practice at Syracuse University. Such an audit might include information about utility costs and provide insight into which machinery uses the most energy within a facility.

“Once they've done that, then they can go through and really look at their whole facility and really focus on what is using the most energy first and then working your way down,” Penfield said.

The scheduled use of different machinery can impact overall energy costs, so operating during non-peak times, such as during second and third shift times, can help cut down on expenses, Krot said. Meanwhile, new technology could provide manufacturers with even further insight.

In the longer term, manufacturers can also consider implementing energy management systems that would allow a company to understand and monitor energy usage across a facility, Krot added. More advanced versions of this software might take advantage of machine learning AI, predictive analytics and sensors to automate aspects of this process.

Revamp equipment and insulation

Updating some equipment might help with reducing energy costs, Krot said. For example, replacing lighting fixtures with LED bulbs can cut down on electricity costs and reduce the need to replace lighting fixtures in the future — since LED bulbs tend to have a longer lifespan.

Improving insulation can help, too. Heating and cooling equipment contribute significantly to manufacturers’ energy costs, he said, and better insulation can reduce the need for excessive use of HVAC equipment.

The National Institute of Standards and Technology has recommended evaluating facilities for potential leaks, which may be caused by issues with minor components. This can include equipment such as compressed air systems that could be leaking, which could lead to a 20-30% loss in a compressor’s output.

Transition to renewable energy  

One of the best strategies for reducing energy costs in the long term is transitioning to renewable sources of power. Some manufacturers are pursuing renewable energy not as a cost-saving strategy, but as a marketing play, said Violition’s Pinkston.

“It's more of a marketing thing where you can even advertise as a green producer, and maybe get clients where they need to do that,” he added.

Still, other manufacturers are turning to solar panels and wind turbines to cut down on their energy bills, Penfield said.

Implementing these technologies can be expensive in the short term. In any energy-saving strategies, manufacturers must factor in operational disruptions created during system installations, added Krot. There are regulatory compliance obligations, as well as potential performance trade-offs when switching technologies.

Still, Penfield said there are still ways to make transitioning to renewable energy more affordable. The Inflation Reduction Act, for examples, includes possible tax credits for companies that engage in clean energy manufacturing.

“Try and look to see if there's incentives from state governments [and the]  federal government to see if that could help you implement renewable energy sources,” Penfield said. “That's another way to save money.”

Dive Brief:

• Deere & Co. is making labor cuts at one of its largest factories in northwestern Illinois, the tractor manufacturer said Sept. 21.

• Approximately 225 production workers at a Harvester Works facility in East Moline will be placed on indefinite leave effective Oct. 16, a company spokesperson wrote in an email. Affected employees were notified of the changes earlier the week of Sept 18.

• The decision came despite a strong earnings quarter, buoyed by favorable market conditions and a recovering supply chain. Deere has no plans for additional layoffs in 2023.

Dive Insight:

Deere’s Harvester Works factory is the largest combine manufacturing facility in the world, spanning 90 acres under one roof, or roughly 4 million square feet.

“Although John Deere has hired hundreds of employees in the Quad Cities in recent years, the company has consistently stated that each Deere factory balances the size of its production workforce with the needs of the individual factory to optimize the workforce at each facility,” a spokesperson wrote in an email.

Deere declined to immediately respond when asked if the changes were cost-related.

Currently, there are 2,300 employees at the Harvester Works factory with about 1,975 of them working production and maintenance jobs, according to Deere.

Several companies across the agriculture industry are making structural changes to production as a way to weather rising costs and volatile price swings. 

Smithfield Foods is shuttering 35 hog farm operations in Missouri in October, while Tyson Foods is set to close four plants across three states. Both meatpackers have experienced sequential profit losses and cut costs to improve their balance sheets this year. 

As others experienced cost headwinds, Deere’s third quarter earnings surpassed analyst expectations, posting a net profit of $2.98 billion, up 58% from 2022. However, company shares have been down, suggesting a lack of confidence among shareholders. Despite glowing guidance from Deere executives, some analysts are concerned about a peak in the agricultural cycle and slower sales ahead for tractors and combine harvesters, according to Investor’s Business Daily.

Seattle-based chocolate company Theo Chocolate is restructuring its operations due to rising costs, the company said in late June.

As part of its restructuring plan, the chocolate maker will cease operations at its Seattle manufacturing facility by Aug. 30, a spokesperson told Supply Chain Dive in an email. Instead, its products will be made by a “strategic chocolate co-manufacturing partner,” with Theo Chocolate retaining control of sourcing and strategic partnering decisions.

The chocolate company has been contending with rising costs across all aspects of its manufacturing and supply chain operations, and initially began a plan to restructure its operations in Q2, according to the press release.

“Price increases and cost-savings initiatives were enacted as we navigated the recent post-pandemic landscape,” the spokesperson said. “Unfortunately, none were able to offset the rising costs of our operating model sufficiently, and the difficult decision to move forward with the operational restructure was necessary.”

The company plans to lay off 60 employees, with the majority of cuts a result of closing manufacturing, according to the spokesperson. Additional staff reductions are also being made across the company’s administrative operations as it relocates its business operations under the new model.

Employee separations will begin in the second half of 2023, according to the release. All impacted employees were offered a severance package as well as medical coverage, paid time off and job search resources.

In addition to restructuring its operations, Theo Chocolate intends to merge with minority stakeholder American Licorice Company, according to the press release. The proposed merger transaction is expected to close in Q3 while operational changes are currently underway.

Theo Chocolate isn’t the only company citing rising costs for confectionary products. Earlier this year movie theater chain AMC Entertainment Holdings announced plans to make its own candy brand to offset price increases from manufacturers.

Manufacturers faced a variety of financial headwinds in 2022, ranging from elevated logistics costs to production disruptions as COVID-19 swept through China.

As companies continue to plan their budgets for the year ahead, many are looking at how to control their supply chain costs.

Resiliency is a common top priority as manufacturers aim to fortify their supply chains in the hopes of never again finding themselves caught off-guard by sudden global shifts.

In a year that already includes a volatile economy and geopolitical uncertainties, what supply chain costs should manufacturers be most concerned with and how can they mitigate them?

With prices stubbornly high, planning is a must

Manufacturers across the country are still contending with inflated material and labor costs, said Steve Young, a partner in Bain & Company's advanced manufacturing and services practice.

Attracting and maintaining a quality workforce ranked as the number one primary business challenge among more than 75% of respondents to the National Association of Manufacturers’ latest industry outlook survey. Supply chain challenges, increased raw material costs and transportation and logistics costs also ranked as significant issues.

The tension comes after years of push among manufacturers to meet demand spikes throughout the pandemic, regardless of budget, Young said. Now, companies are trying to get those costs back in line and focus on operational efficiency.

"Over the last several years, manufacturers and operations leaders have been under a lot of pressure to get output, and that output is at almost any cost, just to meet demand," Young said. “Places where in the past there were really tight controls on indirect spends, whether that be maintenance, engineering costs, [etc.], we're finding clients increasingly focused on getting control back on all those kinds of spends."

Having a thorough, up-to-date understanding of their company’s demand forecasts is one way a company can drive efficiency, according to Young. Operational and commercial teams should work closely together to understand what demand is coming, and how to align production and inventory accordingly.

"It's really important for the operations and the commercial teams and the strategy teams to work really closely together to get control of the underlying demand forecasts," he said. "We've gotten through periods where the demand trends in many industries have not been normal in a way that they have been in any recent history. Going back to the very basics of understanding the markets, the customers, the competition and where demand truly is going becomes really important."

With that, teams should also be in close communication with suppliers, both in a bid to control costs and understand where vulnerabilities in the supply chain lie.

"How do you think about two-way supplier communications? How do you think about supplier risk assessments?" Young said. "How do you think about putting strategies in place that create redundancies and resiliency in that supply base and can see risks out ahead and can address them before they become problems?

Supply chain resiliency may outweigh tight budgets

As manufacturers weigh how to safeguard their supply chains from future disruptions, one word has become particularly frequent — reshoring.

The trend of moving some or all of a company's supply chain closer to its home base has taken on greater importance in the wake of COVID-19-induced disruptions in manufacturing hubs like China.

That trend is likely to accelerate in the year ahead, said Cory Wendt, a principal at Baker Tilly who focuses on manufacturing and distribution advisory.

“COVID challenged us to say how do we make our money, and is it all about low cost?” he said. “Because if you're not on the shelf, all of that cost is lost quite quickly."

Resiliency and domestic market opportunities are likely to outweigh a desire to cut costs, Wendt added.

While labor and other costs may be higher in the U.S. and nearby countries compared with places like China and Southeast Asia, reshoring offers other advantages, including less risk of supply chain disruption that can lead to lost revenue.

Auto and technology manufacturers in particular could relocate their supply chains to take advantage of tax credits offered by the Inflation Reduction Act. The law offers incentives for domestic production of key components, including critical minerals like those used in electric vehicles and EV batteries.

And with the EV market in the U.S. set to balloon in the coming year, the benefits of being close to the growing customer base are likely to be worth the extra costs.

"It's clear that that area is going to be a very strong growth sector," Wendt said. "And so those that get aligned with that quickly, it might be less about supply chain cost and more about being here and available.

Dive Brief:

• Emergent BioSolutions disclosed plans on Aug. 8 to lay off approximately 400 employees as part of a larger initiative to cut costs and move away from its contract drug manufacturing business.
• The layoffs will affect “all areas of the company” and, combined with other cost-reduction efforts, lead to annualized savings of over $100 million, Emergent said. Moving forward, Emergent will focus on its “core products business,” which revolves around the opioid overdose treatment Narcan as well as medical countermeasures to public health threats.
• Emergent will also soon report its latest financial results. During the first three months of 2023, the company recorded $165 million in revenue, with product sales accounting for $143 million and its contracted services — which include developing and manufacturing drugs for other firms — accounting for $15 million. Emergent ended that quarter with a $148 million loss from operations.

Dive Insight:

Emergent said it will reduce operations at facilities in Baltimore and Canton, Massachusetts, though for different reasons. The cuts at its Baltimore site are due to a de-emphasis on contracted services, while the changes at its Canton facility are “in response to changes in volume of U.S. government procurements of medical countermeasures.”

Those changes will also result in a “small reduction in operations” at Emergent’s drug product facility in Rockville, Maryland. The company said it will “maintain a level of operations” at both the Baltimore and Canton sites “to ramp up production in response to new demand.”

“The actions we are taking will further strengthen our core products business and financial foundation,” said Emergent’s interim CEO, Haywood Miller, in an Aug. 8 statement.

Paul Williams, the company’s senior vice president of products, added that Emergent remains “committed to partnering with the U.S. and allied governments to help address public health threats including anthrax, smallpox, and Ebola while also successfully increasing access to Narcan Nasal Spray as an over-the-counter treatment to help address America’s opioid overdose epidemic and give people in crisis a second chance.”

In March, the Food and Drug Administration approved Narcan for over-the-counter use.

Emergent’s restructuring comes amid a protracted downturn in the biotechnology stock market that has forced many small drugmakers to slash their research, development and manufacturing budgets.

Emergent also previously ran into problems with two high-profile contracts, which tasked the company with manufacturing the COVID-19 vaccines developed by Johnson & Johnson and AstraZeneca.

In the spring of 2021, in the thick of the pandemic, an error at Emergent’s Baltimore plant ruined millions of doses of J&J’s vaccine. Days after the mix-up became public, the U.S. government had J&J take over vaccine production at the plant and told AstraZeneca to find a different manufacturing partner for its shot.

By June of 2022, J&J had decided to terminate the agreement. In response, Emergent claimed the pharmaceutical giant owed it between $125 million and $420 million.

Emergent said on Aug. 8 that the activities associated with its strategic shift will cost around $19 million to $21 million, which will be incurred during the third quarter.

The company also announced the elimination of its chief operating officer role. Adam Havey, who currently holds the position, will leave Emergent at the end of September. Manufacturing operations will then be overseen by the head of Emergent’s bioservices business, Bill Hartzel, who will join the executive management team that reports to Miller.

Robotic and software manufacturer Symbotic has ceased operations at its manufacturing facility in Montreal, Quebec, and reduced manufacturing capacity at its facility in Wilmington, Massachusetts, CFO Tom Ernst said in a May 1 release. 

The company will instead outsource its manufacturing, part of a broader operational restructuring plan, Ernst said in a May 1 earnings call. The outsourcing will allow Symbotic to drive system deployment growth as well as set the company up for long-term cost savings.

“During the quarter we advanced our transition to outsourcing partnerships to successfully complete installations of our current system at multiple customer sites and achieved a three-fold increase of deployments in progress since last year,” CEO and Board Chair Rick Cohen said in a statement. 

The company spent $8 million on restructuring last quarter, including changes to inventory, facilities and equipment and $3 million in severance payments to just over 100 employees and 100 contractors, Ernst said.

The CFO noted that the company will begin seeing the savings benefits of the cost-cutting plan in Q3.

“We also expect that our work with these partners in terms of collaboration and communication is going to benefit our mutual operations together over time,” Cohen said during the May 1 call. “And so, this is something that we think will provide opportunity to improve our efficiency over a multi quarter timeframe rather than just a multi-week timeframe.”

As the robot manufacturer works on cutting costs, it continues to grow its distribution portfolio. Symbotic signed a commercial agreement on May 8 with wholesale distributor Associated Food Stores to implement robotic warehouse automation technology in a Utah distribution center.

The agreement is one of several Symbotic has signed over the past year. In September, it signed a deal with United Natural Foods to integrate robotics into five of its distribution centers. Last May, it expanded its work with Walmart, bringing Symbotic tech to the retailer’s 42 distribution centers. 

Nestle Health Science will close two plants in May in Pittsburgh, Pennsylvania, and lay off 312 workers, according to a Worker Adjustment and Retraining Notification (WARN) Act notice dated April 28.

The company’s HVL LLC and Pure Encapsulations plants will close permanently, with job terminations effective June 30, Chris Richardson, director of project management and HR special projects, said in the notice. The company seeks to consolidate its supply chain network to increase efficiency.

HVL LLC is the trade name of nutrition and health company Atrium Innovations, which Nestlé Health Science acquired in 2017. The deal included dietary supplement brand Pure Encapsulations, among other companies.

While the CPG giant plans to shutter the two Pittsburgh manufacturing plants, it has been investing elsewhere to keep pace with changing consumer trends. Earlier this year Nestlé Health Science announced plans to add two production lines to its factory in Eau Claire, Wisconsin, to meet demand for its Boost and Carnation Breakfast Essentials products.

Nestle is also discussing options for its instant coffee plant in northern New Jersey which is considered to be less efficient due to its age. Meanwhile on the West Coast, Nestle closed its California Sweet Earth Foods facility in May 2022, with plans to shift production to its factory in Solon, Ohio.

3M plans to restructure its business after a challenging Q1, and will cut 6,000 more jobs worldwide, the company announced April 25.

"The structural reorganization will reduce the size of the corporate center of the company, simplify supply chain, streamline 3M's geographic footprint, reduce layers of management, and further align business go-to-market models to customers," the company said in a press release, adding the 6,000 job cuts are in addition to the 2,500 announced in January this year.

3M expects to save between $700 million and $900 million in costs through the restructure. The actions will "affect all functions, businesses, and geographies," according to the press release.

Executives shared further detail on their plans in an April 25 presentation and earnings call.

“Not all of these costs are just people-related costs,” EVP, CFO, and Chief Transformation Officer Monish Patolawala said on the earnings call. “We're taking a lot of other costs out from the center of the company, we're reducing rooftops, etc, which allow us to exit some of these cost structures faster and that's where you get a better payback.” 

CEO and Chairman Mike Roman said 3M will reduce rooftops worldwide, including exiting its conference center in northern Minnesota, move its technology to the cloud, and remove hundreds of legacy systems. 

The CEO mentioned the restructure would have distinct impacts for each division, saying:

• "In safety and industrial, in transportation and electronics, we will eliminate certain area based business group leadership and move to a division like model.
• In transportation and electronics we will also combine 2 divisions further reducing structure.
• In consumer we will simplify how we go to market with each area team aligning around their product portfolios and [leading] brands."

And in 30 countries around the globe, Roman said the business would move to "a model partnering with distributors with deep local knowledge and infrastructure, enabling us to reduce our people, real estate, and other related costs."

In addition to the layoffs, the company also announced changes to its leadership. 3M appointed Michael Vale as its group president and chief business and country officer, a new role created for its corporate operations committee, effective April 25. Vale will oversee three of 3M’s four business groups, as well as customer operations, country governance and emerging markets.

The company also added responsibilities to Patolawala and EVP, CTO and Environmental Responsibility John Banovetz. Patolawala will now oversee 3M’s enterprise strategy development and its global service centers. Banovetz will oversee new growth ventures, including 3M’s venture capital and early-stage R&D organization.

The company continues to experience end-market weakness in consumer electronics, shifting consumer spending patterns, retailer destocking, and mixed industrial markets, Patolawala said. 3M also is continuing to navigate COVID-19-related impacts in China and the geopolitical challenges in Europe.

Still, executives credited the actions 3M initiated in Q4 with delivering a better-than-expected Q1, Patolawala said.  Sales hit $7.7 billion, but experience a 1.3% sales decline compared to last Q1

The company adjusted its manufacturing output and controlled costs to improve inventory levels. It also announced a round of layoffs in January, cutting 2,500 manufacturing jobs.