The 'Benny Hill' Effect
March 14th 2006

Encore International's Mark Dickinson MD provides an interesting - if unorthodox - illustration of the need to manage energy costs.

I sit at my desk and my mind reverts to the old ‘Benny Hill’ sketch shows and I reflect on how well the chase scene at the end of each show acts as a metaphor for the way our organisations operate some times. Firstly I remember the music (you all remember how it goes) but this time the setting is a factory with lots of machines and activity. Then I see plant managers and engineers moving at double speed through the plant creating value improving efficiency; I can still hear the music. They are quickly followed in a line by Six Sigma black belts who are generating even more efficiency and delivering even more value; they are also moving at double speed and the music is still playing. As the procession continues and the music is still playing, the small, old, balding man joins the procession (lets call him ‘profitability’) and he happily runs after the line until he runs into a huge chap who slaps him on the top of the head until it turns red; lets call that huge chap ‘Energy Costs.’

Whilst I consider this vision (that bl**dy music is still playing) I note that it doesn’t matter how much good work your organisation does or how long you move at double speed, if you don’t manage your energy costs all of that value is destroyed. The table below illustrates the problem:

Original Energy Cost as a % of Total Cost	Net Profit Margin of Company	Increase in Total Costs with New Energy Price	Additional Six Sigma Improvements Required to main current position	Additional Sales Required to maintain current position
1%	15%	0.6%	0.6%	3.4%
5%	15%	3.0%	3.0%	17.0%
10%	15%	6.0%	6.0%	34.0%
20%	15%	12.0%	12.0%	68.0%
30%	15%	18.0%	18.0%	102.0%
50%	15%	30.0%	30.0%	170.0%

If your company has a 15% profit margin and energy is currently 10% of your costs then the current year on year increases of 60% in Europe have destroyed 3% of your real bottom line value, or to put it another way , your six sigma black belts have to create 3% more value than before just for your company to stand still. Of course there is a limit to how much cost even the most highly trained black belt could drive from the equation and as such the burden will ultimately fall on your sales team but a 17% increase is a lot of new sales.

Ironically if another person had joined the procession lets call them ‘risk management’ (I leave the imagery to the individual) we would have seen the huge chap distracted and saved the head of the poor old little bald guy. Risk management transforms energy expenditure and saves profitability.

If you apply Value at Risk techniques to energy price management you reduce risk and cost; but if risk management is not yet a part of your procession, you best get your bald guy a helmet. Next month how the Tango advert could increase beach supplies!!

More articles from Encore Energy Shipping: