Value creation: problem and solution approaches

Jan HolmströmIndustrial Engineering and Management

Aalto University School of Science

Waste in energy systems?

• Are energy systems as effective as they could be?

• What are the types of waste?

Waste in energy systems: A business perspective

• Does someone benefit from the waste?

Wasteful business models …

• Energy: utilities profit from inefficiency and waste of consumers

• After-sales service: equipment manufacturers profit from breakdowns

• Construction: designers and contractors profit from bad initial design

… and even criminal business models

• Warranty fraud: fabricate claims on manufacturers

• Kick-backs: pay decision-maker part of the profit

Problem: Conflict of interest

Drivers of supplier profit•Consumption•Transactions•Design changes•Breakdowns

customer value ≠ supplier profit

Business logic: Many ways to do business

Business logic Terms

No service (Disposal) Dispose products when they fail or need to be upgraded

Ad hoc Pay for support as needed

Warranty Pay fixed price at purchase

Lease Pay fixed price for a fixed time; option to buy product

Cost-plus Pay fixed price based on cost and pre-negotiated margin

Performance based Pay based on product’s performance

Power by the hour Pay for the value in use

Pay for support as needed

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Pay for value in use

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Train example: Aligning interests to deliver value

ALSTOM and Virgin Trains

Background:Virgin Trains buys Pendolino tilting trains. Wanted ALSTOM to deliver the needed number of fully functioning trains to the platform each morning for the next 12 years. Will not pay if there is no train when needed. Instead, wants ALSTOM to pay penalties if not required ‘service availability’.

ALSTOM’s response: ‘Design for maintainability’ to reduce penalties and need to invest in trains. Creation of Train Care as a new stakeholder (new subsidiary of ALSTOM)Contracting of suppliers within an explicit ‘design for maintainability’ framework derived from Virgin’s requirementsMoney initially set-aside for penalty redeployed to fund technology solutions developed through reliability conferences between Train Care, ALSTOM, and suppliers

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Energy example: performance improvement business

• Energy Service Companies (ESCo) are firms that help businesses and families to trim their energy bills– From $3.6 to $5.1 billion business to in the US from 2006 to 2011; yearly

growth about 10 %• Business model:

– ESCos design a scheme to reduce a building's energy bill, borrow money for equipment, installs and maintains it over a fixed period. Clients pay ESCo's for the savings

– ESCos unburden their balance sheets and lower their borrowing costs by securitizing revenues

• Challenge is to widen market to smaller customers where the transaction costs tend to outweigh the savings– One solution is for municipalities to aggregate many similar properties and

“mediate” contracts between small customers and equipment manufacturers, ESCos and banks

Mechanisms to generate value

• Align interests • Performance improvement • Life-cycle extension• Reuse of designs and processes

Align interests for performance improvement

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Value creation

Time

Performance improvementAlign

interests

Extend lifecycles to accumulate value

Value creation

Time

Align interests

Reuse designs and processes

Extend life-cyclesPerformance improvement

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Pre-industrial business

Skill: Unique product and

unique process

1. How reduce cost while increasing scale

Industrialbusiness

Efficiency: Market mass-

produced product assortments

3. How reach the customer?

4. How give customer more choice?

2. Make or buy?

Standard product +Standard process

Order/delive

ry proce

ss

Distrib

ution

PurchasingPartnership

Product assortmentProduction control

Economies of scale: Reuse of designs and processes

Modeling construction and use in the built environment

Performance modelling

Solution designUse and operations

• User requirements• Technical

specification• Budget

• User experience?

• Technical performance?

• Actual costs?

Construction

As-designed

Closing the gaps for performance improvement in built environment

Performance modelling

Solution designUse and operations

• User requirements• Technical

specification• Budget

• User experience

• Technical performance

• Actual costs

Construction

As-built

• Identify improvement opportunities

• Evidence of outcome

Performance monitoring

As-designed

Closing the gaps: Possible energy futures?

• Guarantee performance of solutions (design and construction companies)

• Allocate investment where best pay back (property portfolio owners)

• Mobilize consumers and intelligent devices to deliver demand flexibility (utility companies)

• Alignment of business logic in multi-firm networks (utility, contractors, designers, service providers)

Do you have more ideas?