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Business Sustainability: A cleaner production approach to small business management

Student Manual

Environment Australia
October 2000
ISBN 0642547149


Business Sustainability: Session 25 - Detailed Study - Part 6

OVERVIEW
Objective of this Session To be introduced to the detailed study, discuss issues with data quality, and introduce quantitative usage maps as a tool for data collection
The following topics will be covered in this session
Evaluation of Options - Initial Evaluation
Evaluation of Options - Detailed Evaluation
Evaluation of Options - Prioritisation
Evaluation of Options - Decision

Evaluation of Options - Initial Evaluation

Reality Check

Sometimes, ideas suggested by a newcomer (your team) are simply not feasible for technical, financial or other reasons. A reality check, done by someone from the business or a technical specialist can avoid time spent developing an improvement option that is unlikely to be feasible.

Long-term Improvement Options

Sometimes it is difficult to evaluate a major change, or an idea that is "out of left-field". Such ideas often have to be developed and evaluated stage-by-stage, perhaps using laboratory testing, small scale projects or pilot trials, to prove the idea over an extended period. Your team can probably only outline a course of action in such cases.

Evaluation of Options - Detailed Evaluation

Rationale

Improvement options are evaluated against several criteria, including technical, safety and economic issues, and are either rejected or passed on to the next stage (prioritisation).

Elimination of Options

The technical, safety and economic criteria listed in the paragraphs below can be used to cull options before going on to the next stage. For example, if an option degrades safety margins or has a long economic payback period, it may be dropped.

Technical Criteria

The following criteria can be used to evaluate the technical feasibility of improvement options:

Safety Issues

The following criteria can be used to evaluate improvement options on safety grounds:

Economic issues

The following criteria can be used to evaluate the economic feasibility of improvement options:

These costs can be expressed as a payback period (see below).

Payback Period

Payback period is simply the period of time taken for the business to break even financially after the change - ie. how long it will take for the savings made by the change to equal the cost of the change.

Normally a business requires a payback period of less than about two years. Fortunately, the payback period of many cleaner production improvements is less than one year.

Calculation of Payback Period

Payback period is calculated as follows. The fixed (one-off) cost of the change is divided by net annual savings in operating costs. The result is the payback period expressed in years.

The fixed (one-off) costs should include, as applicable:

Example

In the following example, payback period is calculated for four options for reducing the consumption of solvent in a spray painting business. The four options are:

  1. Install a solvent recovery unit;
  2. Redesign the painting booths to minimise over-spray;
  3. Soak spray guns rather than spraying solvent to clean the nozzles;
  4. Purchase solvent in smaller packs to minimise spills when decanting.
Option Annual Cost Reduction Cost Of Change Payback Period
Solvent recovery $1200 less solvent $1500 capital/installation + $120 per year operating cost 1.4 years
Redesign booths $200 less solvent $1400 capital and installation cost 7 years
Soak guns $500 less solvent nil Immediate
Smaller pack size $200 less solvent $200 per year higher purchase price No payback

Conclusions from Example

On the basis of the payback period, the "Solvent recovery" and "Soak guns" options would remain under consideration. The other two would be dropped (although the "Smaller pack size" option may still be considered on the grounds of the safety and environmental advantages of minimising solvent spillages).

Next Step

Having culled some options using the criteria given above, the remaining options are prioritised as described on the next page.

Evaluation of Options - Prioritisation

Rationale

Having culled some options in the detailed evaluation stage, a prioritisation matrix is used to make the final decision on improvement options to be included in the business improvement plan.

Prioritisation Matrix

A prioritisation matrix can be used as a quantitative aid to decision-making. The competing options are arranged down the left-hand side of the matrix, and the prioritisation criteria along the top. A rating is assigned to each square of the matrix and the rows are summed to obtain a total score for each option.

Defined Criteria

The criteria on which the options will be assessed will vary from one business to the next, but the following criteria might be considered:

Example

Using the remaining three options for reducing the consumption of solvent in a spray painting business, a prioritisation matrix might look like that shown below.

The options are rated 1-5 against each criteria except for "Annual Savings" which is rated 1-10 because of its perceived importance to the business. Solvent recovery then becomes the highest priority option.

Payback Period Annual Savings Probability of Success Non-financial Benefits Total
Solvent recovery 2 10 5 4 21
Soak guns 5 4 3 2 14
Small pack size 0 0 4 4 8

Evaluation of Options - Decision

Rationale

The final stage of evaluation is the decision on which options to include in the business improvement plan. The choice of options should take the prioritisation results into consideration, but should not be dictated by them. There are many other business considerations that may influence the final decision.

Business Involvement

The decision on which options to include in the business improvement plan must include input by the business manager, and consideration of the resources available within the business for implementing such options.

Instructions to Students

Choose a small number of improvement options. Don't be worried if there are only 2 or 3 viable improvement options.

Choose options which the business manager is keen about (if you don't, the manager will probably ignore them anyway).