- Industry: Manufacturing
- Product(s): @RISK
- Application: Cost Justification of water recycling systems
A major U.S. beverage manufacturer was moving forward with implementation of a water recycling system, but faced a decision barrier around the perceived low cost of water. They hired Antea Group, an international environmental, health, safety, and sustainability (EHS&S) consulting firm, to conduct a quantitative analysis of the proposed project. Using @RISK, Antea Group was able to quantify the business value of the project once ‘true costs’ of water and the business benefits of the project were added to the company’s investment models. After this analysis, the company was able to justify the water recycling project that was previously not able to satisfy the firm’s internal investment hurdle rates.
What’s so nice about @RISK is its transparency. We can show all the formulas, and we can watch the simulations as they run. Other risk analysis software have more of a ‘black box’ design. With @RISK, you can set your variables, change them, and rerun your simulation and see exactly how it changes—it’s very helpful.John Estes, Consultant, Antea Group
For many companies pursuing corporate water stewardship strategies, a common barrier to action is the perceived low cost of water. Water reduction, reuse, and recycling projects can be perceived as very costly to implement when facilities only consider the price of getting water from the tap. As water costs are often as low as $2.00 per thousand gallons, justifying large water reclamation projects can be difficult if not impossible.
A major U.S. beverage manufacturer faced this exact issue. The company regularly used over 300 million gallons of water per year, and was weighing the cost-effectiveness of adopting water-recycling. The project would cost significant capital to implement, but would recycle up to 85% of the water it used and reduce impacts and dependencies on local watersheds. In addition, the company could use the project to pursue sustainability goals and enhance their reputation as a corporate water steward. To help make this decision, they collaborated with Antea Group, a firm with demonstrated expertise in providing water strategies designed to reduce environmental footprints and minimize social impacts. Antea Group consultants used Palisade’s @RISK to conduct a comprehensive analysis of the cost drivers for water throughout the company’s operations.
Uncovering the True Cost of Water
John Estes, consultant with Antea Group, helped examine the beverage manufacturer’s operations to look at the hidden costs of the water they used. “There’s the rinsing, cleaning of equipment, the steam needed to sterilize,” he says. “Essentially, a significant amount of water is used that doesn’t go into the product and instead is discharged to the sanitary sewer system.” The cost of sending this wastewater to the sewer is over $7.50 per thousand gallons— over 3.5x higher than the cost of getting water from the tap. Estes adds that there are additional hidden costs to the water from the heating and cooling processes, system operations and maintenance, and effluent treatment.
Estes says that company decision makers know about these separate charges, “but we’re helping them to pull it all together, so they can evaluate the true costs and business benefits accurately.”
Using @RISK to Review True Costs and Risk Drivers
Estes used @RISK to create a model that would show the true cost of the beverage company’s water. Inputs for the model included the following:
- Production volume
- Treatment costs (pre-treatment, chemicals, filters)
- Electrical energy costs (cooling and transportation of water throughout process steps)
- Thermal energy costs (heating and steam generation)
- Yield loss costs (losses of water with embedded cost or value)
- Waste costs (sewer fee/surcharges, water to drain, wastewater)
- Regulatory costs (water-related permitting, fines , and compliance management)
- Operations and maintenance costs
Estes mined the data for these inputs from historical data and from company engineers’ estimates. “We asked them for a reasonable range of possibilities, something within the 90% confidence level,” says Estes. “We’d then run the model and ask the engineers if the various model outputs looked reasonable.”
Once they agreed on the models, Estes and his colleagues ran a sensitivity analysis to determine which of these inputs was most influential on costs. They found that the most significant cost driver was the discharge to the sanitary sewer. Production cost increases also became dominant because the additional volume to produce the product resulted in additional volume towards sanitary sewer discharge. Once the recycling facility comes on-line, the projected cumulative savings will range between $10.5-million to $14.5-million over 10-years.
After getting the correct range of data for the inputs and using those in the model, Estes and his colleagues were then able to determine a more accurate cost of water as a baseline. With this true cost number in hand, they then ran probabilistic models with @RISK to determine future potential scenarios. These scenarios included such variations as:
*Increased direct costs of water due to inflation, municipal cost increases, etc. *Maximum water allocation volumes *Seasonal scarcity from both frequency and severity of droughts *Projected production volume growth *Sustainability rating/ranking changes due to project implementation *Improved consumer perception of brand due to project implementation
Estes explains that running all these scenarios, with accurate costs included, gave much more informative forecasts of the company's future, which is critical as capital investments can take several years to finance and implement.
Benefits of @RISK
@RISK has proven itself to be an invaluable tool for Antea Group, Estes says. “What’s so nice about @RISK is its transparency,” he explains. “We can show all the formulas, and we can watch the simulations as they run. Other risk analysis software have more of a ‘black box’ design. With @RISK, you can set your variables, change them, and rerun your simulation and see exactly how it changes—it’s very helpful.” This is extremely important for many clients as multiple functions–both engineers and non-engineers alike–within an organization must accept the analysis and outputs to make informed business decisions.