Friday, August 14, 2009

Budgets Before Profits: Hidden Barriers to Energy Cost Control

In most industrial organizations, daily decision-making can be woefully disconnected from the overall profit motive. Why? In part, this is because of the size and complexity of the organizations themselves. Because many skills and resources are needed to serve a production process, division of labor is a practical necessity. This is evident in the creation of departmental functions—- and budgets. But in an environment of scarce resources, departmentalization can foster an internal, competitive dynamic that misallocates wealth.

Here’s why: Budget development is as much about perception as it is the money itself. Budgets tend to be modeled on the previous year’s actual experience. This puts the manager in a precarious position: under-spending this year could undermine the claim for next year’s funding, while overspending may create the impression of waste or mismanagement. In effect, the department manager who economizes has just demonstrated the need for a smaller budget in the coming year. Managers tend to guard their budget dollars as a source of discretionary power. Over time, the annual cycles of budget development, defense, and execution yield a culture of hoarding.

Within the typical industrial organization, certain barriers to energy cost control are a consequence of departmental competition for budget dollars. Energy control activities and costs may be delegated to a “facilities” department, or wherever engineering and maintenance tasks are handled. An industrial facility manager ensures that buildings, manufacturing processes, and attending staff have the heat, power, ventilation, and other services needed to function effectively. These activities are often perceived as secondary in importance, relative to the core business of manufacturing products and meeting production goals. Accordingly, facility managers may be at a disadvantage when competing for internal budgetary and analytical resources. “Success” for a facilities manager means keeping emergency failures to a minimum. By definition, emergency issues are unpredictable in size and frequency. Given the choice between emergency preparedness and the efficiency of ongoing operations, many facility managers are hesitant to spend money on “fixing things that aren’t broken.” This allows energy waste to persist.

Everyone else carries on business as usual without regard to the energy expense implications of their actions. The facilities manager alone would be responsible for reversing the wasteful choices of others. This could be the job of a proverbial Sisyphus, never-ending and without reward. Unless everyone is accountable for energy use, an energy manager’s effectiveness is severely limited. Under these circumstances, energy waste will prevail, directly reducing the financial return available to shareholders.



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