Vendor profit sharing involves working with vendors to spread the risks of projects without giving up the rewards. Your vendors also are being affected by the economic situation and it’s in their best interests to keep the projects moving.
Profit sharing received a bad rap because of savvy vendors who convinced customers that “joint venture” profit sharing provides lucrative benefits. The problem is that they received a large chunk of the profits from the plant’s hard work. For example, a plant installs new energy software that monitors and manages how it uses various energy streams. At the end of the month, the plant calculates the program saved $100,000. It sends a check to the software vendor for $50,000. So, the site just saved $50,000! Why isn’t it unhappy?
Chances are that the attention to the process is why it saved money. A year later, after the vendor collected most of its costs and a profit, the plant’sre stuck with a program that doesn’t seem to save that much anymore. Also, there was probably no provision for the vendor to return money in the months the plant lost money. The vendor might argue that it was due to an operations glitch or incorrect use of the program. There also are many hidden costs, such as those for engineers and operators spending time on the project instead of other potentially profitable tasks. Finally, accounting will go crazy over this agreement because it’s along-term technology license with unknown future costs.
I believe in profit sharing, but it has to benefit the plant first, not the vendor. The vendor should get back the price it would have charged for the product plus a bonus if the return exceeds a minimum. For the energy software, if it normally costs $1 million and saved $100,000 during the first month, I would give the vendor $25,000, put $25,000 in a bonus account for possible future payout, and keep $50,000 for the plant. At year’s end, the vendor gets 50% of the bonus money and the rest is held for next year. Once the original $1-million project is paid through monthly savings and bonus or after, say, 36 to 60 months, the vendor receives 12 more months of savings plus whatever bonus money remains. The software becomes the plant’s property and profit sharing ends.
Launching expense reduction task forces is simply a belt-tightening move to reduce monthly expenses. Items, such as furnace tuning, active energy management, steam trap replacement, air and steam leak repairs, and other efficiency improvements can immediately save money. I require the expense to pay for itself within three months. However, you have to spend money to make money and most of the time, companies haven’t allowed for that. Money saved with these projects and the effect of the task force on how the plant perceives energy, have a wider benefit on overall operations. Consider expanding the task force’s roles to reduce other expenses, like chemicals and water, or form additional task forces to tackle different areas.
Quick return projects are the most difficult but most beneficial. They provide “seed money” for a small internal energy project company or business unit. It spends the money on small energy efficiency projects that have high rates of return. The profit from those projects is credited back to the internal company. The seed money is returned to the corporation at the minimum acceptable internal rate of return. Profits, money left after paying the return, fund future projects. All costs, including personnel, engineering, office space, etc., are charged out of the internal project company.
To implement these ideas, you must have a corporation that has enough insight to understand the importance of energy and that has the courage to think of the corporation’s long-term interests during difficult economic times. Creative thinking in your energy efficiency projects gives you the competitive edge during these tough times and provides your plant with a head start when things become better.
Gary Faagau, is Chemical Processing's energy columnist. You can e-mail him at GFaagau@putman.net.