Tuesday, June 11, 2019

Budgets and Allocations

Years ago, in one of the various roles I served a small company, (to me it was large, but in the bigger scheme of things not as large as it seemed) I was responsible for developing an operating budget for the areas of business for which I was responsible.  It was in a time of rapidly fluctuating input prices -- particularly for fuel -- which were a significant component of our operating costs.  We were challenged to find ways to reduce those expenditures yet, to grow our top line revenue.

Any type of business operation works somewhat like a funnel.  You, hopefully, have a large amount of material going in the top (revenue) and after siphoning off what is necessary to keep the business running and generate that revenue, a steady stream coming out the bottom of the funnel.  The size of the "out" end of the funnel is larger, or smaller, based on the amount siphoned off to cover those operating expenses.  Most people in management focus on the expenses, whereas most leaders focus on the amount going into the funnel at the top.  That is one of the key differences between management and leadership.  One seeks to control activity and the other seeks to stimulate activity.

In a generalized sense, both types of individuals fill crucial roles in an organization and both are constantly thinking about the allocation of resources to meet various needs.  [I didn't intend such a lengthy preamble to what I wanted to say this morning.]

Allocation of resources is a complex problem for most businesses.  It can be complicated for a household dealing with competing needs -- house payment, groceries, fuel, clothing, etc.  If you expand the thinking to a country economy, or even beyond to the world economic situation, the problem becomes almost insolvable.  We depend on the marketplace to allocate resources based on pricing mechanisms that are often manipulated by governments -- such as the tariff "wars" with China, or the product embargoes against Iran.  Ideally a free market allows for efficient allocation of resources.  That free market can mean large price fluctuations based on temporary shortages, or gluts of specific products -- especially applicable to agricultural products -- food.  These can be local, regional, or global in nature.

Is there a better way?  After all, security issues will always come into play in interactions between countries -- or, between companies.  Those issues affect the movement of goods and services around the globe.

I don't think a "One World" government is the answer -- mainly because it concentrates power in too few hands, but I do think better needs-based intelligence could help provide a solution.  The growth of databases and the computing power now available can help us to solve global issues of resource allocation.  Making that "intelligence" available to businesses can provide better decision-making processes based on the dynamics of resource movement.

The problem is an old one; it is simply that of logistics.  When I was in college I took a course in Operations Research which was the mathematics behind solving efficient allocation of resources.  In simplest terms, an example is the best way to describe it.  If you are a large railroad company moving freight around the country, how do you determine the routing of individual rail cars to most efficiently transport them across the country from their point of origin to the nearest point of termination?  If you really think about it, it can become extremely complex.

For many years this type of problem was solved by brute force computation and a few wild guesses.  Today, it can be solved very quickly with computers.  Now expand that thinking to the worldwide allocation of food....

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