It’s often difficult to determine what course of action will most benefit a company’s long-term business objectives.  Even more difficult is the acquisition of funding for speculative improvements in the way of financial and market uncertainty.  As a consequence, some of the complexity involved in choosing among capital projects requires a consultative approach to plan and provide systems equipment through competitive processes.

As we apply capital budgeting techniques, cash flow is essentially the “answer” we’re looking for when comparing today’s operation with tomorrow’s.  Every time one investment is compared to another a series of cash flows is generated for each year the investment remains in operation.

The capital budgeting approach offers a “systems solution” to a prospective customer in a manner that allows he or she to understand the financial impact of the buying decision on the business.  A lower priced solution is compared to one or more higher priced solutions. This is often thought of as a “step-up” method for evaluating each potential project.  In the capital budgeting world this process is referred to as incremental analysis.  Incremental analysis compares the differences in costs and benefits of each project to provide a series of evaluations for which the customer can see a starting point and ending point.  Utilizing this “number trail” leaves little doubt in the customer’s mind that the project selected will provide the greatest financial benefit to support the long-term business objectives of the company.

Understanding this relationship between a facility’s business objectives and lower operating costs, alternative means of conducting daily business will often include levels of technology or automation that can be easily compared to a company’s operating baseline.  In many instances the current logistics operation is indeed labor intensive (costly), and often has its belly exposed through uncoordinated, disjointed or frequently interrupted material flow referred to as a bottleneck to production managers and operations analysts.

Management preferences are often insurmountable.  Discounting, growth rates and various other financial considerations can be adjusted to satisfy these preferences.  In doing so, sensitivity analysis allows the company a “last look” to see how resulting costs will vary from expectations set forth during the appraisal process.  These costs are namely equipment and operating costs.

Larger operations are generally confronted with more than one alternative means of increasing capacities and lowering operating costs. However, some processes are difficult to improve upon.  Capital budgeting often shows that processes should stay in place due to lack of order activity or due to product constraints that prevent the application of more automated methods.  Logistics capabilities must be aligned to support this growth. In general, service is of high business value to our company regardless of material mix to our customers.

By Warren White
Waller & Associates, LLC
www.WallerAssoc.com