Capital Investment

How to effectively demonstrate to administration/financiers the need for capital improvements to your operating facility.

Thursday, May 26, 2016

Joe Guddenburr, President, G.A. Braun, Inc.

Key

Is it wise to invest capital into your operation in a down / sluggish economy?

Many would argue that now is the time to cut back on all expenditures for an operating laundry. However, if your facility has opportunities to improve its use of labor, operating efficiencies, reduce its operating costs for energy and aqueous chemistry, or can significantly reduce its cost to sustain the operation then there is a compelling argument in support of such an investment.

Those who have had a clear understanding of how they could improve their operating performance through investing in new technology, or in re-tooling older facilities have been able to realize a sound return on their investment. These same companies in many cases leveraged a slightly less demanding time to allow them to cost effectively implement change and improvements without disrupting their service to clients. Because of their strategic decision to continue to invest in the continuous improvement needs of their operation, they now have a more efficient facility. This opens up new doors to further enhance the cost structure of their business.

Those who have had a clear understanding of how they could improve their operating performance through investing in new technology, or in re-tooling older facilities have been able to realize a sound return on their investment.

On the other hand, there are organizations that have suspended their spending for maintenance, and cannibalized idled equipment in order to keep their cost structure as lean as possible. This is an approach that will provide a short-term return, but typically results in a potentially exponential financial burden. It is clear that we are not going to see an immediate recovery to the economy, but a rather gradual improvement over an extended period of time. In such an environment needs only get worse or magnified if they are not addressed resulting in a painful operating situation. This pain will take the form of reduced efficiency, inconsistent equipment and operations performance, reduced end product quality or service rates, and quite possibly unplanned capital spending requirements. So you may say this all makes sense, but how do I justify to the powers to be that now is the time to address equipment and infrastructure needs?

It all comes down to showing that any investment that is going to be made has a compelling ROI (return on investment) associated with it. No-one will or should authorize spending without a logical ROI assigned to each financial transaction.

Typically, a ROI will take the form of one or a combination of the following five categories:

Sustainment of Core Business/ Reduction of Ownership Costs:

The bottom line here is that if you decide not to spend the money on improving your facility; it could result in your inability to sustain your core business, or in the rapid escalation of your operating costs to keep the plant running. Arguably, if you are at this stage, you are already suffering from a failure to continuously invest in the health of your operation.

Energy/Aqueous Chemistry/ Waste Reduction:

Depending on the vintage of equipment and facility you run, there may be an exceptional opportunity to harvest savings in each of these areas. Most of the plants that are being re-tooled today are realizing natural gas savings in the 25-35% range, electrical savings through the use of invertors and improved productivity, cutting their water usage by up to 60+%, and reducing their waste streams which are becoming more costly every day.

Labor Savings:

In the washroom, there are opportunities to reduce touch labor by automating manual facilities. The larger savings target typically lies in the textile finishing end, or in the material handling areas of the plant. There are a host of dynamic solutions available on today’s market. This can allow plants to rid themselves of one dimensional processing solution, and eliminate non-value adding touch labor.

Efficiency/Productivity Savings:

If the capital investment allows for greater productivity, it will afford the business the ability to spread its fixed costs over a greater volume of products. This will improve profitability, and provide greater flexibility as it pertains to pricing as sales forces compete to retain, or secure new business.

Quality:

This may take the form of reduced rewash, improved garment life, or enhanced end product appearance. It may also result in improved employee morale. It can be argued that all are forms of productivity, but the quality metric is an important one the merits discrete attention.

Each of the areas noted can provide for a compelling argument to invest in your people, process, equipment, and infrastructure.

In reality, owners and operators are not faced with a yes or no decision as it pertains to spending. More importantly, they are faced with the decision regarding how much spending is justified given the full review of the businesses commercial and operational performance. A down economy can and does provide for a great opportunity to invest as long as it is done wisely. Those who do so will be prepared to take on new business, diversify their revenue streams, and weather a prolonged soft economy. Those who don’t may find the waters to be very rough.

View all News »