The art of capital budgeting

by Jim Kline
Share This:
Typically, answering the question whether to refurbish or replace is where the investment decision bogs down.

Awhile back, I suggested considering “valued asset management” as an approach to assessing and documenting a company’s process and facility assets. Valued asset management, a major step beyond traditional cost-based accounting and asset management systems, provides a broad-based approach to valuing the various aspects of an asset: its functional utility (contribution), operational performance (against standard) and total capital invested (initial plus improvements).

It also assesses the remaining functional (not accounting) useful life of an asset, monitors the true cost of operation, captures total labor requirements (direct and indirect), assesses the impact on associated processes (Does it enable or restrict the process?) and monitors the cost of maintaining the asset (maintenance and sanitation). Establishing and maintaining such a system may seem daunting at first … but consider its value.

One of the most common investment questions for management is that of aging and/or poorly performing equipment. And typically, answering the question whether to refurbish or replace is where the investment decision bogs down. I suggest it doesn’t have to be the time-consuming, iterative process that it so often turns out to be. Broken into basic elements, the answer is rather straight forward — the more difficult part can be identifying the critical basic elements.

Assessing performance is a good first step. But before you start analyzing current data, take a step back in time and determine what the unit was designed to do. Typically, this will be stated in terms of product characteristics (size, weight, quality, etc.); throughput (rate, yield, waste); projected downtime (mechanical and operational); labor requirements (operating and support); and ancillary characteristics such as utility requirements and planned maintenance events (preventive and predictive maintenance).

With the equipment’s baseline established, the next step would be quantifying current performance. The most common performance deviations are scaling weight, process loss and downtime. When evaluating these — or any performance factors — compare them to the baseline. A frequent error in calculating variances is using current data to establish the baseline and then calculating the variance or deviations against that. That approach misses any deviation between baselines.

Given the benefit side of the equation (potential savings) has been completed, it’s time to work on the ­renovate-or-replace analysis. And there is much more to this analysis than just costing out current performance against the baseline.

Refurbishment needs to consider the opportunity to upgrade the equipment: improving energy efficiency, in controls and operator interface, adding automation features, extending its useful/functional life. OEMs can be quite helpful in this evaluation, as can third-party specialists who can provide innovative improvements.

And it is likely when considering replacement you will find there have been advances in technology that provide enhanced performance benefits. Typically, these advances will be terms of reduced product variation, improved reliability, reduced operator and support activity labor requirements, sanitary design, improved safeguards and even self-diagnostic capabilities. Here again, each of these points needs to be considered and evaluated against the established performance baseline to quantify their potential benefit(s).

Other considerations are: utility requirements, physical size, process interface points and facilities interface. Confirm that the utility requirements can be met by existing services — electric, gas, water, sewer, compressed air, steam — then the associated costs to upgrade systems, if any, need to be factored into the analysis. The size of the replacement equipment is another major consideration. Far too often, the replacement equipment has different dimensions — will it fit in place of the existing equipment? Are special footings or foundations required? Is the clear under space from piping or structures sufficient? What are the process interface points — are they dimensionally the same; are any changes are required? Are the speeds matched with up and down stream equipment? Can the control systems communicate with one another?

Once you have baseline and current performance quantified, some relatively simple math should enable a projection of what savings can be realized by returning the equipment to standard or better operation. Having gathered this collective information — basically performing a 360-degree assessment on the current performance, refurbishment and replacement options — your decision to refurbish or replace, and the timing of this decision, should be clear to you.

And what better timing with the International Baking Industry Exposition (IBIE) at our doorsteps? With your needs defined and your wish list in hand, you know what you will be shopping for: equipment that improves productivity and yield, solutions for those problems that face the business, the opportunity for new processes and facility improvements. Once you have the needs and wants identified, take the time to break the list down using the categories that IBIE exhibitors are listed by. This will greatly help you in planning your path through the exhibition space.

In addition to being prepared with the shopping list, what has worked for me is planning my time at the exposition: Day One, I do a walkthrough focusing on those firms that supply equipment and/or services that address my immediate needs. I take notes as I go (if not, by day’s end, it is a blur). Next, I identify which companies warrant further consideration and which ones I want to get back to if there is time. Day Two, I start on my next level of priorities but also look around to see what I can find that is new and might have immediate or future application. Day Three is for follow-up and catch-up.

One last tip, a point I have made before: For those suppliers that I know well, I inquire on what’s new; if nothing, it’s time to move on. I was always interested in learning about the equipment, services and firms that were not that well-known to me … many times that is where innovation came from.

Where will you find innovation at IBIE 2016?

Comment on this Article
We welcome your thoughtful comments. Please comply with our Community rules.

The views expressed in the comments section of Baking Business News do not reflect those of Baking Business News or its parent company, Sosland Publishing Co., Kansas City, Mo. Concern regarding a specific comment may be registered with the Editor by clicking the Report Abuse link.


By Paul Chan 10/4/2016 4:26:16 PM
Hi Jim Very good article = right to the point!! Great way that bakers & companies can get the most out of their Cap Ex. Cheers PaulC