How important is CAPEX in industry?

CAPEX projects are only important in a few industrial sectors, such as energy and construction. Large and, in particular, recurring CAPEX investments play an important role in industry. However, the maturity of CAPEX procurement in companies can be very different.

You would think that dealing with CAPEX projects would be routine in industry.

That is unreservedly true for the big players. However, there is a significant difference between big corporations and mid-sized companies. While corporations are very mature and professional when it comes to CAPEX, and in some cases have their own organizations for it, mid-sized companies have major shortcomings.

What is the main difference between the big players and mid-sized companies?

In industry, it is usually about investing in replacement machinery. This is quite normal for major players such as the automotive industry because, in a factory, machine parts have to be constantly replaced with new ones. To avoid downtime as much as possible, these companies have well-established structures for CAPEX procurement. Although new plants are being built much less frequently, this is still more common in large companies than in mid-sized companies. Since these requirements are rarely relevant in mid-sized companies, strategically-aligned CAPEX procurement just does not happen.

How do mid-sized companies get around this problem?

Often, not at all! Our experience shows that CAPEX has neither a culture of controversy nor an open discussion around it. Mid-sized industries do not realize how much money they are wasting through their current shortcomings in CAPEX procurement.

Who takes care of the resulting CAPEX requirements?

Planning and decisions are simply left to the departments and planners, so functionally-driven commercial expertise is ignored.

And what is the intention behind this?

None, to be perfectly clear. It is more the result – whether consciously or unconsciously – of a lack of imagination, and sometimes there is just no desire to leave their comfort zone. Establishing or optimizing viable procurement structures is a complex process that requires cross-functional teamwork, and many mid-sized companies shy away from making this effort.

How would you advise mid-sized companies?

The first step is to create transparency about CAPEX expenditure and reveal the potential. Then, that can serve as a basis to plan the next process. Since many companies only rarely have CAPEX projects, it does not always make sense to create a separate organization for this, which is what big corporations are able to do. But there should be a defined process for CAPEX procurement in every company, where the individual process steps, roles, and responsibilities are clearly defined for all parties involved. Only then can the identified potential be achieved.

What basic recommendations would you make to companies when it comes to procurement of store layout requirements?

I would generally advise retail companies to make the procurement process for store layout and visual merchandising as efficient as possible, using all the necessary freedom of creativity and design they have. Above all, that means reducing complexity and increasing standardization.

Is store layout particularly complex?

Yes, because in this sector, there is usually a lot of stakeholders with specific requirements and interests: designers, the store building department, and also often corporate management, because store layout is a senior management issue. Procurement is then frequently the last link in the process chain.

And how could this predicament be resolved?

The real challenge is to coordinate CAPEX requirements. This means creating a central coordination point, requiring interdisciplinary teamwork in all the relevant business units.

Does that not usually happen anyway?

No, it is more the exception rather than the rule. Individual departments often cooperate very little, or even not at all. This must be reconciled in order to effectively leverage the opportunities for synergy.

Can you explain this using a real-life example?

Yes, there was a large food company with several independent subsidiaries setting out to equip its stores with 36 different shopping carts, because each subsidiary buys them independently. Significant savings were made by standardizing three different types and creating bundled procurement for all stores. This applied across the whole group, but everything was coordinated through a purchasing unit such as central procurement. Of course, every subsidiary still has control over its own designs and can add its own branding to its shopping carts.

How skilled would procurement be in terms of design?

Procurement does not, of course, deal with technical questions autonomously, because ultimately it is, and remains, merely an executive body of consumers, equipped with commercial expertise. It should, however, be closely involved in the design process to ensure that designs are realistic and achievable, and that the budget is not exceeded. The keywords here are “commercial knowledge”. Procurement can pre-qualify suppliers in the early design phases and perform practical design tests.

Will CAPEX not lose importance in the wake of continued growth in online trade?

No, quite the opposite. In relative terms, this shift will even cause CAPEX to rise in the future, although traditional bricks-and-mortar retailers will tend to stagnate or decline. But, when it comes to the shopping experience itself, customer expectations of those retailers are increasing. To meet this demand, retailers need to become more innovative in equipping their stores, meaning the costs will rise.

What are the biggest challenges facing the energy sector?

Planning cycles for these investments are very long-term. Life cycle planning often stretches over decades. Reasonably realistic planning therefore requires key risk factors to be identified early. An adequate timeframe for critical procurement decisions, the most specific requirement planning possible, detailed construction phases, and sub-projects to complete the design stage are all crucial from a procurement point of view.

To meet the planned requirements on time and in line with specifications, the timeframes for strategic procurement processes and critical delivery must be taken into consideration from the outset as part of project planning. Despite a relatively high degree of maturity in project management and capital goods procurement in energy companies, there is often still work to be done in timely, cross-functional cooperation.

What other factors play an important role?

In spite of high volumes of regular investment, gaining optimal benefit from the experience of previous projects is often neglected, something that is due mainly to low staff continuity. In addition, project processes, including involvement in procurement, are insufficiently standardized. This begins with determining the optimal project structure for construction phases and signing appropriate agreements to incentivize partners in terms of crucial objectives, such as the date of commissioning. Procurement, as part of the project team, should help shape relationships with key partners from the outset, ideally using project-related managers. This includes actively monitoring the change process in projects in order to minimize any additional demands by using effective follow-up management.

How can procurement ensure compliance with planning values?

Strategic risk management is essential for this. To estimate the impact, a model-based evaluation of the effects of strategic procurement on project efficiency, complexity, and scheduling is crucial. The risk of delay can then be evaluated financially, and any possible additional costs, for example from changing suppliers, can be calculated, in order to make the right decisions.

Why do you argue that OPEX and CAPEX should not be considered separately?

Whether a requirement is OPEX or CAPEX is initially completely irrelevant from the buyer’s point of view and only has consequences for the subsequent financial posting. The practice of separating OPEX and CAPEX requirements is counterproductive, as this lacks the necessary transparency in mixed product groups. I would therefore argue that purchasing should first only be differentiated according to functional IT product groups, which then contain all the requirements of this category, whether OPEX or CAPEX.

What does this mean in concrete terms in IT procurement?

The procurement of a server, for example, is CAPEX or OPEX, depending on whether it is purchased, leased or procured as-a-service. For the demand planners, however, it is not relevant how the server is procured, because the demand is always the same. Only the procurement channels are different. Consequently, the anticipated separation of OPEX and CAPEX is premature from a purchasing point of view. The merger, on the other hand, ensures transparency and enables more efficient viewing and support together with the procurement department.

In your opinion, where else are the IT requirements affected?

In IT, there is sometimes an excessive need for security and a latent aversion to risk. This often leads to a considerable over-specification of actual requirements. Take the example of a new data line. This is where IT decides in favour of the feature with the highest availability. However, this decision is neither future-oriented nor appropriate. This would be the case if the capacity of the data line could be flexibly adapted to the respective future requirements and already available models of the market could be used.

How can such situations be solved?

Through trustful cooperation between the specialist department and procurement – throughout the entire purchasing process. Always on the basis of IT requirements, Purchasing can already support the vendor-independent specification, methodically accompany the joint market development, help evaluate alternatives from a business point of view and point out potentials.