Making a Case for Capital Spending

Splicing the genes of an accountant and an engineer might help cost-justify plant improvement projects, but a dash of showmanship and passion also help build capex consensus.

By Kevin T. Higgins, Managing Editor

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Money begets money, and those who control the purse have no shortage of options on where to park their funds. Unfortunately, manufacturing in general and food and beverage production in particular usually are not in the top tier of options.

Capital improvements have to compete with marketing programs, acquisition war chests and investor disbursements for funding. If projects are to make the transition from drawing board to reality, engineers and production managers must be conversant in the lingua franca of accountants. If the efficiency gains and payback calculations overlook or omit any key factors, a project might fall short of the internal rate of return and never be funded.

But capital projects aren't just about money; they also involve human interaction. The difference between projects that get done and those that languish is not simply a matter of which generate the fastest ROI. It also has to do with the people who are pitching them and the groundwork they lay.

Data collection and reporting systems are a funding challenge today, and they were an even tougher boardroom sell 12 years ago. As the 20th Century was drawing to a close, industry threw billions of dollars into IT upgrades to avoid a feared Year 2000 computer meltdown. Y2K turned out to be a non-event, and senior management was left with a sour taste, questioning what had been gained by diverting capital from other projects.

It was not the best time to request $35 million to implement a manufacturing execution system (MES) across a platform of 48 plants and 500 lines. Walt Staehle, then a director of manufacturing execution & shop floor information systems, drew the assignment at Kraft Foods.

Standardized data on overall equipment effectiveness (OEE) and other key performance indicators was viewed with suspicion and apprehension at the time. Some processing professionals thought the data would determine which plants closed and which would be modernized. Preliminary work on the MES project was paid from operating budgets, but the board of directors would make the final go/no-go call.

Before approaching the Kraft board, Staehle began lining up support among the vice presidents of various corporate divisions. These individuals needed an answer to WIIFM: what's in it for me? Unless he could convince them that MES would deliver real value to their operational areas, those managers would either be indifferent or consider MES a direct threat to funding for their own pet projects.

By the time he made his funding pitch, Staehle had six vice presidents solidly in his camp. Simply discussing ROI numbers and discussing other fundamentals would not be enough.

"The folks in that boardroom are looking to see if you're confident and have the stomach and the passion to drive the project," explains Staehle, who recently was named senior director of national and strategic accounts for Siemens Industry Inc., Spring House, Pa. "They want to know, 'Does this create a vision for us, does it support our vision, is this a paradigm shift?' And they want to know if they have a leader that they can entrust with this investment. That goes beyond ROI."

Even with middle management support, Staehle faced lobbying by in-house competitors and senior vice presidents with their own agendas. He laid out the financial aspects, described how risk would be managed, explained the quality-assurance benefits, then addressed the emotional element.

"I closed with a description of Alexander the Great's campaign into Asia Minor," Staehle recalls. "After his army crossed the Hellespont, Alexander ordered that the 120 ships that transported his soldiers across the straight be burned in the harbor. After pointing out we were a year and a half into the project, I said, 'Now is the time to burn the ships.'

"The room went absolutely quiet for what seemed like an hour but was probably just seconds. Then the board agreed to fund it."

Hard assets, hard sell

Before America's financial industry imploded in 2008, manufacturing was the red-headed stepchild of investment. Why put a dollar into producing goods on the chance of receiving two dollars in five years? After all, derivatives and exotic financial instruments could yield triple returns overnight. Those opportunities no longer exist, of course, and although food companies by and large are awash in cash these days, generally they are directing it toward acquisitions, bigger dividends and stock buy-backs.

Whatever's left goes into the capital bucket, where individual projects compete with other possible initiatives in the facility and, in the case of multi-plant companies, throughout the network. Executive management of privately held companies are more tolerant of longer paybacks than those at large public firms, observes Paul Hudale, sales director at Nutec Group, a York, Pa.-based architectural engineering firm. And the gap is widening.

"Small guys tell you point blank, 'We can take a seven-year payback, we're in it for the long haul,' " he says. Conversely, a disposable-building philosophy is evolving at publicly traded corporations. Cognizant of the changes automation has brought in the past 20 years, they are capitalizing greenfield projects that will reach obsolescence at the end of the depreciation schedule.

Greenfields will always account for a portion of capital spending, of course, if only because the fastest growing food companies — think Greek yogurt-maker Chobani and Living Essentials, maker of 5-Hour Energy — typically manufacture products that didn't exist 10 years earlier. Nonetheless, new construction is a waning investment category.

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