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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A growing share of spend is shifting to systems that boost throughput, improve efficiency or address food-safety concerns. Packaging lines have been popular options that show few signs of losing favor, agree Hudale and John-Paul Saenz, president of the industrial group at Haskell, a Jacksonville, Fla., design-build firm.

Haskell has been realigning its professional services to fit the shift in spending priorities, adding bench strength for in-plant projects. Thirty months ago, it acquired E²M, an Atlanta packaging-line integrator. In December, it snapped up Seiberling, the Beloit, Wis., specialists in process engineering. Capital outlays to accommodate new packaging formats trump projects to add capacity in today's market, according to Saenz.

"Packaging firms are in the plants all the time," Nutec's Hudale observes. "They're there more than we are."

It seems counterintuitive, but large food companies are more likely to turn to A/E firms for help in calculating payback than their smaller counterparts. Project scope is part of the reason, but other contributors are the greater tendency to outsource engineering responsibilities in large organizations and the silos of responsibility that exist.

"Smaller clients are able to involve their entire staff and put together a team that draws from engineering, maintenance and finance to come up with a reliable ROI calculation," says Kurt Warzynski, process engineering manager at Stellar, another Jacksonville, Fla., A/E firm. "They have more interaction."

"Engineers are not always great about communicating the ROI," adds Lisa Diven, business development manager at Burns & McDonnell Inc., Kansas City, Mo. "You must engage the operations team and the supply chain folks to understand the true costs and returns." Cross-functional engagement becomes more difficult as organizational complexity increases.

Some projects go off the rails when proponents fail to account for the ripple effects on infrastructure. For example, new processing or packaging systems might require additional piping or more compressed air than existing systems can deliver. If those costs aren't included in the original ROI calculation, the project is doomed.

"Anybody can calculate the ROI on a piece of equipment," sniffs Mark Shambaugh, president of Shambaugh & Son, Fort Wayne, Ind. "Most plants are running lean. If they don't have the expertise to get a firm cost number, the project will get blown away later."

Haskell's Saenz echoes his point. "A lot of engineering departments are getting smaller and smaller," he agrees. "They really rely on third-party consultants to understand the state of their current manufacturing systems."

Airtight payback calculations are especially important if borrowing comes into play. GE GE Capital, Corporate Finance draws on the expertise of its parent corporation when evaluating the financial needs of manufacturers. Chris Nay, senior managing director for food & beverage in the Chicago office, calls on four industrial engineers to benchmark food plants and calculate expected payback and risk level. "We bring not only capital but smarter capital to clients," he says.

Soft(ware) returns

The abstraction of software makes it a bigger ROI calculation challenge than projects based on mechanical motion and stainless steel. As the scope of the program expands, so does ROI complexity.

Quantifying a return on software is a number-crunching exercise Tom Nessen wrestles with on an ongoing basis. Nessen is the senior solution engineer for Plex Systems Inc. (www.plex.com), a Troy, Mich.-based vendor of ERP software. The firm's roots are in automotive, though its focus shifted to food and beverage two years ago.

MES functions such as inventory management and plant-floor data mining were augmented with front-office functionality over time. Because it is software as a service with a monthly fee and doesn't involve servers and licensing fees, "the cost is often an operating expense and doesn't rise to the level of a capital expenditure," says Nessen. Nonetheless, potential clients need "to come up with a payback that management is reasonably comfortable with," he allows.

To that end, Nessen is developing a model that quantifies cost savings that could reasonably be expected through identifiable economies. For example, his spreadsheet includes 20 scenarios involving inventory management. Performance outcomes at other manufacturers who implemented ERP are applied to each metric to derive likely and conservative estimates of improvements in warehouse labor hours, data-entry error reductions, work-in-process cuts, transportation savings, etc. A dollar value then is calculated for moving the needle on a company's current performance to the likely or conservative level.

While the model nibbles at labor savings, there are no overt references to head-count reductions, the traditional cost justification for automation. "You hardly hear the discussion of how many jobs can be taken away when automation initiatives are discussed anymore," Stellar's Warzynski says. Instead, management has adopted the view that the greater value is the generation of information to guide decisions on what products to make and how best to deploy resources. "The question now is, how can we use automation to make us more successful?" says Warzynski.

Senior management has a fiduciary duty to manage risk and ensure that directing liquid assets or loan proceeds to hard assets is prudent. To execute that duty, reasonable expectations of return on investment are crucial. However, best-guess estimates of the financials are not enough when bold initiatives are being considered. In those cases, confidence and trust in the individuals involved are essential.

"You reach a point of no return, when incremental information about ROI isn't going to sell the project to the organization," says Staehle. "At the C level, the concerns are broader and longer in view than at the operational level. It's more than considering one project with a 20-month return and one with a 15-month return, and then taking the 15-month. They want projects that move the organization forward, projects that can be sustained and built upon. Otherwise, they will collapse in time as roles change and people move on."

Reinvestment is required in any business, and a certain level is necessary to maintain a plant's current capabilities. But long-term sustainability requires capital above and beyond just-enough levels. That requires leaders who not only can crunch the numbers but also project the confidence and passion to drive successful capital improvements.

This article originally appeared in the April 2013 issue of Food Processing Magazine.

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