The weather is hot and humid right now, but business owners and financial executives know that budget season is just around the corner. An important part of the budgeting process is the strategic conversations around capital expenditures (CapEx). Priority should be given to CapEx investments that foster growth, increase margin and improve customer service and quality performance, and it is critical that these investments generate the expected payback.
Evaluating CapEx investments from a Lean Six Sigma perspective can help ensure the desired return on investment (ROI). Below we look at two common areas for CapEx investment and highlight lean considerations that can help your business achieve its goals.
Automation and New Equipment
Whether on the shop floor, in the office or in the field, everyone likes the idea of task automation and increased efficiency. The cost-benefit for investments in robots, automation or new equipment is typically justified by the faster processing time and lower workforce costs; however, taking a Lean Six Sigma perspective prompts the analysis of several aspects that can better capture the true ROI of the proposed equipment.
Ask yourself the below questions; if the answer to any is “no,” it is likely that capacity can be increased without a capital investment. The more “no” responses, the greater the possibility for capacity growth with the existing equipment.
- Is the current operation, process or department as efficient as it can be now?
- Is it capable of consistently running at target capacity?
- Are delays and downtime minimal?
- Has all excess motion and processing been eliminated to minimize cycle time?
- Has changeover time been shortened?
- Is it capable of doing a quality job the first time?
- Is it scheduled based on demand and not forecast?
Another lean consideration is to take a value-stream view of the potential investment. Step back and ask the following questions to determine if the capital expenditure will contribute to your company’s overall value:
- Will the new automated equipment allow you to actually ship more product, take more orders and/or cut customer lead time?
- Will overall output increase at the end of the line, or is only the throughput of the workstation increasing?
- Will the automation create more work-in-progress, causing a new bottleneck to pop up downstream?
- How is the higher capacity of the new equipment being balanced with upstream and downstream processes to ensure higher total output?
Similar to equipment investments, facility expansion investments require the same considerations like cost, implementation time, staff attention, risk, opportunity, etc. Whether you run a small business or a Fortune 100 company, planned expansions could be unnecessary if significant gains in free space can be created from existing facilities, so be sure to ask these questions before expanding:
- What has been done to streamline material and people flows in the current facility?
- Has a critical analysis of space demand from stored material and parts, WIP and aged inventory been completed?
- Has 5S, Point of Use Storage and Cellular Flow been fully implemented?
If the expansion is justified by “yes” answers to these questions, take it a step further and ask more questions from the lean perspective to optimize performance of the new facility:
- Is the new layout incorporating lean concepts to minimize footprint, travel distances, reduce handoffs and integrate smoothly with the existing facility?
- Is the on-going operating cost (OpEx) and total cost of ownership going to be lower because of the new, efficient layout?
Lean helps maximize CapEx benefit
These two categories demonstrate the value of evaluating potential CapEx investments from a lean perspective to ensure maximum benefit. After all, re-investment of your company’s hard-earned profits or new investments should generate immediate, tangible return.
Businesses with questions about how to apply lean considerations to potential CapEx investments should contact me at email@example.com or 717.394.5666.
Contributed by Robert E. Pozesky, manager in RKL’s Business Consulting Services Group. Bob specializes in operational consulting, with extensive experience working with clients to execute Six Sigma, lean and organizational development strategies to support growth and performance improvement.