Capital Investments: Review, Evaluate Historical Performance

By Bruce Wesner  
OTHER PARTS OF THIS ARTICLEPt. 1: Big-Ticket Purchases: Financial JustificationPt. 2: This PagePt. 3: Financial Justification: Develop Capital-Budgeting Policies

A manager's request for funds to replace big-ticket equipment begs these questions: Could the manager have avoided being forced to replace the asset in the first place? Did the department evaluate all repair options before requesting to purchase a replacement?

If an organization lacks internal resources dedicated to identifying and resolving limiting factors on assets, one likely result is the assets and processes will underperform. Managers can overcome chronic reliability issues by applying the right approach before big-ticket needs arise.

Organizations need to identify the true issues impacting the asset or system requiring replacement to understand the factors undermining its performance. Managers can meet with front-line personnel to better understand the known waste and loss issues before choosing the capital-investment path.

Before moving toward capital investment, managers should:

  • review and evaluate historical performance, cost, reliability, and maintenance data to isolate potential loss-elimination opportunities
  • compare current facility data with comparable best-in-class facilities to identify opportunities to eliminate loss
  • develop a prioritized list of loss-elimination opportunities, including estimated impact on performance
  • perform a root-cause analysis on the top three loss-elimination opportunities
  • develop a report that concisely defines the opportunity, its cost, and specific recommendations to eliminate loss.

When finished, managers can compare the cost of eliminating the loss through other measures to the proposed capital-investment cost.

When considering whether it is actually necessary to replace a piece of equipment to achieve the required asset performance, managers can consider other hot buttons for justifying a capital purchase:

  • Energy use. Would a newer asset be significantly more energy efficient?
  • Environmental concerns. What risks does the organization need to mitigate?
  • Safety implications. Would this purchase address safety incidents?
  • Business risks. Would eliminating a problematic asset significantly improve serving customers' needs?

Continue Reading: Management Insight

Big-Ticket Purchases: Financial Justification

Capital Investments: Review, Evaluate Historical Performance

Financial Justification: Develop Capital-Budgeting Policies

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  posted on 10/1/2010   Article Use Policy

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