PROCUREMENT ROLES IN CAPEX MANAGEMENT
An article written by, Ratri Loudes.
When we speak about Capital Expenditures or commonly called CAPEX in an organization, generally speaking, they are managed either by a Project Manager or their future users (the concerned department of the organization). Relating to the involvement of buyers in CAPEX management it can depend on the degree of procurement culture in an organization. Procurement people may be informed in the final process when all is set and the only task left is to place an order to the supplier. It could be even worse as buyers may not be invited to get involved at all in CAPEX management. If this is what is happening in an organization, it means that there is no full comprehension of the potential values that procurement people can create.
This article may bring a new perspective.
Before talking about what kind of values that procurement can create in an organization relating to CAPEX management, I suggest to speak firstly about how it should be managed from a procurement standpoint. We can consider CAPEX management is like project management as they have two similar main characteristics. Most of the time, if we look at the type and cost of such investments, they are mainly considered as a one-shot purchasing action, for example: buying manufacturing tools or upgrading IT infrastructure. CAPEX for a product/service is temporary as it has a beginning and an end in a given period and it is unique as the act of buying is not repetitive nor frequent.
To create added values in CAPEX management, the following factors are indispensable for procurement people:
1. Buy-in from stakeholders
First thing first to have procurement people involved in CAPEX management, an organization needs to get buy-in from stakeholders, in this case, especially from the Top Management. It won’t be a problem if an organization has already a good level of maturity in procurement culture. In big organizations, there is a regular meeting dedicated to reviewing investment plans and they have specific buyers dedicated to this category. A review meeting is an opportunity for all internal departments including procurement to get and to share the most updated information about on-going and future investments. Yet, it might not be the case for some small or medium-sized businesses. Even if the procurement department does exist in an organization, it doesn’t mean that they would be involved automatically in any projects of the organization. It happens for example in an organization in which working culture in silos is still common. This is why it is important to have procurement people in the board room or to receive an official order from the Top Management to get procurement people involved in CAPEX management. It will invite all concerned parties of the organization to collaborate without taking aside/behind or forgetting the procurement department.
2. Relationship Management
Whenever we speak about investments, an organization may want to invest in an existing product or service or a new product/service development (ex: customized manufacturing equipment). In both cases, procurement people need to participate in the first-ever contact with potential suppliers before an official kick-off tender process; for example: in a(n) (in)formal product/service development discussion. Early-buyer-involvement in the process is helpful for the organization and the supplier(s). Some benefits that we can take from this triptych discussion (user – supplier-buyer): - It will allow all parties to get the same understanding of what the organization’s wants and needs (technical, quality, lead-time, cost requirements, etc); - From the users’ side: it will allow them to understand the suppliers’ ability - From the suppliers’ side: it will allow them to understand their (future) customer’s expectation - From the buyers’ side, the more information they can get, the better they can manage the relationship with the supplier(s). If suppliers have been working with the buyers for different projects, this relationship can even be useful. In all, buyers will be able to identify and to have different leverages in their negotiation.
3. Planning Management
When an organization decides to make an investment, cost and schedule are some of the principal points. Speaking about the schedule, to get related tasks done, establishing planning could be a solution. An early-buyer-involvement in CAPEX management can help an organization to stick to the planning as per my following description. Let’s say that an organization and supplier(s) have to do a product development phase or discussion before supplier selection or order placement. Buyers’ participation in this process is useful to get the most updated information. If there are any modifications of which buyers are aware, it will allow them to adapt their negotiation strategy accordingly too. Unfortunately, it happens that future users think that the early-buyer-involvement is not necessary as most of the time, the development phase is to talk about technical and quality requirements and they don’t speak yet about commercial aspects. If buyers are involved later, the potential risk is that buyers will lack time and information relating to their negotiation phase with the (selected) supplier(s). Consequently, buyers will negotiate as best as they can get. In this case, there is a chance that buyers can’t optimize the creation of values to respect the planning. Or, they will take time as needed to prepare their integral negotiation but it can cause the investment out of schedule. It is important to bear in mind that good negotiation needs good preparation. Furthermore, when the work is started with the selected supplier, buyers can take a role as policemen to monitor the planning, to remind potential lateness and eventually to address a claim to the supplier if a penalty clause is a part of the contract.
4. Costs Management
In CAPEX management, there are at least three basic costs that we can identify and they are: -
Capital expenditures: they are amortized over the expected life of the investment; One-time project expenses often contain hidden costs such as fees to investigate alternatives, training travel, data conversion or lost productivity when employees go through a learning curve
On-going support costs: they include annual license fees and maintenance fees for vendor support.
SO, what kind of values that procurement people can create to an organization in CAPEX management?
Price negotiation This is the role that common people know or expect from procurement: to negotiate the lowest price that an organization can get to generate cost-saving. However, buyers’ strategic role(s) is not limited to it. The next points below are some other values that buyers can bring on.
Negotiation for different clauses Many times, whenever future users negotiate directly with suppliers, they tend to take a look only at partial interests, mainly related to technical and/or quality requirements or clauses that can be categorized as non-commercial aspects. It happens as either user would think that commercial aspects are buyers’ business or they would consider that cost won’t matter as long as the supplier can provide non-commercial aspects. However, as mention previously, it is important to take into consideration of TCO in an organization’s decision as it is not only about acquisition cost that they need to afford. Furthermore, other aspects need to deal with suppliers such as delivery time, payment terms, warranties, termination clause, and many more. Buyers are here to negotiate the integrated clauses which are the best for their organization. Hence, early-buyer involvement is indispensable.
Contract or Agreement Finally, after negotiating different clauses as per above points, as a rule of thumb, buyers, with a collaboration with the legal department, should translate the result of their negotiation in a contract or an agreement. It is very important, especially since when it’s about an investment, the organization will still carry on the on-going costs such as IT license and/or maintenance fees. By getting signed a mutual contract or agreement between the organization and the selected supplier, buyers create another value for both parties. Beyond its signification as a legal document, a contract or an agreement can have different functions as it is also a mean of risk management, pipeline project implementation, supplier relationship management and many more.