Capital expenditure: software vs equipment

Capital Expenditure Software vs Equipment

Food supply chain managers know that companies have limited capital to invest in their future. In spite of this, the list of potential projects looms, unlimited.  In response, companies create guidelines around return on investment (ROI) for capital expenditure projects to give the project decision-making process structure.  The upside here is obvious: by setting guidelines and documenting the expected project in detail the company can better assess past projects and plan future projects. One of the downsides, however, is that these same guidelines often make it exceptionally difficult for a company to think outside the box and engage in necessary “moonshot” projects.

Assessing Capital Expenditures for Future ROI

One common method for assessing future projects is a capital request (CAR) process in which the purpose and the ROI for a proposed project is detailed.  Those familiar with these know that a CAR form is ideally a one-page form easily completed with a project’s estimated costs, ROI, and other details in a relatively short time.  More often the CAR is an arduous process that can take weeks or months to complete, potentially eating up hundreds of labor hours. There is value in the CAR process: by creating an expected ROI which can be measured into the future, the leadership group of a company has a powerful decision-making and post project analysis tool.

Unsurprisingly, middle managers see this issue in a completely different light. During my 15 years working in the meat business, managers expressed a need for useful business tools that could provide obvious ROI as well as tools that were more transformational.  When I would urge them to pursue the capital for their proposed project, there was great reluctance to “stick their necks out.” In other words, the talented individuals who were in the best position to help the company move forward saw the consequences of a difficult CAR process as too risky for them to pursue in spite of obvious benefits to the company.  

This is not a rebuke of those managers. However, it is a reality that it takes a very unique person to put their reputation (or job) on the line for a project with hard to measure results. This brings us to the point of this post, which is that it is much simpler for operations teams to define the benefits of a piece of physical equipment in the plant. Equipment has measurable outcomes, like reducing a specific amount of labor, or yield increases that have been tested beforehand.  Business software, not so much.

Better measurement of business software ROI

Business management software has difficult to measure outcomes because there is seldom a single parameter which can be measured against while holding all else constant. Let’s say you implement a system which plans your production, calculates what you have left to sell, and creates an optimized price based on your business rules. How do you measure the benefit of that? The markets are always changing so it is an imperfect analysis to measure price or profit year over year. You may or may not plan to reduce staff because of the new software, which may not be something you can measure. You can see that these types of projects feel risky to the managers who would be required to push for them.

There are, of course, ways to measure hard to measure business software. Reduction of distressed product, shortages, frozen product, and labor (both as reduced headcount and as reduction in turnover). There is also absolutely no reason not to measure profitability as long as you rationalize the analysis for changing market conditions.  

I always think of adding new equipment with ROI’s of 3-9 months like hitting singles or doubles.  You have to be good at hitting those to win games and they are absolutely critical. However, if you want to lead your industry or simply stay competitive over the long run, you must create an environment where moonshots are not only taken but encouraged. If you don’t, it is becoming increasingly clear in a data driven world that one or more of your competitors will.

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