Reduce Capital Budgets Through Focused Planning

“The general rule-of-thumb I’m seeing is this: ‘Capital spending is bad,’ ” says Neil Cooper, general manager of manufacturing and business operations for controls vendor Invensys Process Systems (www.ips.invensys.com), Plano, Texas.

He sees this especially in refining, where “they don’t want to be spending cash on existing facilities.”

But capital improvements are inevitable—and getting approval to spend capital almost always requires a project to be competitively attractive. That means showing the real return the future asset provides within a pre-determined period, typically with the return-on-investment (ROI) metric using the net present value (NPV) of the total outlay. For some budgets, that may mean looking more at an asset’s lifecycle costs.

Demonstrating the winning ROI first means researching investments and doing the right no-surprises planning. For automation systems, “look at the initial cost of the system, from design to intellectual property, and at the things that don’t need to be touched again,” states Gayle Hicks, Invensys Process director of advantage & lifecycle management, in Foxboro, Mass.

Further, get reliable information from the supplier about the product’s future road map. With that data, end-users might be able to avoid the capital budgeting process entirely by upgrading capital equipment via a service contract. For example, Hicks notes, unless there’s a complete change in technology, “maybe only 5 percent to 10 percent of the system will need to be replaced.”

Consider, too, the cost penalty of not keeping new assets updated. “People underestimate the pain and cost of keeping their automation systems current,” Cooper observes. Protective, proactive planning involves taking a more integrated, total-cost-of-ownership view, he suggests. Some questions he proposes end-users should ask themselves include: What should I be doing on the automation and maintenance sides of the business? How am I getting measurements to know if I’m getting the maximum throughput in the processes?

Get everyone involved

Be sure to involve multiple plant disciplines, such as operations, maintenance, control engineering, reliability engineering and finance in the budget process, he counsels. And take a longer operational cycle view. In the “perfect world,” it would be 10 to 15 years, Cooper advises. “But we’re seeing three to five years” as the more realistic long-term view now used by most industries, he says.

With what he calls the “critical” NPV-based planning process that gives a long-term lifecycle view with ROI, “you’ll have significant impact,” he claims. That planning requires something, though, that industry may not have possessed historically: the knowledge and value of equipment failure. That will require information of and about preventive, predictive, condition-based and/or reliability maintenance. Incorporating this knowledge into capital budgets may save as much as 20 percent, Cooper notes.

Regardless of the long view used in planning, if an end-user plans correctly in an annual cycle, “over a certain number of years, that will save more money later,” Cooper says. “It is so much more [costly] to spend capital up front. But you can plan an upgrade over a period, rather than a big outlay of cash at one time.”

One hidden planning element Cooper advises that end-users address is the pace at which things change. “If you don’t have your process-automation structure ready, then there’s a huge opportunity cost for not being ready [when changes come]. So be looking at technology evolution and the value of things coming down the road.”

“Remember, too, to be aware of actual versus budgeted costs,” adds Christina McKeon, director of performance management solutions for Infor (www.infor.com), an Alpharetta, Ga.-based enterprise software vendor. Without being able to identify everything—from the equipment to operating supplies and maintenance, including repairs—she believes that “it is hard to understand where opportunities exist for reducing costs.”

C. Kenna Amos, ckamosjr@earthlink.net, is an Automation World Contributing Editor.

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