Understanding Procurement Roles in Effective CAPEX Management

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). The involvement of buyers in CAPEX management depends on the procurement culture in an organization. It may happen that people in procurement are only informed in the final process when all is set and the only task left is to place an order to the supplier. But 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 professionals can create. This article may bring a new perspective.

Before talking about what kind of values procurement can create in an organization in terms of CAPEX management, I would like to initially focus on how it should be managed from a procurement standpoint.

We can consider CAPEX management to be like project management, as both 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 of time and it is unique, as the act of buying is not repetitive nor frequent.

In order to create added values in CAPEX management, the following factors are indispensable for procurement professionals:

1. Buy-in from stakeholders

First things first, in order to have procurement professionals 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 already has a good level of maturity of procurement culture. In big organizations, there is a regular meeting dedicated to review investment plans and they have specific buyers dedicated for this category. A review meeting is an opportunity for all internal departments, including procurement, to get and to share the most updated information about ongoing and future investments. Yet, it might not be the case for some small or medium-sized businesses. Even if the procurement department  exists in an organization, it doesn’t mean that they would be involved automatically in any projects of the organization. This sometimes happens for example in an organization in which working culture with a silo mentality  is still common. This is why it is important to have procurement professionals in the board room or to receive an official order from the Top Management to get theminvolved in CAPEX management. It will incite all concerned parties of the organization to collaborate without picking a side or forgetting about the procurement department.

2. Relationship Management

Whenever we speak about investments, an organization may want to invest in an existing product or service, or in a new product/service development (i.e.: customized manufacturing equipment). In both cases, it is important for procurement professionals to participate in the first ever contact with potential suppliers prior to an official kick-off tender process; for example: in a formal or informal product/service development discussion. Early-buyer-involvement in the process is helpful for the organization and for 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 are (technical, quality, lead-time, cost requirements, etc);

– From the users’ side: it will allow them to understand the suppliers’ abilities

– From the suppliers’ side: it will allow them to understand their (future) customer’s expectations

– 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 be useful. All in all, buyers will be able to identify and 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. In order to get related tasks done, setting up a plan is a solution. An early-buyer-involvement in CAPEX management can help an organization to stick to the plan as per the following description: Let’s say that an organization and the supplier(s) have to do a product development phase or discussion prior to the 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 of, it will allow them to adapt their negotiation strategy accordingly too. Unfortunately, it just so happens that future users may 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 yet mention commercial aspects. If buyers are involved later, the potential risk is that buyers will lack the time to gain necessary information within the negotiation phase with the selected supplier(s). Consequently, buyers will negotiate in the best way they can. In this case, there is a chance that buyers can’t optimize the creation of values in order to respect the plan. Or, they will take time as needed to prepare their negotiation, but doing so can cause the investment to be out of schedule. It is important to bear in mind that a good negotiation needs  good preparation.  Furthermore, when the project  with the selected supplier begins, buyers can monitor the plan 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 in CAPEX management, whichare:

– Capital expenditures: they are amortized over the expected life of the investment;

One-time project expenses whichoften 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: these include annual license fees and maintenance fees for vendor support.

5. Values Procurement Can Create For CAPEX Management

So, what kind of values can procurement professionals create for an organization in CAPEX management?

1. Price negotiation

This is the role that is commonly known or is expected from procurement: to negotiate the lowest price that an organization can get in order to generate cost savings.

2. 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. Either users tend to think that commercial aspects are the buyers’ business or they would consider that the cost won’t matter, as long as the supplier can provide non-commercial aspects. However, as mentioned previously, it is important to take into consideration the Total Cost of Ownership (TCO) in an organization’s decision, as it is not only about acquisition costs that they need to afford. Furthermore, there are other aspects to be considered in order to deal with suppliers, such as delivery time, payment terms, warranties, a 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.

3. Contract or Agreement

Finally, after negotiating different clauses as stated above, as a rule of thumb, buyers in collaboration with the legal department should translate the result of their negotiation in a contract or an agreement. This is very important, especially since it’s about an investment, and the organization will still carry on the ongoing costs such as IT licenses and/or maintenance fees. By signing a mutual contract or agreement between the organization and the selected supplier, buyers create value for both parties. Beyond its significance as a legal document, a contract or an agreement can have different functions as it is also a means of risk management, pipeline project implementation, supplier relationship management and many more.

About the Author

Ratri Loudes

Ratri has a unique insight into global supply chains and procurement practices. She lived in 4 different continents (North America, Asia, Africa, and Europe), and has experience in different industrial sectors such as oil and gas, and railway transport. Ratri has been involved in global procurement and multi-site project management for more than 10 years. Her experience includes multinational companies such as TOTAL and ALSTOM.