Article 14 Oct 2024

Optimising Capital Investment for Enhanced Business Performance

Effectively utilising capital investment is critical for driving performance and achieving long-term business success. However, before embarking on new capital investments, it is essential to evaluate and optimise current assets and explore operational improvements. This approach ensures that capital investments yield the highest value and align with strategic business objectives.

Aligning Operational Excellence and Capital with Business Strategy

A successful capital investment strategy begins with a clear alignment between operational excellence and overall business goals. This first involves defining a robust strategy, setting business objectives and ensuring that all efforts contribute directly to the company’s core capabilities and improving cost of goods sold (COGS) and service levels.

Operational excellence is part of a broader set of business goals and should be viewed as a tool to support strategic objectives such as market expansion, cost reduction, or improved customer satisfaction. A recent study found that companies prioritising operational improvements before capital investments achieved a 10-20% increase in efficiency within six months, compared to an 8-15% increase for those that prioritised capital investments first.

Imagine a scenario where a production line is underperforming due to low asset efficiency. The decision to improve performance should be weighed against the option of replacing the asset. Improving existing assets through targeted efforts often offers quicker returns and requires less capital than complete replacement. Additionally, it is crucial to ensure that behaviours, capabilities, and the overall operational frameworks are in place to maximize the benefits of new capital investments. Operational readiness, as it is known, ensures that the new asset will perform optimally, providing the expected return on investment and contribute to overall business objectives.

Evaluating Capital Categories

When considering capital investments, it is essential to evaluate how it impacts the business: expansion, capability, innovation, or stay-in-business (SIB) investments. Each category serves a different purpose and aligns with distinct business needs.

Relying solely on like-for-like replacement can stagnate innovation and leave a business in constant firefighting mode. For example, replacing old machinery with newer versions without considering technological advancements or future needs may lead to missed opportunities for market innovation. Instead, capital investments should be strategically planned to not only maintain high operational efficiencies but also drive business growth and competitiveness.

Speed of Implementation: Operational Excellence vs. Capital Investment

One key consideration is the time required to realize the benefits of operational excellence initiatives compared to capital investments. Operational improvements often deliver quicker results at a lower cost, whereas capital investments generally involve longer lead times and payback periods. On top of this, when brand new assets are run without consideration of an improved operational capability, the asset performance will very quickly return a similar performance of the aged assets.

A targeted operational excellence initiative can start delivering value within three months. For instance, by optimising existing processes or implementing lean manufacturing techniques, a company can quickly reduce waste, improve efficiency, and enhance product quality. These improvements typically require minimal capital outlay compared to large-scale investments. According to the Institute for Supply Management, businesses with well-aligned operational and capital strategies experience a 15-20% higher return on investment over five years compared to those without such alignment.

Conclusion: A Strategic Sequence for Maximising Value

To get the most value from capital investments, a strategic sequence that integrates operational excellence with capital planning must be considered:

Set Strategic Goals: Clearly define your business objectives and the role of operational excellence and capital investments in achieving these goals.
Analyse Losses: Conduct a thorough analysis to identify inefficiencies and performance bottlenecks within existing operations.
Design an Operational Implementation Plan: Develop a detailed plan to address identified issues through targeted operational improvements.
Supplement with Focused Capital Investment: Augment the operational improvement plan with strategic capital investments that enhance overall value and support long-term business objectives.

By following this framework, businesses can establish a solid foundation for operational excellence and ensure that capital investments are aligned with strategic goals, thereby driving sustained performance improvements and business growth. This integrated approach not only maximises the return on capital investments but also positions the organisation for ongoing success in a competitive market.