What is Capex procurement?
This blog is the MOST visited page on my website. I’m the only trainer in the world (that I know of) that has expertise in this niche area of Procurement.
I love Capex procurement (and specifically machinery procurement) because the end to end Procurement approach is quite different from the purchasing of day to day supplies that keep the business running, and requires a “big picture” mindset.
This is a very brief introduction to capex / machinery procurement, defining what it is and some of the features that make it unique.
This article is a companion to another blog on this topic.
Items like raw materials, packaging, energy and certain indirect services are of course critical to the operational and financial performance of the company in the here and now.
Capex procurement on the other hand is linked to the future strategy of the company: building new capacity to enter new markets, introducing new technology that will reduce unit costs / improve quality, or bringing a new production line on-stream that emits lower carbon emissions or offers vastly reduced waste.
Capex, like machines, have a long lifetime (10-25 years) so the capex purchasing decisions you make today will impact the business for years to come.
It’s usually a very high-cost investment and in the case of fixed assets is very difficult to undo the decision.
The supply market is often heavily consolidated due to high economic and technical barriers to entry, so commercial leverage may be less than the leverage you typically enjoy on direct materials.
From a Finance point of view, Capex is added as an asset to the balance sheet and reflected on the cash flow statement, unlike direct materials that show up in the profit & loss (“P&L”) account.
The purchase price is unlikely to be the largest cost component over the lifetime of the investment. The equipment will continue to incur myriad other costs prior to start-up and throughout its lifetime. Think of it like the iceberg, opposite, with the tip of the iceberg representing the purchase price.
Consideration has to be given to how the equipment will fit with your existing machinery infrastructure – will it require adaptation or will it simply slot in to your existing set up?
This same point applies to spare parts, servicing and operator training. A machine from a new supplier might attract a lower purchase price, but will you need an entirely new inventory of spare parts, will servicing be more costly, will operators have the capability to switch seamlessly between machines from one supplier and another?
Finally, Capex and machinery procurement is often led by technical functions looking solely through a technical lens, overlooking the commercial risks and opportunities that exist and it is often difficult for Procurement to enter this realm.
I’ll explore this topic in more detail in a series of future blogs.
Meanwhile, if you think I could help your team understand how to successfully navigate capex procurement and how to generate maximum value from this category, please get in touch.
