Business/Organization: Client is having multiple plants. Client manufactures copper parts for the electronic industry. Client supply parts to Amazon, Toshiba and Godrej.

Business challenge: Client is not getting good results with the Cost improvements initiatives. Historically they are improving costs related to raw material costs and conversion costs. They have explored initiatives for purchasing excellence, design innovations, lean, or six sigma approaches. These initiatives initially feel lucrative, and they gave competitive advantage. However, client see diminishing returns over time with these initiatives.Clients operation is turning to be CAPEX hungry. Every year each customer’s prerequisite is to invest in in the CAPEX. More CAPEX means more products and more variants. If an organization declines for the CAPEX expenditure, then it’s competitor will invest in the CAPEX. This may result in reduced market share. There will be a risk of negative growth. Capex spend is significant. The fact is they end up spending around 4-9% of revenues on capex. Moreover,CAPEX is CFO or finance department headache. It is not an indicator of company’s performance. Operating or plant managers did not have really involve in CAPEX amount and its proper utilization efficiency. However, their stake holders do worry about the low utilization of the CAPEX.

CAPEX amount and its utilization was overlooked because of various reasons mentioned below.

1. Capex was viewed as an output. 
2. Capital is owned by the CFO and not the line managers. Only CFO cared about capex.
3. Savings from a capex efficiency initiative is viewed as a 1-time savings. Savings in material cost or conversion costs are ongoing. Savings from balance sheet items, like inventory or capex, are one-time. That is, unless your initiative focuses on implementing the processes and capabilities required to drive capex efficiencies, in which case the savings will be recurring.
4. Capital is the smaller lever when compared to material cost or conversion costs, especially on high volume programsHowever, if material cost has been optimized for years, that level of opportunity may no longer exist.
5. Capex efficiency is difficult to measure. It was believed that capex is an enabler to build product. You may deploy more capital in a process in order to increase the level of automation and lower the labour cost. That would be a good use of capital. There are measures to assess how effective and efficient your capital spend is, but there is no silver bullet metric to compare project to project, division to division, or company to company.

Consulting solution from Odyssey Consulting: Caring about capex is one thing but doing something about it is quite another. Measuring efficiency of CAPEX spending is the best way to ensure good returns on the expenditure. CAPEX utilization efficiency enables growth. Hence our team measure CAPEX efficiency for each project and working on improving it.

Results: Achieving 20% more efficiency in your apex was a game changer. The good news is client after launching capex efficiency initiatives were typically handsomely rewarded. We worked with few companies on the topic of Capital Productivity and in each case, we have found capex reduction opportunities in the range of 15-30%. Executives today have dozens of initiatives on their plate at any one time. However, consider the following questions when assessing whether now might be the right time to launch a capex initiative:

• Is the level of capex available constraining the amount of programs you are developing?
• Do you have programs with sub-par returns which you could take on if the capital were reduced and the ROIC increased?
• Are your capacity constrained, driving the need for new equipment and facilities?
• Are you expanding or shifting your manufacturing network, resulting in the launching of greenfield or brownfield plants?
• Are you seeing deteriorating returns from your material cost and conversion cost reduction initiatives?

Answering yes to any of these questions could indicate the timing is right to take action.