Continuing the discussion of increasing your ROA or Return on Assets – this article will look at how procurement can improve the ROA on capital equipment. While increasing the utilization of the capital equipment currently in operation is a direct approach to improving the return on capital assets, there are so many business and operational inputs that typically fall outside of procurement’s control that it can be difficult for procurement to lead these efforts (while we believe this to be the case, we would love to hear otherwise; so, please share if, and how, your procurement group has been involved in any capital equipment utilization improvement projects). As such, our focus in this article will look at a few other ways to increase the return on capital assets, primarily the disposition or redeployment of surplus or underutilized equipment.
The Opportunity:
One of the best ways to save money is not to spend it. One of the best ways to get money is to sell something. If there are capital assets on-hand that could be redeployed to avoid additional investments or assets of value that are collecting dust and tying up working capital, unlocking this value would provide a huge boost to budgets and the bottom line.
The Challenge:
In a large, globally-dispersed operation, it can be very difficult to get an accurate enterprise-level view of the location and condition of all owned (and leased) capital machinery and equipment. To start, procurement is not always involved in the acquisition/procurement of capital equipment. Second, many enterprises lack an enterprise-level asset management system; and of those enterprises that have asset management systems, many still have difficulty using them to track and maintain information on capital items. (Sidebar: earlier this week, I presented at SAP’s Summit on Procurement where I met a Director of Supply Chain Management who had recently customized his company’s SAP SRM application to include some very advanced asset management capabilities. This shows that some procurement groups are getting more involved in asset management). Third, some other group or business (centralized or decentralized) may stake a claim to the ownership/management of these assets and resist procurement getting involved.
The Strategy
Identify unused capital machinery/equipment and heavily underutilized capital equipment/machinery and determine if it can be redeployed or sold to the benefit of the enterprise. Seek a partnership with both the business and finance in this project and seek explicit support from the CEO and the CFO. Attempt to negotiate a gain-share benefit for procurement (i.e. where 20% of every found dollar can be added to the procurement budget).
The Process:
Depending on the status of your asset management systems, this will probably be the hard part – where sweat equity will be required to generate cash equity – the inventorying and tagging all capital equipment. The high-level steps to follow include:
(1) Start by analyzing the asset management systems for the location and description of all capital assets. (2) After reviewing those systems, set up a series of meetings with finance to understand the current depreciation levels of all capital equipment – this will serve as the first check against what is captured in the asset management system. (3) Develop a starting list of capital equipment from the different systems (4) Validate the list by getting staff at the different locations to walk the site and list everything that they find and the level of utilization – most likely this be the field procurement staff; if possible, try to get as many junior accountants involved – anal-types that leave no stone unturned are wanted (5) Complete a final master list of all capital machinery and equipment and classify the different assets based upon type, age, owned/leased, and utilization
(6) With a master list in hand, evaluate the assets/opportunity and develop a strategy to sell, redeploy, or dispose of all unused or heavily underutilized assets. Seek to void or buyout any contracts for leased assets. Depending on the situation, it may make sense to engage a third-party that specializes in asset disposition like Asset Nation or GoIndustry DoveBid. Some may even be able to manage the entire program. Many offer low initial investments with gain-share programs.
ROA – Capital Equipment: one of your best opportunities to improve returns this upcoming year may literally be in your own backyard. Come to think of it, selling the backyard could be a great strategy too (property being a major capital asset, that is often underutilized).
