Capital Expenditure Allocation Software

Capital Expenditures (CapEx) consistently fail to deliver the anticipated return on investment. There are three primary obstacles that prevent companies from achieving the maximum return from their capital allocations:

Isolation - This is perhaps the most costly root cause of underperforming capital. Capital investments are routinely initiated at the departmental level without regard to impact on ancillary departments or functions. For example, operations invests in a new packaging and labeling machine that doubles throughput, only to realize later that shipping cannot code and load trucks at the improved rate.

Relationships and Interdependencies - Once investment decision-making has moved from isolation, executives must consider the relationships each investment has on correlating investments or activities. In other words, investments impact investments; therefore, optimal decision-making requires the ability to mix, match, and sequence investments. When evaluating capital spending and opportunity investing, top brass must see the big picture.

History - Another critical disconnect is the use of heuristics and history for projecting the financial impact of an investment. Average costs and margins derived from the “plan of record” are consistently off target. This occurs because historical costs cannot consider the marginal impact an investment may have on key variables such as processing costs, input prices, and tax liabilities.

Additionally, when it comes to robbing a company of Return on Invested Capital (ROIC), Excel® is often a key obstacle. Historically, Excel has been the “tool of choice” for estimating ROI, and rightly so since a superior alternative was not readily available. Yet Excel, with its high-level of acceptance and pervasiveness, continues to distort CapEx allocations because of its modeling limitations. For example, Excel cannot account for the marginal impact of the investment on key variables such as input prices, processing costs, diminishing returns, end-product prices, or even tax liabilities. Furthermore, Excel cannot assess all investment projects simultaneously and over time, in a dynamic, holistic model of the business. Nor can it calculate the true marginal economic impact of each project, or define the optimum collection of expenditures within a portfolio of projects.

River Logic’s CapEx Solution
Enterprise Optimizer (EO) enables managers to determine which decisions best support a company’s strategic objectives and deliver the highest financial gains.

Through Integrated Business Planning (IBP), EO incorporates activity-based costing, constraint-oriented process modeling, and comprehensive financial modeling. Specific elements of EO’s CapEx solution include:

• Providing a single model using operational, financial, and KPI metrics as well as business constraints
• Identifying true performance drivers using a system-wide view of the business, with all variables, interdependencies, suppliers, channel partners, and customers
• Utilizing ABC methodologies for calculating full costs and profits
• Quantifying marginal opportunities, including all variables (e.g., input costs, resource productivity, etc.) to yield an accurate measure of “what would happen with the next unit of work”
• Determining the impact decisions have on Cash Flow and Balance Sheet items
• Identifying and quantifying new opportunities while considering existing commitments, constraints, and opportunity costs
• Optimizing performance by defining the best solution in a given scenario, using financial, operational, or key performance indicator (KPI) metrics as the objective function