07 April, 2016
Capital expenditure has always been on the high priority list of every CFO agenda. Globally, the attitude towards capital spending is also taking a leap. The investment decisions regarding CapEx are critical not only because of the size of spend, but also from the point of view of an organization’s strategic goals. It has been observed that most of the time policies or the assumptions for CapEx budgeting and CapEx approval are not very clear in an organization. This article should help better an understanding of industry best practices for capital expenditure planning and considerations behind CapEx polices.
Procurement is one of the crucial parts of CapEx, but is it able to contribute reasonably in the present establishment of CapEx polices in various organizations?
As an age-old convention, organizations have been following very similar practices when it comes to procurement under capital expenditure. The project manager, who is responsible for project execution, would initiate the process as a request for capital expenditure. Usually, he is the one who understands the requirements best. The project manager has to define technical requirements for project, scope of work, project timelines, schedules, contract requirements etc. Only after this, the request has to be sanctioned/approved by the authorized managers to get a final nod for fund allocation. In most organizations, it has been observed that the procurement team gets involved considerably late and contributes only at a tactical level.
This traditional approach is not only time consuming but it also deprives the organization from gaining numerous opportunities to optimize the capital expenditure as well as the CapEx management. As procurement gets involved only at a later stage of the process, it becomes increasingly difficult to bring value to the organization through contract evaluations and negotiations. The major focus for the procurement team remains to minimize the cycle time through quick tactical solutions.
Publication: My Purchasing Center