Globalization puts onus on critical capital expenditures
Warehouse operators should develop work sheet to evaluate critical needs
Current global beverage business conditions have had a significant impact on operating and capital budgets in all industry segments, including the supply chain. Why has this occurred? What has actually happened? How has the industry addressed the results from the changing conditions? What suggestions might be appropriate and helpful?
Numerous situations could contribute to a critical situation. The following are some examples.
Producers are acquiring distributors, many are merging with other producers and some are being reallocated in franchise transfers or eliminated. Reporting sources, retail market conditions, geographical consumer tastes, economies of scale, cost reductions or, to some extent, regulations, all contribute to these transactions.
As a result, beverage producers and distributors now are confronted with resetting priorities, reassessing strategies and rethinking philosophies, which involve both operating and capital expenditure budgets for the near and long term.
Experience, observations and recent discussions have provided a reasonable basis to determine which operations perspective is necessary to make the adjustments required in operating facilities, staffing and knowledge base.
Because the current situations prevail in most beverage segments, it is important to recognize and realize that current conditions exist in four major areas: real estate, machinery and equipment, marketing equipment, and vehicles.
Within these areas, beverage operations become capital intensive in all supply chain phases; therefore, providing finances becomes a critical issue and involves detailed definition and budgeting for expenditure needs. Some owners and franchises have addressed the capital issue with previously used systems and/or procedures. However, the physical changes have brought new factors that need to be addressed, and many have experienced some degree of difficulty doing so. As such, warehouse operators need to decide which actions are timely and necessary.
Operating budgets usually are straightforward and include funds for maintaining and supporting the assets required for producing and delivering product. However, capital budgets are somewhat more difficult because the value, life expectancy, magnitude, contribution and justification for the assets each play a significant role in capital funds allocation. For this reason, capital expenditure budgeting has been labeled “critical” and should be the prime concern in these major transactions.
The critical nature of capital budgets requires a prioritized and systemic approach to ensure the budgeting result is accurate, inclusive and realistic for the operating condition it represents. Although different approaches can be used, and often reflect personal preferences, actual experience and time have shown omissions, misclassifications, compliance infractions and account coding errors can and will occur unless a systemic approach is used. Some basic steps should be considered when setting up a systematic approach.
An important initial step involves a capital expenditure budget worksheet that includes input from all departments. Worksheet development will define and organize data pertinent to all proposed capital items. Simple as it might be, many well-intended “short cuts” are used and generate unnecessary problems. At minimum, the worksheet should include category, assigned account, geographic location, fiscal year, item number, class codes, description, purpose, quantity/cost and requested funds.
For example, class codes and category stress the importance of why an item is being requested. Class codes are used to prioritize the item for reasons such as replacement, compliance or requirement, volume-related, and cost improvement. Category is used to place the item in the proper account. This is basic and necessary for laying out the capital budget format.
Although account coding structures vary, the following categories should be universally applicable to most operating facilities: real estate and improvements for facilities and support structures; machinery and equipment, including process, production and warehouse items; automobiles and trucks, including distribution and support activities; furniture and fixtures, including administrative support and computers; marketing equipment, including vendors, fountain units and related equipment; and returnable containers, which include beverage containers (if returnable), plastic shells and plastic pallets.
Once the capital expenditure budget format has been developed, the next logical steps add to the critical nature of the process.
First, capital budget responsibility should be assigned to a coordinator thoroughly knowledgeable in all beverage operation functions, such as a comprehensive supply chain understanding. Coordinator selection itself is critical to ensure acceptable results.
Second, depending on the fiscal year period, a schedule for submitting items for inclusion in the budget is mandatory for all locations, departments and functions to consider short- and long-term issues. This often is predicated on marketing plans, availability, technology development, competition and seasonal variations.
Third, justification development and submission is perhaps the most critical part of the entire process. Based on management criteria for return-on-investment (ROI) and other company policies, justification for capital expenditures becomes the traffic light for budget content.
“Critical” might not always fit, but the beverage industry constantly is changing, and capital expenditures are a top priority.