Regarding procurement digitisation, enterprises often consider the supply chain as crucial for creating the product. They don’t think twice about using digital procurement software to keep the manufacturing process in motion to purchase goods from suppliers. These operational expenditures (OpEx) are important to keep the business running. However, organisations fail to realise the importance of procurement in capital expenditure (CapEx). CapEx involves purchasing of large items such as custom machinery for production, building materials for expansion, etc. These oversized items are not purchased repetitively and are usually considered investments for a better business future.
Difference Between CapEx and OpEx Procurement
The procurement team is actively involved in OpEx procurement because it is done daily, and detailed supplier information is available for better sourcing. On the other hand, CapEx purchases are carried out by project managers and concerned department heads without notifying the procurement team. Usually, the procurement team is notified at the last minute to create purchase orders.
OpEx and CapEx procurement involves completely different procurement models. Procuring raw materials, packaging, supplies, and office materials must be done periodically, and these repetitive purchases must be optimised for better cost savings. CapEx procurement involves large purchases that must be delivered on time. Often, these purchases are custom-made, so choosing the right supplier is crucial. These purchases are intended to last long, and are usually purchased for business growth.
Optimising CapEx Procurement
According to a Mckinsey study, organisations that employ effective CapEx management can cut project costs by 30% and increase ROIC by 2-4%. Organisations focus more on operating performance than capital expenditure, mainly because it is not a core business. Leaders can’t fully comprehend the usefulness of capital performance based on individual projects, resulting in cost and schedule overruns.
Following are the best practices for optimising CapEx procurement using a digital procurement system:
1. Involvement of Stakeholders
All the key stakeholders must be involved in CapEx management, including the procurement team. Large organisations usually organise review meetings for all internal departments to share ongoing and future investment decisions. However, small and medium-sized businesses don’t realise the importance of the involvement of procurement teams in these decisions.
2. Relationship Management
Procurement professionals must be invited to communicate with potential suppliers before the tendering process. This helps all the parties to understand the organisation’s goals and requirements. Suppliers will have the opportunity to establish their ability and understand the requirements of the buyer clearly. By engaging in active interactions with suppliers, buyers can strengthen the supplier relationships, which is crucial to negotiate in later stages.
3. Planning Management
The procurement team will also have effective procurement strategies that can be adopted for CapEx purchases. With a proper procurement plan, your organisation can find an optimal supplier, negotiate better deals, and deliver the product on time with all the necessary customisation.
4. Cost Management
There might be numerous hidden costs involved in CapEx purchases. The purchase value of the item is not the only indicator of ownership cost. These one-time expenses may also involve additional costs to investigate alternatives. Time, cost, and effort required to train for the new purchase should also be included. Organisations have to deal with the loss of productivity when the employees go through a learning curve to start using the purchase as intended. Cost management strategy should also consider ongoing charges such as license fees, maintenance costs, ongoing vendor support, etc.
How can a Procurement Solution Create Value for CapEx Management?
Using e-procurement from the early stages of the project will help your organisation establish an accurate CapEx budget. The procurement team can allocate skilled resources with market intelligence and commodity trend awareness to the capital project. The procurement leaders can develop a contracting strategy using risk-benefit analysis for cost benchmarking and performance metrics. Deloitte research shows that capital procurement excellence can improve ROI by 2-5%. Procurement software will help with CapEx management in the following ways:
1. Price Negotiation
Effective procurement practices starting from efficient planning can help your company achieve better price negotiations. With a good understanding of the suppliers and market, you can increase supplier competition and get the best cost-saving discounts from the suppliers. The procurement software also helps you establish non-cost parameters for negotiation.
2. Reduce Total Cost Of Ownership (TCO)
Apart from optimising the purchase price, other aspects such as payment terms, delivery time, warranties, termination clause, ongoing support, etc., must also be considered to evaluate the total cost of ownership. By establishing open communication with the suppliers using the procurement solution, your organisation can negotiate based on different integrated clauses to bring more value. This is why early-buyer involvement is crucial.
3. Rock Solid Contracting with Guaranteed Compliance
After negotiating, e-procurement can help you to draft solid contracts automatically based on agreed-upon terms. The legal department can consult with the buyers to verify the contracts because this contract outlines the investment rules and includes contracts for ongoing licensing, support, and maintenance. It is essential for risk management, compliance assurance, project pipeline implementation, and much more.
Organisations must develop a new approach toward CapEx procurement in the following stages:
- Document guidelines to develop a standardised CapEx procurement process.
- Create a cross-functional team to appraise and evaluate CapEx investment.
- Develop adequate project evaluation techniques.
- Digitise the process with a procurement solution.
- Review the process for effective monitoring and control.
Procol is one of the most comprehensive procurement software that can be customised for both OpEx and CapEx procurement. Schedule a demo with us to learn how to optimise your CapEx procurement to improve efficiency and reduce TC