CAPEX

PROCUREMENT

WHAT IS IT?
HOW TO OPTOMIZE IT?
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 What is Capex?

A capital expenditure, or Capex, is

money invested by a company to
acquire or upgrade fixed, physical or
nonconsumable assets.

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 How to calculate capital
expenditures
Formula:
CapEx = PPE (current period) – PPE
(prior period) + Depreciation (current
period)
1.Retrieve your company's financial statements, including
cash flow statements, income statements etc.

2.Subtract the value of your current fixed assets from the

value of the fixed assets from last year.

3.Subtract the accumulated depreciation.

4.Add the total depreciation value to the difference

between fixed assets the current year and previous year.
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EXAMPLES

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MAJOR CHALLENGES IN CAPEX PROCUREMENT

• The major challenge in the traditional approach

for Capex approval and procurement is its long,
slow, and inefficient processes

• Unclear definition of approval limits, absence

of a comprehensive purchasing policy

• Lapses in planning, multiple approvals, and

repetitive and recurring processes at different
sanctioning levels

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OPTIMISING CAPEX PROCUREMENT

According to a McKinsey Study, organizations that employ effective

Capex management can cut project costs by 30% and increase ROIC by
2-4%.

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TRADITONAL CAPEX PROCUREMENT MODEL

• In a traditional project manager–procurement manager relationship,

the project manager is part of the business unit or plant organization
and the procurement professional is part of a centralized, shared
service.
• The project manager develops the technical specifications, which are
tailored to the way the plant prefers to work.
• In effect, the technical specifications establish de facto business
processes, addressing items such as shop drawing reviews, schedule
coordination, acceptance procedures, and contractor reporting.
• This approach fails to involve procurement until after
key decisions are made, relegating the procurement
team to a well-defined solicitation process that
culminates in tough, structured negotiations.
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KEY CONSIDERATIONS OF CAPEX

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 A SAMPLE STANDARDIZED
AUTHORIZATION MATRIX

Sample
Sanction/Authorization
Matrix

Approval Limit (USD)

$10
Level of Responsibility <=$ <=$ 1 <=$ 2 <=$ 5 <=$ 20 >$ 20
K-
500K Million Million Million Million Million
50K
Board of Directors √
MD/ CEO √ √
Executive/Senior Vice
√ √ √
President
Financial Controls
√ √ √ √ √ √ √
Director/CFO
Functional Director/Head √ √ √ √ √ √
Project
√ √ √ √ √ √ √
Manager/Requester

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CENTRALIZED CAPEX APPROVAL MODEL

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 OPTMIZING CAPEX PROCUREMENT

• Documentation of Guideline and Standard Procedure

• Cross-functional Team for Appraisal and Evaluation

• Appropriate Project Evaluation Methodology i.e decide on NPV method,

IRR method, accounting hurdle rate, rate of return, payback period, and
economic value

• Process Automation (E-Platforms)

• Focus on Effective Analysis on Total Cost of Ownership (TCO) / Life

Cycle Costing (LCC)

• Regular Review for Better Control & Monitoring: @Ravi Nishant

 HOW CAN PROCUREMENT HELP IN CAPEX
ACQUISITION?

• Defining Consistent Buyer/Supplier Business Processes Across Business Units.

• Defining Consistent Terms and Conditions Across Business Units

• Elevating Supply Market Research and Analysis

• Analyzing CAPEX Data to Identify Enterprise-wide Contracting Opportunities

• Scope Options for CAPEX Purchases

• Building Broad Approved Supplier Lists

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