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Commitment of Capital
Automation projects and facility projects share a common
trait: the commitment of large amounts of capital for
long periods of time. The typical commitment is 5 to
10 years in duration, with options extending the useful
life of the commitment by another 5 to 10 years. The
company can benefit(or suffer) from the choices made
at the time of commitment for a long time.
Opportunity Cost or Value
The best time to change things is when they are already
changing. If money must be spent no matter what, then
usually other things can be accomplished at the same
time with small incremental cost. High Opportunity Value
can be created, but the client must "Seize the
Moment". If the opportunity is squandered, then
there can be a High Opportunity Cost. The net effect
can be seen in overhead costs and product costs for
many years.
Converging on the Solution
Making decisions is really nothing more than making
choices, selecting the best of several options. Thus,
it is critical that all decisions are framed appropriately.
At SMI, our roles is to assist the client in this decision
making process. On most projects, it is quite possible
to keep many options open, while converging on a solution.
Our philosophy is to make each decision no sooner than
it has to be made.
Embracing Risk
To embrace risk, it is important to keep open as many
options as possible, even having after the capital is
committed. There are a number of available methods to
keep options open.
- Contractual Terms and Conditions. This is the primary
option tool. A long term strategy provides the framework
for contract content. The contract is where risk is
assumed or shifted to others.
- Modularity. Designing equipment and floor layouts
in a manner that provides degrees of freedom for easy
expansion to meet future needs.
- Refined Project Plan. The project plan assures that
critical details are not missed. Options can actually
be reduced if the timeline is not managed. When the
project runs out of time, the only options that remain
are the ones that can be executed in the available time.
Options Have Value
- Exit option. The exit option always exists, but is
often not considered in the contract language or financial
justification.
- Reconfiguration Option. This option exists only by
proactive management choice, and is realized through
creative design guided by precise objectives. Designing
for reconfiguration can reduce future operating costs
and capital expenditures. Both buildings and manufacturing
lines can be designed for reconfiguration.
Information Creates Options
- Absence of Information. Many businesses providing
goods and services rely on the customer's limited ability
to compile information in order to justify their margins.
An informed client/customer has more options because
they can do more with less money.
- Benchmarking. To leverage the most value, the client
needs a basis of comparison for their decisions. Benchmarking
provides comparative information that supports a value
seeking approach during the decision making process.
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