On a recent flight, I was sitting next to a Southwest Airlines pilot and asked him about the “things” on the end of the plane’s wings that weren’t there a few years ago. He told me that the airline was able to earn back, in under a year, the substantial cost of adding the “winglets.” The airline spent $750,000 in January and the added fuel efficiency paid off the upgrade costs that very same year, according to the pilot. The winglets lead to average fuel savings of roughly 2 percent, more than enough to recover the capital investment in less than 12 months. In effect, the upgrade was “free.” The $750,000 was “hiding” in the operating budget; it just had to be recognized.
Not all capital investments are created equal. An investment of $1 million to add a new capability may look attractive based on the five-year ROI projection. But what if the new sales take a lot longer than anticipated? That million dollars of capital will be unavailable for even more years than initially projected. It’s not unreasonable to be extra cautious when making those decisions, especially in uncertain economic times. However, this caution can be ill-advised when looking at capital investments that directly affect your company’s day-to-day operations.
I just experienced this phenomenon myself on a small scale. I have a couple of workhorse color printers I use extensively. I was intrigued by a new HP printer that uses innovative edge-to-edge technology to print at a rate of 40 sheets per minute. I asked myself why I’d invest around $1,300 for a new printer and supplies when I had a perfectly good working system. Then came the epiphany. The new printer not only prints twice as fast as my old ones, it would replace my scanner and fax machines and the power they consumed. The new HP printer consumes one-third the electrical power of my old color printer. Further, the ink and maintenance supplies would cost half that of my old printer. The money I’d save in electricity and supplies would quickly overcome the upfront cost. This was a no-brainer decision, since the money to pay for the new equipment was already in my operating budget.
Over the years I’ve facilitated strategic planning meetings where the team started out trying to solve the wrong problem. They would ask, “Where will we get the capital to upgrade our quality assurance system, or ERP software, or capacity?” Asking what the positive financial impact of the new equipment would be has led many a team to realize it was a no-brainer decision. If the new quality assurance equipment would reduce scrap by $50,000 per month, then as long as the entire cost was under $600,000, the investment wouldn’t even impact that year’s profitability.
Identifying unstated assumptions, communicating personal insights, and developing new and productive way to view issues is at the heart of the strategic planning process.
If you’re interested in having a facilitated strategic planning meeting that moves you from concept to tangible implementation, check out our service offerings online, contact us, by email or better yet, give us a call at (800) 207-8192 to arrange for a complementary consultation to determine if you are ready for strategic planning and if our program is right for you.