The Dilemma of CAPEX and OPEX: Decisions That Shape the Future of Companies

In today’s fast-paced business world, managing capital and operational expenses is one of the biggest challenges leaders face. Choosing between CAPEX (capital expenditure) and OPEX (operational expenditure) can significantly impact the success or failure of a project.

The Complexity of the Decision

Investing in CAPEX, which includes acquiring fixed assets like machinery, facilities, and technology, often requires a substantial upfront investment. For instance, consider a company that opts for low-cost equipment from a distant part of the world. Initially, the savings appear impressive, but this choice must be weighed against important factors such as after-sales service, lead times for parts, technical support, durability, and overall reliability.

Years ago, I was involved in a project where we imported a crusher from the USA to save costs. However, within a few months of installation, cracks began to appear, and the root cause was not immediately clear. We tried reinforcing the concrete foundations, suspecting excessive vibration was the issue, but that didn’t solve the problem. Next, we increased the number of hydraulic rock breakers at the entrance of the crusher, as the manufacturer suggested that the rock size was to blame. Unfortunately, this approach didn’t yield results either.

The downtime of the crusher while waiting for repairs resulted in significant production losses. To mitigate the situation, we had to rent a mobile tracked unit at a high cost, as we needed to ramp up production quickly. Months later, the manufacturer admitted that there was a design flaw and sent us a new, reinforced crusher. However, this did not factor in the costs incurred from hiring qualified welders, the time the equipment was out of operation, and the rental of additional machinery.

More than a decade has passed since that incident, and I recently reconnected with the technician involved at the time. He revealed that all the crushers from that manufacturer in Brazil encountered similar issues, prompting the company to redesign the product. This raises an important question: was the risk worth it?

An Example of Poorly Managed CAPEX

Another illustrative example of the importance of careful CAPEX investment occurred many years ago. A requisition for spare parts for our crushing operation was prepared, but the technical person responsible confused two similar parts. Instead of ordering a wear part that should be replaced every 30 days, he mistakenly ordered a part with minimal wear that is typically replaced only once over the equipment’s lifetime.

As a result, we ended up with an excessive order of over 10 parts, which cost about the same as three popular cars (which is astonishingly expensive in Brazil). It took considerable time to identify the error, and the improper storage conditions led to oxidation of the parts. Additionally, we recognized that there was a significant process flaw, as we did not have a well-defined evaluation stage for requisitions. This incident highlighted not only the immediate issue but also other underlying problems within our processes. By the time we figured out what had gone wrong, the person who made the request had already left the company, and the parts had deteriorated. Unfortunately, the company had to absorb this loss, underscoring the critical need for careful management and precision in these decisions to ensure profitability.

The Delicate Balance

Finding a balance between CAPEX and OPEX is essential. A thoughtful analysis is necessary to ensure that investment decisions align with the company’s strategic goals. This involves:

1. Strategic Planning: Understanding future needs and market trends.
2. Risk Assessment: Evaluating the risks associated with each investment type and their long-term impact.
3. Continuous Innovation: Investing in technologies that can reduce operational costs without sacrificing quality.
4. Team Involvement: Engaging the maintenance and operations team is crucial. After all, “an ugly child has a father, and that father is maintenance.” The teams involved in day-to-day operations can offer valuable insights that help prevent critical errors.

Conclusion

The process of deciding between CAPEX and OPEX is a vital topic that deserves careful consideration. Every choice carries its own consequences, and ensuring that the operations and maintenance teams are prepared to navigate these challenges is a responsibility that leaders must embrace.

?Investing in the future is complex, but with the right analysis and planning, it’s possible to forge a path that not only safeguards the company’s financial health but also fosters sustainable growth.