Weissr

White paper · The Capex process

The tailwags the dog.

How tactical capex decisions run company strategy, and why the capex process leads to massive capital destruction.

The Tail Wags the Dog white paper cover

Inside the white paper

"We only do high NPV projects."

Almost all companies in all industries evaluate capex decisions in basically the same way. The white paper describes how that process, and how universities teach us to make capex decisions, leads to massive capital destruction.

It builds on work that began in 1994 and on Asset Strategy projects in more than 500 mills and plants since 2004. The examples come from pulp and paper, but the principles apply to any capital-intensive industry.

  • Why a short payback can point capital at the mills with the weakest future
  • Why the deltas of projects in the same capex plan overlap each other
  • How a hurdle rate above the capital cost moves even more capital to struggling assets
  • Why ROCE and other P&L and balance sheet measures give corrupt information at mill level

A system of 10 mills

The future is in one place. The capital goes somewhere else.

The white paper sorts a business of 10 mills into three categories and asks how a normal year's capex is split between them.

Category A

~80%

of future total cash flow

Close to state of the art technology. Represents about half of the capacity.

Category B

75%

of the capital

Aging assets with a growing technology gap, often with environmental and safety issues.

Category C

3–5%

of the capital

The mill the company expects to close within one to three years.

Categories B and C get 95% of management attention. In the authors' experience, a company loses a value of at least 30% of its capexes every year.

Why it goes wrong

Three basic reasons companies fail.

The first two are present in all companies, and they have to be there. The third can be thrown out today.

  1. Reason 1The capex process is a bottom-up process.
  2. Reason 2Delta calculations are used to evaluate the benefit of a capex project, and the projects are evaluated one by one, in isolation.
  3. Reason 3ROCE (or ROOC, Re, EVA, or any other P&L and balance sheet based measure) is used to prove the performance of the mill.

From the white paper

"The calculated payback simply never happens, even if assumptions turn out to be true in the future."

The capex process is so strong that it sets the strategy for the assets. When the capex process determines the strategy, the white paper calls it "the tail wags the dog". Every company that invests in fixed assets needs an Asset Strategy that governs capex allocation.

Contents

Three sections, from the single project to the whole system.

  1. 01

    What really creates a short payback?

    • The everyday capex situation
    • Misunderstanding the value of a capex project
    • Actually, reality is worse
  2. 02

    The tail wags the dog: how tactical capex decisions run company strategy

    • Competitiveness over a lifecycle
    • How capital and other resources are allocated in a system of mills
    • Why it goes wrong
    • The tail wags the dog
  3. 03

    The "creative destruction" funnel

    • Began the work in 1994
    • Going concern, the route to capital destruction

Continue exploring

Put an Asset Strategy in charge of capex.

See how Weissr Capex Strategy compares strategic alternatives for the whole asset base before projects enter the capex process.