Six Reasons for Capital Equipment Disaster
Capital projects fall short of expectations for reasons that are mostly avoidable
In my first postcollege job, I was a manufacturing engineer for Cummins Engine Co. in Columbus, IN. Two weeks into the job, my boss came to me with a project to purchase an industrial wash system, and I leaped at the opportunity. It was a disaster.
I didn’t know where to begin searching for a supplier. I had never prepared a request for quote and our cleanliness specs were vague (how dry is dry and how clean is clean). I didn’t order some options that would have been helpful in cleaning filters, so we needed add-on equipment and the budget was busted. The equipment arrived and I had not prepared the area for its placement, so it sat on the dock for a couple of days. We scrambled to clear the area and set the drops for the machine. In short, my first project was late, out of budget, and borderline on performance.
That was 24 years ago. Since then, I have been a part of more than 500 capital projects. Many have been a success, while some fell short of the promised return for the company.
Projects fall short of expectations for a handful of reasons that are, to some degree, avoidable.
Capital project management is a risky business. The role of the capital project manager (CPM) is to manage risk to ensure the capital investment meets the expected return on investment (ROI). There are two main components to risk management: The first is timing, and the second is the budget. When projects are late, the ability of the company to begin recognizing revenue is delayed, and the company’s reputation with its customers is damaged. When the budget gets blown, the expected ROI is not achievable. The best strategy for managing both involves significant upfront work and vigilant communication with all stakeholders.
The Upfront Work
The upfront work involves preparing documentation that clearly articulates the vision for the project. In other words, the documentation should define success.
The CPM should have a team that can support the functions over which they don’t have direct responsibility, such as quality, purchasing, materials, maintenance, packaging, operations and product engineering. The next step is to work with that team to create a well-defined request for quote (RFQ). To do that, the team should have a clear idea of the type of supplier they are seeking to provide the capital equipment. Questions like these can help identify the ideal vendor:
- Does the supplier need to have direct experience with our product type?
- Does the supplier need specific technology experience?
- What unique qualities should the supplier have? For example, would you prefer a large company or a small one? Should the supplier provide 24-hour service? Should it be experienced with a specific PLC?
- Does the location of the supplier matter?
- How will the supplier to support the equipment after installation?
I highly recommend a supplier selection process that includes a checklist of your preferred supplier qualities, including some additional items such as timely response to requests, equipment concept and quote details. When projects go south, good documentation will help sort through the responsibilities. The better the definition is in black and white, the lower the risk of being left holding the bag when disaster strikes.
The best CPMs keep stakeholders up to date regarding the project’s status. One tool we teach CPMs to use is an executive summary. This is a two- or three-page overview of the project, including the vision, expected ROI, key milestone dates, team members, management sponsors, budget and status.
The executive summary should be updated each month and shared with the company’s management to keep them in the loop as to the project status. All internal and external project meetings should be summarized and shared with the appropriate team members. The CPM should have a prioritized, and up to date, list of open issues to help manage the day-to-day efforts to bring the project in on time and within budget. The importance of regular, documented communication cannot be overstated.
Six Types of Disaster
Poor vendor selection is the No. 1 reason capital projects fail. Just because a company meets the budget does not mean they qualify as a competent vendor. Selecting a vendor is akin to marriage. After you commit, a piece of equipment will result from the marriage. Choosing the wrong partner will result in a nightmare, because there is no easy way out after the project has begun.
I have had customers select vendors simply because they were located nearby, and their engineers could live at the vendor’s facility if necessary. The flaw in this thinking is that you don’t control the vendor’s resources. Just because your engineers show up at the vendor every day does not mean it will comply with your expectations.
Choosing the lowest bid is another excuse I have heard many times, and these customers always get what they pay for. When you buy cheap, you get cheap.
“They can meet our timeline” is another common excuse for poor vendor selection. Some potential partners whisper sweet nothings in your ear to win your business, but know that they won’t meet the delivery requirements.
How do you avoid making a poor vendor selection? Get clear on the type of company you want to work with and don’t compromise during the selection process. The right fit is out there, but it often requires vigilance to find it.
Insufficient equipment funding is another recipe for disaster. Inadequate funding often happens because your company’s sales team was aggressive in pursuing the new program and did not plug enough capital funding to do the job right. This leaves the manufacturing team with minimal resources to invest in retooling or purchasing equipment.
How do you avoid having insufficient funds for new programs? Get involved in the quoting process for your business unit. As the manufacturing engineer, you understand the funding requirements necessary to do the job right. The best way to control your department’s destiny is to get involved.
The third major reason for capital disasters is a lack of parts for proper debug and runoff. Lack of parts is a significant and common issue in the capital equipment world. Prototype or early production parts are expensive, so naturally, your company wants to minimize quantities to save dollars. However, when equipment has not had appropriate run time before runoff and production, problems will invariably arise. The only way to identify programming or mechanical issues is to use the equipment. The best way to use equipment is with virgin parts because they will most closely represent the production reality. “Pay me now or pay me later” is a phrase that best represents the investment in parts for debugging a machine.
How do you avoid a lack of parts for proper debug and runoff? Get involved in the quoting process and stay engaged in initial planning meetings so you can make a case for funding the necessary quantities of parts.
Another major reason for capital disasters is not allocating enough time to complete the project. In my 20 years in capital equipment, most issues related to timing are management driven. Senior management rarely has the same urgency to approve funds as you do. Invariably, they will be out of the office and unable to review the appropriations request.
In other cases, delays can be caused by your customers. Does this sound familiar? An OEM customer promises to award your company a parts supply contract, but the official purchase order lingers on someone’s desk for six months. You’d like to start working with an integrator to build a new line to make those parts, but you can’t until the PO arrives. In the meantime, the time required to do the job right has vanished. Your manufacturing team is left to scramble to meet the launch requirements. All of this is avoidable if OEMs would simply stop playing games and treat their suppliers as true partners.
How do you avoid project timing issues? The CMP’s executive summary should always include a section for identifying the most significant risks. Delays in appropriations approval should always be noted as a significant risk to the company achieving launch dates. Management won’t like being held accountable, and that is the problem!
Design changes are yet another common cause of capital disaster. Design changes can cripple a capital project. Early in the program, you will want to inquire about the stability of the design. Has your OEM customer signed off? Is there performance or a packaging issue that still needs to be resolved? The more you understand about the potential changes, the better you will able to manage the risk.
Design changes can affect the timing and the budget for a project. If there is a design change after you have kicked off with the machine builder, it is often best to negotiate a project hold depending on the timing and significance of the changes. When projects are allowed to limp along in limbo, they incur unnecessary costs from the vendor. Design changes can cause significant issues for machine builders because they have already allocated their resources. Delays create inefficiency. Inefficiency will cost your company, and you should not expect the machine builder to absorb those costs. It’s your company’s problem, not theirs.
How do you avoid design changes? The best strategy is to get involved early to understand the areas of risk. Do your best to pin down the design group as to when they will have a frozen design. In my experience, the product design team gets a free pass from accountability to a timeline, so you must be proactive. If you see a change coming, don’t give the green light to a machine builder unless you have to for timing purposes. Alert the vendor’s team leader immediately when you know a design change is coming. Communication is vital!
The sixth major reason for capital disaster is a lack of a detailed runoff plan. The best strategy for a runoff is to get your team involved in establishing the criteria for equipment acceptance. The quality engineer should provide a quality plan and all necessary gauging. The materials group should have all the necessary parts shipped to the equipment builder. The equipment builder should provide an inventory upon receipt of parts to make sure all parts are accounted for and ready to go. The safety team should have already been to the supplier to sign off, ensuring the equipment meets safety standards. The maintenance team should have been to the builder several times to identify any concerns regarding specification compliance. The operations group should have been alerted as to the number of operators that will be required for runoff, and all travel arrangements should be made. There should be a detailed onsite plan to prep, train, and qualify the equipment to ensure that the operators are used efficiently so they can return to your plant as soon as possible.
How do you avoid not having a runoff plan? Make a plan well ahead of the actual runoff. You will want to have your team members provide you with plans for their areas of responsibility. Reviewing the plan before and during runoff is critical to keeping things running smoothly!