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Efficient Capital Expenditure

Replace assets with low operational efficiency

Spending capital on replacing an asset with low operational efficiency due to high expenditure can improve the ROA for an organization. High expenditures could be due to either poor inherent reliability, in which case both operational efficiency and asset use efficiency will be influenced if the asset is replaced, or expensive maintenance costs due to poor asset design.

Figure 16: Capital expenditures on asset replacement with lower overall expenditure

Figure 17: Capital expenditures on asset replacement with lower overall expenditure and improved reliability

Increase asset base capacity

The ROA for an organization can be improved through increased production capacity as illustrated in Figure 18 by:

  • Enhancing the capacity of existing equipment.
  • Installing additional assets to add to the organization’s production capacity.

Figure 18: Capital expenditures to increase capacity to generate revenue

Tip from The (New) Asset Management Handbook Revised Industry Experts

Of course, there are times when market conditions and financial constraints require less investment that is optimal. Organizations practicing asset management are better prepared for such conditions because they have a clear picture of the outcomes of decisions and can prioritize investment, even when limited.

The asset management approaches expressed in the New Asset Management Handbook are designed to connect top management to the physical asset base using a concept called line of sight. Asset management frameworks require that value and acceptable risk be defined and understood at all levels of the organization. This provides the alignment in decision-making at all levels of the organization to deliver value from assets at an acceptable risk level.

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