Capital Improvement Approval Made Easier (Conclusion)

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(Image credit: Alissa Ausmann)

“How can a laundry manager most effectively demonstrate to management or institutional administration the need for capital improvements in his or her facility?”

Chemicals Supply: Scott Pariser, Pariser Industries Inc., Paterson, N.J.

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Scott Pariser

Scott Pariser

An integral part of a laundry manager’s duties is the need to be able to appropriately convey to administration the requirements for capital expenditures for his or her laundry.

Among the criterion used to justify such investment, a laundry manager ought to be cognizant of a variety of factors, to include the intermediate to long-term mission of the organization, proposed expenditure prioritization and related alternatives, and the cost benefit and return on investment (ROI) pertaining to such investments.

If the intended capital expenditure is equipment-related, the life expectancies of existing equipment must be estimated, and the respective dealers should be called upon to assist in providing any utility and labor savings available as a result of such purchases. Multiple quotations should be pursued, and the estimated costs and ramifications of not making the investment, such as implementation of emergency contingency plans in the event of downtime, should likewise be taken into consideration.

All investments of this nature should take into account the respective institution’s overall future plans. Questions like “Will the facility requirements increase over the near term?” or “Is a significant event on the horizon that might cause the laundry to relocate?” should be directed to management ahead of a request for capital expenditure so that the manager can appropriately consider and prioritize same in terms of medium- and long-term expectations.

Finally, the laundry’s overall production cost to produce a clean pound of linen should be understood by a manager relative to the alternative costs to outsource, not including any disadvantages in service that this might entail. This exercise, apart from its integral relation to capital investment, can serve as a financial baseline for quantifying the need for all potential production modifications.

Armed in the described manner, a laundry manager can properly request and justify all necessary capital expenditures to administration in a coherent, comprehensive and convincing fashion.

Textiles: Steve Kallenbach, ADI American Dawn, Los Angeles, Calif.

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Steve Kallenbach

Steve Kallenbach

Capital improvements are evaluated on return on investment (ROI). These types of improvements are machinery (including electronics) or building. In our industry, the most common capital improvement is machinery. To demonstrate ROI, the typical formula is to calculate the savings against the investment and then project how long it will take for the savings to pay for the new installation.

In our industry, that’s usually done by calculating all production cost savings, such as water, sewer, water treatment, chemicals, utilities, etc. It’s common practice to attempt a five- to seven-year model return on investment in equipment. So, if a new machine costs $100,000, the idea is to demonstrate $20,000 per year in savings (or $1,666 per month, $384 per week or $77 per production day). It’s always a bit more immediate and realistic if a manager breaks down the number to daily ROI, which will assist in “getting to the bottom line” more quickly.

Some of the factors contributing to ROI are easy to see. How much water does the equipment save per load, per day, etc., and how much does that water cost? Then, the same calculation for electricity, based on the efficiencies shown in the specifications versus the old equipment. The manager should also be able to show a bit less chemical use, and perhaps even boiler use, if the equipment will use a lower temperature or fills quicker.

These “hard” numbers are pretty easy to ascertain, and thus calculate the “visible” ROI. Involve your equipment distributor in this area; it has all the numbers you need. And if you can easily prove them, you have most of your ROI information.

But many laundry managers forget the gray areas in ROI, such as production labor savings, product flow, route savings, customer service, administrative support and management support.

For instance, if your production operation is working 10 hours per day to keep up with the flow of goods, and you install a new washer, dryer or ironer that will get your production done in eight hours per day, the labor savings is significant and should be worked into the calculation, including the overtime hours saved.

But go further: How many run-backs does the service department do for “late” goods, because the plant simply couldn’t output the production in time for the morning departure? These run-backs cost driver time, truck wear and tear, gas, management supervision and office time in taking calls from customers who are shorted. If you can prove with simple math that your additional output will assist in this area, figure out those cost savings and add them into your ROI.

Quality is another gray area of calculation when looking at equipment ROI. Take the example of an ironer being replaced, because you simply cannot get the expected quality of finish on linens while putting out goods at the required speed to finish production on time each day.

In this scenario, many times, quality has driven the decision to evaluate new equipment but typically isn’t calculated into ROI. Sit down with the service department and review all of the lost business for the past year. If the group can tie specific losses to this particular linen-quality issue, then the weekly revenue of that loss can fairly be used to calculate ROI.

If, for example, you lost a $200-per-week account based mostly on the specific ironing quality of your linen, it would be reasonable to estimate that you can save approximately $10,200 in annual revenue via the installation. This, added to the visible ROI, will assist you in getting to the number needed to show a five- to seven-year return.

So, total visible cost divided by savings should be five to seven years in most cases. Involve the equipment company in the process, and don’t forget to calculate all of the gray areas.

A final note is presentation: Get some help in putting together a proper ROI “presentation” to your management beyond a bunch of numbers on a page. Make it visual. Show the savings and ROI as the prize.

The biggest unspoken issue in capital improvement is that it’s looked at as a “cost.” An effective laundry manager needs to gather the information and then put together a visual that shows this as an investment with a return. As you prepare for your presentation to management, meet with key people in the decision chain to get their feedback on your approach. And then show the ROI.

Equipment/Supply Distribution: Todd Santoro, Cleanwash Laundry Systems Inc., Omaha, Neb.

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Todd Santoro

Todd Santoro

We meet every day with managers and administrators who are outside direct supervisory control of a facility’s laundry and who are often surprised by the capital cost of replacing their laundry equipment. In these instances, we’ve found it helpful to be prepared with the following:

  • Previous repair bills — Often, management doesn’t realize the ongoing operating costs of older equipment. Showing prior equipment maintenance costs and expected parts life-cycle estimates can be eye-opening about the true cost of ownership.
  • Efficiency differences — Comparing estimated cost savings from equipment that is as recent as 8 years old to newer, higher-efficiency models can be staggering. What really can seal the deal is improvements in options such as reversing and moisture sensing that can decrease both utility and labor costs.

By showing expected savings in maintenance, downtime, utilities and labor, combined with tax depreciation benefits, managers can find that new equipment will result in almost immediate net operations savings to their facility.

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