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Capital Requests Hinge on Just Three Letters: ROI (Part 2 of 3)

“How can an on-premise laundry manager most effectively demonstrate to administration (or a for-profit textile rental operator demonstrate to financiers) the need for capital improvements and renovation in his or her plant?”Equipment/Supplies Distribution — Donnie Weiland, Tingue, Brown & Co., Alvin, Texas
How many hirings or promotions are based on prior performance? It’s not too often nowadays that someone of authority will take a chance on an applicant based on his “gut.” He wants to know what kind of results this person has produced, their track record.
The same holds true when it comes to decisions related to money. The “Big Guy” wants to know some numbers before agreeing to spend more on capital improvements or renovations. This is especially true in these tight economic times!
This one fact is the strongest reason to go about the daily grind in the same way a duck paddles — his webbed feet may be going like crazy underwater, but those watching from the shore see him gliding smoothly across the surface. It’s about staying calm and cool.
Being able to do this in business connotes an assuredness that almost anyone, including the Big Guy, can like and have confidence in. The moral of the story: If you do the right things consistently, you will most likely be noticed, appreciated and rewarded!
[NP][/NP]When you consider improvements you want to make, by all means calculate the ROI.
In most organizations, people are usually the most expensive budget item. Therefore, the criterion one can use most frequently to determine ROI is employee reduction, or lowering the number of FTEs (full-time equivalent).
Reductions can also be accomplished by enhancing workflow, such as reducing or eliminating redundancies, using newer tools to expedite processes or getting a better handle on replacement-parts inventory.
Make your presentation once you have solidified the numbers. Keep in mind that you want to show your plan’s “reward” — make the Big Guy visualize it and he’ll want it, too!Equipment Manufacturing — Joe Gudenburr, G.A. Braun, Syracuse, N.Y.
Many would argue that now is the time for an operating laundry to hunker down and cut back on all expenditures. If the facility has relatively new equipment, is already efficient and produces exceptional product quality, then this argument may hold water.
But if your facility has opportunities to improve its use of labor, bolster operating efficiencies, reduce energy and chemistry costs, or significantly reduce overall costs to sustain the operation, then there is a compelling argument in support of making such an investment.
As an OEM, I have seen both sides of this argument play out over the last 24 months. I would argue that those who had a clear understanding of how they could improve their operating performance through investing in new technology or in retooling older facilities have been able to realize a sound return.
These same companies, in many cases, leveraged a slightly less demanding time to allow them to cost-effectively implement change and improvements without disrupting their service to clients. Because of their strategic decision to continue to invest in the needs of their operation, they now have a more efficient facility. This opens new doors to further enhance their cost structure.
[NP][/NP]On the other hand, I have seen organizations suspend their spending for maintenance, and cannibalize idle equipment in order to keep their cost structure as lean as possible. This approach will provide a short-term return but could potentially result in an exponentially heavier financial burden.
We are not going to see an immediate economic recovery, but rather a gradual improvement over an extended period. In such an environment, needs only become magnified if they are not addressed, resulting in a painful operating situation. This will take the form of reduced efficiency, inconsistent equipment and operations performance, reduced end-product quality or service rates, and quite possibly unplanned capital spending.
You may say this all makes sense, but how do you go about justifying to the powers that be that now is the time to address equipment and infrastructure needs?
It all comes down to showing that any investment has a compelling ROI associated with it. No one will, or should, authorize spending without a logical ROI. Typically, a ROI will take the form of one or a combination of five categories:

  • Sustainment of Core Business/Reduction of Ownership Costs — The bottom line is that if you decide not to spend the money on improving your facility, it could result in an inability to sustain your core business or lead to a rapid escalation of costs to keep the plant running. Arguably, if you are at this stage, you are already suffering from having failed to continuously invest in your operation.
     
  • Energy/Aqueous Chemistry/Waste Reduction — Depending on the vintage of equipment and facility you run, there may be an exceptional opportunity to harvest savings in each of these areas.
    Most plants that are being retooled today are realizing natural-gas savings in the 25-35% range. They are saving electricity through the use of inverters and improved productivity, cutting water usage as much as 60% or even more, and reducing costly waste streams every day.
     
  • Labor Savings — In the wash room, there are opportunities to automate manual facilities. The larger savings opportunity typically lies in the textile-finishing or material-handling area of a plant. There are a host of dynamic solutions available that can allow plants to rid themselves of one-dimensional processing solutions as well as nonvalue-adding “touch” labor.
     
  • Efficiency/Productivity Savings — If the capital investment allows for greater productivity, it affords the business the ability to spread fixed costs over a greater volume of products. This improves profitability and provides greater pricing flexibility as sales forces compete to retain or secure new business.
     
  • Quality — This may take the form of reduced rewash, improved garment life, or enhanced end-product appearance. It may also result in better employee morale.

It can be argued that all are forms of productivity, but the quality metric is an important one that merits discrete attention.
Each of these areas can provide for a compelling argument to invest in your people, process, equipment and infrastructure. In reality, owners and operators are not faced with a yes-or-no decision when it comes to spending. More importantly, they are faced with the decision regarding how much spending is justified given the full review of their laundry’s commercial and operational performance.
A down economy can and does provide for a great opportunity to invest, as long as it is done wisely. Those who do will be prepared to take on new business, diversify their revenue streams, and weather a prolonged soft economy. Those who don’t may find the waters very rough.ATTENTION: American Laundry News Seeks Applicants for 2011 Panel of Experts; Nov. 17 Deadline to ApplyAmerican Laundry News seeks the contributions of today’s leading laundry and linen services professionals as it prepares to select its Panel of Experts for 2011. The magazine is seeking panelists who are actively involved in promoting the best interests of institutional or on-premise laundering and/or textile rental services.
The magazine will choose representatives from several industry segments, including hotel/motel laundry, healthcare laundry, linen supply/commercial laundry, textile/uniform rental and others, to contribute to monthly articles that will appear in American Laundry News and on www.americanlaundrynews.com throughout 2011.
Those interested in applying are asked to e-mail Editor Bruce Beggs (bbeggs@crain.com). He’ll supply a link to an online application that must be submitted by Wednesday, Nov. 17, for parties to be eligible for selection.Please check back Wednesday, Nov. 3, for Part 3 of this story.
Click here to read Part 1 of this story.
 

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