Align capital strategy and allocation with corporate strategy
Companies that can manage capital projects well can transform their overall strategy into a single business unit or regional capital strategy. If the overall strategy cannot be clearly translated into the allocation of component business, then the strategy is unlikely to produce the expected results. In order to allocate capital correctly, chemical manufacturer must closely consider the risk return situation of each business unit or region.
Some best practice chemical manufacturers ensure that projects are aligned with the overall strategy and have appropriate priorities. Because many projects are small, the allocation is often done at the business unit or product line level, which makes it necessary for companies to adopt strict processes to ensure that expenditures are consistent with the overall strategy. For example, to ensure a close link between high-level strategy and small project execution, a diversified chemical company has added a door to assess how the goals of any project relate to strategy. At the same time, the company ranks the assets it considers most critical to its overall strategy.
Leading companies also ensure that projects are viewed in terms of the overall value they create for the company. This method usually leads to the conclusion that the project should not continue, and the goal of value creation can be achieved in other ways. This process constitutes an important release mechanism, which enables chemical companies to get rid of the “engineer thinking mode” of some companies, focusing on the implementation of the best possible engineering projects without considering the creation of value.
Best practice also requires the establishment of a system to monitor capital expenditure on a regular basis. An interdisciplinary reporting meeting is held every year in a multi business group of chemical manufacturers. The engineering and operations director will summarize the total expenditure, the rate of return on capital deployed, the snapshot of project status, as well as the capital expenditure priorities and project progress of each department. This ensures discipline in the annual capital expenditure cycle.
