Permitting capital investments that specifically
accommodate an unpredictable business environment
- Capital equipment is "cost justified" in the traditional
financial sense only when it is being acquired specifically for reducing costs. The
majority of capital investment at Remmele is for equipment expected to open or expand
market potential, and that potential is the focus of the justification process. Capital is
allocated among competing requests not on the basis of financial justification numbers,
but rather on the strength of accumulated knowledge and the resulting gut feel of the
people involved in the decision. Ultimately the president, with board of director
concurrence, approves the annual total capital budget and allocation plan, but does so in
consultation with the cross-divisional management committee responsible for recommending
the annual capital plan. Remmele's president directly attributes their high hit rate on
successful market entry to the fact that they don't justify on rate-of-return financial
data alone, but rather on a broadly shared and deep-studied knowledge base. Recognizing
the unpredictable nature of their markets (aerospace decline, computer disk-drives using
less machining, etc), capital is funded from profits only, never from borrowing. So cash
availability can be the limiting factor on next year's businessbut uncertain or
mercurial markets will not catch the company over-leveraged.
- Supporting Remmele's knowledge-based intuitive approach: "Whenever
we allow ourselves to ignore the truth, the computer becomes the ally rather than the
enemy of our conceptual errors. Those who live by the numbers may find that the
mathematically inspired techniques of modernism have sown the seeds of a destructive
technology in which computers have become mere replacements for the snake dances, the
bloodlettings, the genuflections, and the visits to the oracles and witches that
characterized risk management and decision making in days of yore."1
Reducing risk and increasing return
- Capital equipment for the General Machining and Repetitive Batch
Divisions (Plants 10-20-40) is generally bought before any jobs are secured or sales
activity begun, in order to reduce the risk associated with the learning curve for brand
new technology. Investment decisions recognize equipment and technology that have multiple
uses, such as five-axis machines that can do three-axis machiningso if the bleeding
edge potential cannot be realized there are alternative ways to productively employ the
new resources.
- The company ideology leans heavily on the concept of informed risk: There
is a lot of tolerance for making mistakes if you have done your homework; but you will get
called on the carpet if you cannot demonstrate and communicate a serious homework process.
This ideological pressure comes from everywhere, not just from above: the people in the
shop have questioned why computers were purchased and want to know what was
- behind the decision. When equipment was purchased for the Production
Machining Division that didnt work out, management had to spend a long time
explaining to the shop people how they had reached the unfortunate decision.
"Decision making is a real key factor in what we do," so the decision-making
process is constantly scrutinized by everybody.
Keeping up with new technology and new process
- Remmele's investment guidelines favor new, top-of-the-pyramid
technologiesthose that offer new and under-served markets which can sustain the
margins necessary to fuel the capital and learning-curve investments. A proactive
commitment in the form of technical resources and market-search provides a grasp of
emerging opportunities. This process has led to the current push-the-envelope investments
in high-velocity machining, flexible manufacturing systems, and lights-out operation.
Conversely, Remmele turned down a major job opportunity that required too much
"new" process technology. It was new to Remmele, as they had no real in-house
experience with screw machines, but old in terms of technologyand not leverageable
into leadership competitive capabilities. Had the customer been better known to Remmele
they might have accepted the risk. "Its a question of knowing that the customer
will work with you when you try things that you are not experienced with. We prefer
customers who understand about the new-process learning curve."
Investment decision turns out to be incorrect: market doesnt
materialize or technology is insufficient
- Remmele has been known to sell off new technology quickly when it has
become apparent that the motivating potential cannot be satisfiedsometimes because
the technology is not ready for the application they had in mind, sometimes because the
suspected market does not materialize for them quickly enough. In any event, the company
is highly conscious of capital limitations and will convert disappointing experimental
equipment to cash quickly for reinvestment in other promising areas.
Different plants want different things, each on their own growth
curve
- Depreciation plus 40% of generated profits are suggested to the
divisional managers as a capital investment guideline. On occasion, some programs require
major and disproportionate capital investment relative to the divisional guidelines, such
as the high velocity machining program for the General Machining Division. When this
occurs it is evident that the company is capital-restricted, as some divisions must settle
for less so that another can utilize more than the overall guidelines suggest.
Business is capital-intensive and growth requires increasing
investments
- Corporate guidelines consider debt instruments as too risky for capital
investment funding: The nature of the business is capital intensive, and investing through
debt is a seductive path to being owned by the bank. As a result, strategic policies
restrict business to that which returns healthy margins to ensure an adequate pool for
investment; and specify that capital investment each year will at least equal the prior
years depreciation. Actual investment amounts have consistently exceeded this
depreciation minimum by a large margin. Supporting this Remmele practice: "The most
important management act is the allocation of the company's capital. It is the most
important because allocation of capital, over time, determines shareholder value. Deciding
what to do with the company's earningsreinvest in the business or return money to
shareholdersis, in Buffet's mind, an exercise in logic and rationality
.If the
extra cash, reinvested internally, can produce an above average return on equity, a return
that is higher than the cost of capital, then the company should retain all of its
earnings and reinvest them. That is the only logical course. Retaining earnings in order
to reinvest in the company at less than the average cost of capital is completely
irrational. It is also quite common."2
Adding equal capabilities for investment in areas other than
machining and process technology
- The Remmele capital investment practice is highly effective but narrowly
focused, being heavily biased by the intuitive grasp that management develops for emerging
machining technologies and markets. The industry is now on the verge of employing
information technology as a competitive infrastructure for both customer interaction and
for internal operations. To secure necessary capital, information technology investments
will compete for the same pool of funds and will not compete evenly until the same breadth
and depth of knowledge gathering and sharing is brought to bear.
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