CapEx vs OpEx—Which is Right for You?
CapEx vs OpEx: which makes sense for your automation budget? MHI's Solutions Community breaks down the pros, cons, and when to choose each.
By SOLUTIONS COMMUNITY
Understanding when one expenditure makes more sense than the other is key to affording automation.
Warehouses can require an enormous amount of equipment and automation to run efficiently. Everything from lift trucks to racking, robotics, conveyors, sorters and more populate the space, and they are essential to getting the materials out the door quickly and efficiently. There’s also the software that orchestrates it all, everything from WMS to WES and WCS.
While much of this automation is necessary—and even table stakes—today, the question of paying for it all remains a challenge. But you’re not locked into a capital expenditure (CapEx) for all of it. There’s also the increasingly common option of budgeting for automation through an operational expenditure (OpEx). What’s important is understanding the pros and cons of each option and knowing when to use one versus the other.
CapEx and OpEx will impact your budget in different ways, but ultimately, you’re aiming to choose the one that will increase your productivity in the most affordable way possible. This scenario will look different for every company, and also for every piece of equipment on your floor.
Before you can decide between them, you need to understand what both CapEx and OpEx are exactly.
CapEx is the money that you spend to purchase, maintain or upgrade a piece of equipment. You need a new conveyor, so you budget in to purchase it, with an eye on long-term usage. The purchase is a one-off, and you will own that asset for the time it exists on your floor. It will need to benefit your business for at least one year to meet tax rules and make fiscal sense. If you later on decide that you no longer need the asset, the onus is on you to sell them.
OpEx, on the other hand, is the category that covers your daily expenses for running your business. When it comes to equipment and automation, that generally means you’re shifting your expenditure into a recurring structure. You’re using a product or service and paying an equipment manufacturer to use it for whatever time you need it. You don’t own the equipment and generally, if you need to upgrade it during the period of the service agreement, that’s included in the pricing. OpEx is not exactly a rental, but it follows a similar format to renting. For instance, if you bring in a fleet of autonomous mobile robots (AMRs), you’ll be responsible for them while under your roof. Once you’ve finished using them or it’s time for a change, you simply reach out to the service provider and turn them back in—you’re out nothing at that point.
Most often, warehouses use OpEx with robots, or Robotics as a Service (RaaS), which closely resembles the Software as a Service (SaaS) model. In this model, contracts will vary, but providers supply the AMRs and other types of robots to the warehouse through a pay-per-use plan. This may include maintenance, software upgrades, training, remote assistance, or replacements, if needed. This frees the warehouse up from upkeeping robots, and can reduce the operational complexity of the equipment, which can be a real advantage.
You’ll be less likely to employ OpEx for equipment like conveyors or sortation because they’re a more fixed type of equipment. If you invest in laying out a long, complex conveyor system, it doesn’t make much sense to use OpEx; that conveyor will likely be on your floor for years to come, and disassembling and replacing it would come with a large investment in time and money.
One of the biggest determining factors between OpEx or CapEx is your need for flexibility. If you think you may be scaling in the future or have a wide range of customers with varying needs, you might want to go with OpEx. OpEx can be effective if you want to move on equipment quickly and know you likely won’t use it beyond seven years.
CapEx requires more cash outlay at the outset, but over time, can be the better bet if you’ll be keeping it for a long period of time—beyond seven years. Here you’ll be paying upfront, but it will stay on your balance sheet and you can depreciate it over time on your tax ledgers. If you know your business model is stable for the long run, CapEx can make sense.
There’s also a third model, which serves as something of a hybrid. This is a leased model, where you agree to paying for a certain period—say seven years—and at the end of the period, you buy the equipment. This option works like a RaaS model because it requires no upfront cash layout. You’ll spread your expenses over the years, but at the end you still own the equipment.
The good news is that today’s material handling equipment offers several options to make it affordable. Each company needs to weigh the pros and cons of the models and then move forward however makes the best sense.
Want to learn more about OpEx and CapEx for material handling automation? Visit the MHI’s Solutions Community here.
Contributor: Bob Jones, Integrated Systems Design
Reviewed by: Solutions Community Marketing Committee
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