Capital expenditure project prioritization for Japanese railway company

A leading railway company has many business units, such as retail and real-estate development in Japan. The company’s growth strategy depends on the growth of business units other than its stable, cash-cow railway business.  The company, therefore, tried to restrict the railway business’s CAPEX (capital expenditures) and divert cash generated by the railway business to other business units with more growth potential.

Challenge
Because the company did not have clear criteria for prioritizing capital projects, there was a risk that they would restrict the projects with high priority or that transparency and acceptance of investment decisions would be lost through the CAPEX reduction process.

Approach
A.T. Kearney worked with the railway company to develop a framework for prioritizing capital projects. The team prioritized more than 200 capital projects by applying the framework with the following steps:

  • Assess the need for capital investment – evaluating impact and likelihood of achieving objective of each capital project
  • Determine the project category and importance (weight) of each category
    • Group investment projects that have similar objectives and effects into categories, to prioritize based on similar attributes
    • Assign each category a weight that represents the category’s importance relative to others through “paired comparison analysis”
  • Develop an investment policy for each category – reviewing the competitive environment
  • Develop priority scoring criteria for each category – selecting attributes, assigning a weight to each attribute, and setting scoring criteria of each attribute
  • Prioritize capital projects based on developed priority scoring criteria and weight of each category
    • Score each capital project based on category’s scoring criteria
    • Considering category weighting, sort (prioritized) capital projects by their importance / effective score and amount of total investment

Results
The railway company prioritized more than 200 capital projects for 4 investment categories and rejected more than 10% of capital projects based on priority scoring.

Contact

For more information, contact Hitoshi Kuriya