Manufacturing Management in Process Industries: The Impact of Market Conditions and Capital Expenditure on Firm Performance

Abstract

Process industries operate in commodity markets with low product variety, little product differentiation, and highly capital-intensive manufacturing. Because prices are volatile and demand is uncertain, manufacturing capabilities become the main strategic competitive lever. The purpose of this paper is to evaluate the interplay between market conditions, capital expenditure, manufacturing flexibility, and production capacity to effectively analyze the consequences of manufacturing investments in both the short and the long terms. In order to achieve this, we developed an econometric model linking market conditions and operational decisions. We tested the model on a sample of 480 firms from the mining sector and 1053 firms from the oil and gas sector. The results show that firms in process industries follow the market with their investments, which impacts their operations in the short term as well as their capacity growth in the long term. Additionally, from our findings, we propose a firm value driver model that managers could consider when deciding on capital expenditures. Finally, our results indicate that the managers of financially healthy companies should resist the stock market's short-term pressure to reduce fixed costs and instead play the long game.

The Long-Term Performance of Capital Expenditure from a Fundamental Perspective: Evidence from Indonesia

“…Specifically, our study analyzes big capitalization companies and proves that capital expenditure impacts long-term performance, with no proof of any impact in the short term. The results of this study contribute to the discussion regarding the inconsistent results of previous studies in which capital expenditure was found to have both a short-term effect (Ball et al, 2009;Kim, 2001;Turner & Hesford, 2019) and a long-term effect (Canace et al, 2018;Chen & Chang, 2020;Kothari et al, 2002;Moser et al, 2021) on company performance.…”

“…This signal will arguably result in the short-term and external-based measurements of firm performance, as in most previous studies. The external-based measurement of firm performance refers to market value (Kim et al, 2021;Moser et al, 2021) and market or investor responses (Akbar et al, 2008;Burton, 2005;Chen & Chang, 2020;Juniarti & Toly, 2021). This study complements previous studies by using fundamental measurements (ROA and ROE) to confirm the influence of capital expenditure on long-term firm performance.…”

“…They discovered that while renovation capital expenditures have a significant short-term benefit in terms of increased revenue, profitability gains, higher customer satisfaction, and lower repair and maintenance costs, they have a significant long-term negative impact on revenue and profitability. In another example, Moser et al (2021) attempted to evaluate the interplay between market conditions, capital expenditure, manufacturing flexibility, and production capacity in order to effectively analyze the consequences of manufacturing investments in the mining, oil and gas sectors in both the short and long terms. They attempted to develop a firm value driver model, which shows that higher capital expenditure will impact higher market valuation in the long term due to higher production capacity.…”

Measuring the impact of lean practices on manufacturing performance – case study from the process industry

“…Many studies also analysed the effect of contextual factors (Marin-Garcia and Bonavia, 2015;Shah and Ward, 2003) or the inter-relationship between different lean practices (Fullerton et al, 2014). However, none of them considered capital investment, although it is usually a crucial aspect in process industries (Moser et al, 2019). Although lean does not rely on big investments to improve performance, still, it can help to enhance its impact.…”

“…The Volvo case (Netland and Ferdows, 2016) is a good example of this. Furthermore, the process industry has some specifics, like capital intensity or a low variety of non-discrete products (Moser et al, 2019), that make lean programs, and the portfolio of relevant lean practices different. Therefore, the following research questions will be answered: RQ1.…”