The Procurement of Equipment

The Procurement of Equipment

 

  • ·        The Nuances of Capital Equipment Procurement –

 

  • o       Nonrecurring Purchases – The purchases of a particular piece of capital equipment typically occurs no more than once every three to five years or so. For example, a supply manager recently purchased a unique high-temperature electric furnace for use in her company’s research and development laboratory. Since the furnace is used only periodically for experiment work, it is very unlikely that another purchase of this kind of equipment will be made in the foreseeable future.  In contrast, a few industrial operations require the use of many identical machines in their production processes. For example, in petroleum and chemical processing plants, the product is transported by pipeline throughout most of the production operation. This requires dozens, at times hundreds, of similar pumps which vary only in size and details of construction. To keep capital expenditures at a fairly uniform level from year to year and minimize maintenance costs, pumps often are replaced on a continuing basis rather than all at once. Although relatively uncommon, this type of operating equipment purchase has some of the characteristics of conventional production purchasing.  The lead-time requirement is a unique feature of most equipment purchases. While some types of equipment are standard off-the-shelf products, many are not. Much production machinery and prime moving equipment is built, at least in part, to operate under specific conditions that are peculiar to each purchaser’s operation. Consequently, manufacturing lead time for potential suppliers is usually a matter of months or perhaps years. The production of a large stream turbine generating unit, for example, may require negotiating and expediting work substantially different from that normally required in production procurement.

 

  • ·        Nature and Size of Expenditure  – An expenditure of company funds for capital equipment is an investment. If purchased wisely and operated efficiently, equipment generates profits for its owner. Because it affects the costs of production, the selection of major capital equipment should be a matter of significant concern to top management. The purchase of most major equipment involves the expenditure of a substantial sum of money. The purchase price of a piece of equipment, however, frequently is overshadowed by other elements of cost. Since a machine often is used for many years, the cost of operation and maintenance during its lifetime may far exceed its initial cost. For example, downtime costs easily may exceed the equipment’s purchase price. An auto assembler estimates its downtime cost as $26,000 per minute. Hence, the total life cost of a machine relative to its productivity frequently is the cost factor of primary importance. Although estimating the operating and maintenance costs which will be incurred in future years is not easy, such costs will be incurred and must be addressed when one is comparing the total cost of ownership of two or more items of equipment which will satisfy the firm’s needs. Thus, post sale technical and the availability and cost of replacement parts may be crucial supplier selection criteria.

 

The timing of many equipment purchases often presents a paradoxical situation. Typically, the general supply capabilities of equipment producers cannot be adjusted quickly to changes in demand. Thus, because most firms’ equipment purchases are made infrequently and often can be postponed, producers of industrial capital goods frequently find themselves in a “feast or famine” type of business. When a potential purchaser’s business is good, it needs additional production equipment as quickly as possible to satisfy customers’ burgeoning demands. But because other purchasers are in the same situation, the buyer may find that equipment prices are rising in a market with short supply. Conversely, when a buyer’s business is down and additional production equipment is not needed, equipment is in plentiful supply, often at reduced prices. Finally, the installation cost may be as much as 30-50% of the total cost and involve multiple contractors for site preparation. The contract must cover all such details.