Building The Foundation

Building the Foundation                         


  • ·        Identify the Need for a Procurement – At least five functional areas may identify a need for the acquisition of equipment: the using department, marketing, process engineering, supply management, and plant engineering. The using department  may desire equipment which is one more productive, that is, requires less equipment or operator time (for both) per unit of throughput. Marketing may identify new products whose production processes require new equipment. Process engineering (or operations) is concerned with the equipment’s ability to meet new and changing requirements. Supply management is responsible for monitoring threats and opportunities in the supply world. In the process, supply management may identify relevant new technology and new equipment. Additionally, supply management should be potential suppliers’ primary point of contact. Supply management should be both a filter and a conduit for suppliers whose products may be of interest to other functions within the firm. Plant engineering may stimulate equipment procurement by identifying the potentials risks of downtime if an item of equipment is not replaced.


  • ·        Project Management – If the equipment is critical on the basis of either cost or schedule, a project manager should be selected to drive the process. Ideally, that individual will champion and oversee the project to success. Good people, communication, leadership, and project management skills should be a requirement for the person who will fill this position.


  • ·        Selection of an Equipment Sourcing Team – Depending on the critically of procurement, the following functional areas may be representing on the team responsible for obtaining the equipment: operations, process engineering, finance, supply management, and plant engineering.


Operations is responsible for identifying the required and desired operating characteristics of the equipment. Process engineering, which also known as manufacturing engineering, is concerned with the equipment’s ability to meet current and likely future needs. The process engineer must balance two frequently conflicting forces: a very specialized piece of equipment may be the most productive one but may be incapable of being adapted to possible future production needs.


Finance’s involvement is based on four primary interests in equipment purchases and leases. First, this department usually administers the firm’s capital budget; it therefore is concerned with the allocation of funds for the proposed purchase. If the budget contains a provision for such equipment, all is well; if it does not, the team will have to secure a budget authorization. Second, the finance department has the responsibility for deciding how to finance such purchases. Is enough cash available internally? Can a long-term loan be arranged? Will it be necessary to raise money through a bond issue? For large purchases, the answers to these questions bear heavily on the final equipment selection decision. Third, the finance department should be involved in the economic analysis of alternative machines. Fourth, finance normally chairs the lease versus buy analysis. In some firms, the finance department conducts the original analyses; in other, the analyses are done by engineering or supply management. In any case, the finance department normally is involved in these activities in connection with its capital budgeting responsibility.


Supply management plays many roles: it is the primary point of contact with potential suppliers and a conduit for the flow of information. Supply management ensures that the statement of work or specification that is developed to describe the firm’s needs is sufficiently specific to protect the firm’s interests and broad enough to ensure competition, assuming that competition is appropriate. Supply management normally guides the sourcing process and lead to negotiating team, and it also is responsible for the post-award activities.


Plant engineering is concerned with both current and future issues. Immediate considerations include physical issues such as size, foundation, and power requirements. Future concerns include reliability, maintainability, service support, and the availability of replacement and square parts.


  • ·        Build and Train the Team – The careful selection of the “right” representatives from the appropriate functional areas is an essential task. Unless the representatives have recent successful experience working as a team, an internal or external trainer should be called on to build and train the team.


  • ·        Identify Objectives and Estimate Costs


  • o       Identifying Objectives – As is true with production requirements, some 80 percent of the costs associated with the procurement of equipment are built in during the requirements development stage! Estimating the acquisition cost and the total cost of ownership is always difficult. It is especially challenging at this early stage. However, it is strongly recommended that the team agree on both a target acquisition cost and a target total cost of ownership. Normally, the total cost of ownership is based on the present value (P.V) of the anticipated stream of expenditures and downtime minus the P.V. of the item’s estimated salvage value.


The desired operating and engineering characteristics are by far the most influential factors in selecting the supplier for a particular item of equipment. The user and appropriate engineering personnel must clearly establish the function the equipment is to perform and its design and operating capabilities. Operating characteristics include the equipment’s capacity, setup and run times, product yields, operator ease of use, and adaptability to meet unforeseen requirements.


Closely related to the equipment’s operating characteristics are its engineering features. Ideally, these features will be compatible with the buying firm’s existing equipment, process, and plant layout. They also must comply with standards established by state and federal regulatory agencies such as the Occupational Safety and Health Administration (OSHA) and the Environmental Protection Agency (EPA). Some major engineering considerations are reliability, size and mounting dimensions, interface with other equipment, power and maintenance requirements, safety and OSHA requirements, and pollution and EPA requirements.