The Nuances of Capital Equipment Procurement Nonrecurring Purchases Nature and Size of Expenditure Building the Foundation Identify the Need for a Procurement Project Management Selection of an Equipment Sourcing Team Build and Train the Team Identify Objectives and Estimate Cost Identifying Objectives Used Equipment Spares Estimating Acquisition Costs and TCO Develop Specifications and Initiate Sourcing, Pricing & TCO Analysis Develop Specifications Sourcing Develop Updated Acquisition Cost and TCO Estimates Updated Cost Estimates Meet Budget and TCO Objectives Top Management Approval Negotiation Leased Equipment Types of Leases Factors Favoring Leasing Factors Weighing Against Leasing To Lease or to Buy? Initiate Lease or Contract Post Award Activities

1. 8-1
Chapter 8
The Procurement of
Equipment

2. 8-2
Key Concepts
• The Nuances of Capital Equipment Procurement
» Nonrecurring Purchases
» Nature and Size of Expenditure
• Building the Foundation
» Identify the Need for a Procurement
» Project Management
» Selection of an Equipment Sourcing Team
» Build and Train the Team
• Identify Objectives and Estimate Cost
» Identifying Objectives
» Used Equipment
» Spares
» Estimating Acquisition Costs and TCO

3. 8-3
Key Concepts
• Develop Specifications and Initiate
Sourcing, Pricing & TCO Analysis
» Develop Specifications
» Sourcing
» Develop Updated Acquisition Cost and TCO
Estimates
» Updated Cost Estimates
» Meet Budget and TCO Objectives
» Top Management Approval
» Negotiation

4. 8-4
Key Concepts
• Leased Equipment
» Types of Leases
» Factors Favoring Leasing
» Factors Weighing Against Leasing
» To Lease or to Buy?
• Initiate Lease or Contract
• Post Award Activities

5. 8-5
The Nuances of Capital Equipment Procurement
• Nonrecurring Purchases
• Nature and Size of Expenditure
• Price vs. total life cost (TCO)
• Single-purpose vs. multi-purpose
• New, Used, Lease?
• Who should be involved in the process

6. 8-6
Supply Management’s Role
• Distinctly different
role than in
acquisition of
materials
• Gatherer of
Information
• Source of information
• Process coordinator
• Consultant to
management
• Contract
administration
• Facilitator of unbiased
specifications
• Liaison service
provider
• Negotiator

7. 8-7
Identify
Need
Identify
Need
Assign
Project
Manager
Assign
Project
Manager
Form
Task
Team
Form
Task
Team
Build &
Train
Task team
Build &
Train
Task team
To Phase IIB
Phase I: Build the Foundation
• Identify the Need for
a Procurement
• Project Management
• Selection of an
Equipment Sourcing
Team
• Build and Train the
Team
Figure 8-1

8. 8-8
Figure 8-2
Phase II: Identify Objectives and Estimate Costs
• Identifying
Objectives
• Used Equipment
• Spares
• Estimating
Acquisition Costs
and the Total Cost
of Ownership
B
Identify
Objectives
Identify
Objectives
Estimate
Total
Cost of
Ownership
Estimate
Total
Cost of
Ownership
NO TCO
Analysis
C
Estimate
Acquisition
Cost
Estimate
Acquisition
Cost
Capital
Budget
Analysis
NO
YESYES
Consider Used EquipmentConsider Used Equipment
Address Need for SparesAddress Need for Spares
To Phase III
From Phase I

9. 8-9
Used Equipment
• Reasons for Purchasing Used Equipment
» Cost
» Availability
» Used equipment may satisfy the purchasing
need
• The Used Equipment Market
» Used equipment dealers
» Sale by owner
» Brokers
» Auctions

10. 8-10
Used Equipment
• Cautions in Purchasing Used Equipment
» Difficult to determine the true condition
» Check the reputation of the supplier
» Inspect the equipment
» Observe the equipment under power
» Determine the age

11. 8-11
Estimating Acquisition Costs and the Total Cost
of Ownership
• A team should develop both acquisition
cost and TCO cost estimates
• In the development of the estimates the
life cycle costs should be considered

12. 8-12
Life Cycle Cost Analysis
• Usage of the
equipment
• Number of years it will
be in service
• Various economic
inflation factors
• Original delivered cost
• Installation
• Ongoing adjustment
• Calibration
• Energy and labor for
operation
• Routine maintenance
• Major overhauls
• Downtime
• Disposal of the
machine

13. 8-13
Total Cost of Ownership for Equipment
n
TCO = (A) + (NPV  Ci) - NPV Sn
i = 1
A = delivered acquisition cost
NPV = net present value
Ci = total operating costs incurred in year i
Sn = salvage value in year n

14. 8-14
Develop Specifications and Initiate Sourcing,
Pricing and TCO Analysis
• Develop Specifications
• Sourcing
• Develop Updated Acquisition Cost and
TCO Estimates
• Updated Cost Estimates
• Meet Budget and TCO Objectives
• Top Management Approval
• Negotiation

15. 8-15
Top Management ApprovalTop Management Approval
Develop SpecificationDevelop Specification
Develop Updated Acquisition
Cost & TCO Estimates
Develop Updated Acquisition
Cost & TCO Estimates
NegotiationNegotiation
From Phase IIC
YES
Identify
Objectives
Initiate Sourcing TasksInitiate Sourcing Tasks
Meet Budget &
TCO Objectives?
NO
YES
D
To Phase IV
Figure 8-3
Phase III: Develop Specifications and Initiate
Sourcing, Pricing and TCO Analysis

16. 8-16
Develop Updated Acquisition Cost and TCO
Estimates
• Meet Budget and TCO Objectives?
• Top Management Approval
• Negotiation

17. 8-17
Develop Updated Acquisition Cost and TCO
Estimates
$2,500,000$3,000,000
$1,300,000$2,000,000PV future cost
$1,200,000$1,000,000Acquisition cost
YX
Table 8-1
TCO

18. 8-18
Post
Award
Activities
Post
Award
Activities
Lease or
Buy
D From Phase III
Initiate LeaseInitiate Lease Initiate ContractInitiate Contract
Figure 8-4
Phase IV: Sourcing Lease/Buy Analysis
and Post Award Activities

19. 8-19
Leased Equipment
• Operating Lease
» Used by most firms to facilitate business operations
» Focus is on operating convenience and flexibility
» Firm is usually not interested in ownership
» Most operating leases are short term
» Most often used when firm wants freedom/flexibility
• Financial Lease
» Primary motivation is to obtain financial benefits
» Usually they are long-term
» Length is usually shorter than the life of the equipment
» Many financial leases are non-cancelable
» Some argue financial leases distort the financial reports

20. 8-20
Leased Equipment
• Factors favoring
» Operating and
Managerial
Convenience
» Operating Flexibility
» Obsolescence
Protection
» Financial Leverage
» Income Tax
Considerations
– difference between
lease payments and
allowable depreciation
can be written off
• Factors against
» Cost
» Control

21. 8-21
To Lease or to Buy?
• Cost Comparison
• The Decision
» Determine the operating advantages and
disadvantages
» From an operating point of view, is leasing the
preferred alternative?
» If leasing is preferable, calculate and compare
the present value costs of the two alternatives.
» Make the decision

22. 8-22
Initiate Lease or Contract
• Responsibility of both parties
• Acceptance testing and inspection
• Acceptance timing
• Machine specifications
• Performance standards
• Guarantee conditions
• Penalties, if any
• Length of agreement

23. 8-23
Post-Award Activities
• Work closely with the users of the
equipment to ensure that performance
expectations are fulfilled
» Collect and interpret performance data
» Use techniques from the chapter on
Relationship and Contract Management where
applicable

24. 8-24
Concluding Remarks
• Supply management personnel function
as facilitators, coordinators, contract
administrators, and consultants in
procurement of equipment
• Specifications must be precise and
complete
• Economic analyses must be thorough and
accurate
• Total cost of ownership analysis must be
used
• Responsibilities of both the supplying and
buying firms should be established