Chapter 15 – Purchasing Capital Equipment
Capital Equipment (def): Assets that are held for longer than a year acquired for
long-term requirements and used in the production of goods and services.
- Buying capital equipment is thus an investment decision and the following
considerations must be taken into account:
(1) product support
(2) availability of spares
(3) after-sales service
(4) financial viability of supplier
Take total cost of ownership of buying capital goods into account and not just the
purchase price.
Classification of Capital Goods:
- multipurpose equipment: have a variety of uses in various industries, have a
relatively longer life and have considerable salvage value e.g. forklifts,
furniture
- single purpose equipment: only does one or several similar operations but
quality of work is better e.g. specialised production machinery and specialised
machinery tools
Characteristics of Purchasing Capital Equipment:
(1) Large Expenditure
- relatively large capital outlay regarded as an investment and financed from
long-term capital
- could be necessary to use special financing like bond issues/ leasing/ paying in
instalments
- look at total cost of ownership and include all relevant costs along with
purchasing price e.g. purchasing admin, follow up, transportation, insurance,
depreciation etc
(2) Non-Recurring Expenditure
- capital equipment purchased at irregular intervals and used up gradually in
production process
- to keep capital expenditures uniform yty and keep maintenance costs to a
minimum, replace equipment regularly rather than all at once
(3) Specialised & technical nature of capital equipment
- due to specialised nature of capital equipment various other functions can get
involved in purchasing process
- lead time can be longer and major installations could also require a significant
period of start-up
- capital equipment procurement can be strategic so supplier selection is very
important
Size and Scope of Capital Equipment Team:
- several tasks need to be performed to meet key objectives:
(1) determine specifications
(2) select adequate supplier
(3) conduct negotiations
, (4) install and maintain equipment
- important to select the correct equipment sourcing team, often across
functions, to decide on acquiring capital equipment
- the number of people involved depends on the following:
(1) extent of possible adverse consequences (greater the risk, more people
involved)
(2) purchasing situation; purchasing can handle a straight re-buy but in a new task
or modified re-buy more functions can be involved
(3) size of the organisation
(4) business orientation of the organisation
The role of purchasing and supply management in the procurement of capital
equipment:
- purchasing and supply function does not necessarily play a dominant role in
the purchasing of capital equipment – mainly provide support – give advice
and promote supplier relations
- can provide input in the following areas:
(1) provision of information; provide info on availability of suppliers, new
equipment, price of capital equipment etc
(2) evaluation and selection of suppliers; contribute by investigating potential
suppliers including financial position, management abilities, technical
abilities, reputation, after-sales services etc AND make recommendations on
local, national, international suppliers/ reciprocity AND help compile supplier
assessment
(3) negotiations with suppliers and contractual conditions: help prepare
negotiating strategy and define the contractual conditions of the purchase
(4) coordination and administration of the purchase: act as central point where
specific purchases are analysed and considered, assume admin of the purchase
and execute the purchasing transaction
(5) specific purchases: purchasing can assume control of standard equipment with
relatively low unit value
Factors to be considered in purchasing capital equipment:
Why does an organisation procure capital equipment?
- increase capacity
- achieve economy in operation and maintenance
- increase productivity
- improve quality
- ensure availability as orgs are dependent on its use
- save time and/ or labour costs
- for more durability
- for safety, pollution and emergency protection
Qualitative considerations: - not easily transformed into monetary terms
(1) reliability of equipment; relates to risk of interruption in production
(breakdown = higher costs), maintenance & adjustment times, expertise of
maintenance staff
Capital Equipment (def): Assets that are held for longer than a year acquired for
long-term requirements and used in the production of goods and services.
- Buying capital equipment is thus an investment decision and the following
considerations must be taken into account:
(1) product support
(2) availability of spares
(3) after-sales service
(4) financial viability of supplier
Take total cost of ownership of buying capital goods into account and not just the
purchase price.
Classification of Capital Goods:
- multipurpose equipment: have a variety of uses in various industries, have a
relatively longer life and have considerable salvage value e.g. forklifts,
furniture
- single purpose equipment: only does one or several similar operations but
quality of work is better e.g. specialised production machinery and specialised
machinery tools
Characteristics of Purchasing Capital Equipment:
(1) Large Expenditure
- relatively large capital outlay regarded as an investment and financed from
long-term capital
- could be necessary to use special financing like bond issues/ leasing/ paying in
instalments
- look at total cost of ownership and include all relevant costs along with
purchasing price e.g. purchasing admin, follow up, transportation, insurance,
depreciation etc
(2) Non-Recurring Expenditure
- capital equipment purchased at irregular intervals and used up gradually in
production process
- to keep capital expenditures uniform yty and keep maintenance costs to a
minimum, replace equipment regularly rather than all at once
(3) Specialised & technical nature of capital equipment
- due to specialised nature of capital equipment various other functions can get
involved in purchasing process
- lead time can be longer and major installations could also require a significant
period of start-up
- capital equipment procurement can be strategic so supplier selection is very
important
Size and Scope of Capital Equipment Team:
- several tasks need to be performed to meet key objectives:
(1) determine specifications
(2) select adequate supplier
(3) conduct negotiations
, (4) install and maintain equipment
- important to select the correct equipment sourcing team, often across
functions, to decide on acquiring capital equipment
- the number of people involved depends on the following:
(1) extent of possible adverse consequences (greater the risk, more people
involved)
(2) purchasing situation; purchasing can handle a straight re-buy but in a new task
or modified re-buy more functions can be involved
(3) size of the organisation
(4) business orientation of the organisation
The role of purchasing and supply management in the procurement of capital
equipment:
- purchasing and supply function does not necessarily play a dominant role in
the purchasing of capital equipment – mainly provide support – give advice
and promote supplier relations
- can provide input in the following areas:
(1) provision of information; provide info on availability of suppliers, new
equipment, price of capital equipment etc
(2) evaluation and selection of suppliers; contribute by investigating potential
suppliers including financial position, management abilities, technical
abilities, reputation, after-sales services etc AND make recommendations on
local, national, international suppliers/ reciprocity AND help compile supplier
assessment
(3) negotiations with suppliers and contractual conditions: help prepare
negotiating strategy and define the contractual conditions of the purchase
(4) coordination and administration of the purchase: act as central point where
specific purchases are analysed and considered, assume admin of the purchase
and execute the purchasing transaction
(5) specific purchases: purchasing can assume control of standard equipment with
relatively low unit value
Factors to be considered in purchasing capital equipment:
Why does an organisation procure capital equipment?
- increase capacity
- achieve economy in operation and maintenance
- increase productivity
- improve quality
- ensure availability as orgs are dependent on its use
- save time and/ or labour costs
- for more durability
- for safety, pollution and emergency protection
Qualitative considerations: - not easily transformed into monetary terms
(1) reliability of equipment; relates to risk of interruption in production
(breakdown = higher costs), maintenance & adjustment times, expertise of
maintenance staff
