Chapter 16 Capital Goods 16 - 3 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

Chapter 16

Capital Goods

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Special Problems of Equipment Purchasing

• Strategic considerations and high cost of failure• Substantial amounts of money for a single purchase• Long life and infrequent purchases• Difficulty estimating the total cost• Derived demand• Environmental impact and disposal• Significant tax considerations• Technology forecasting• Dedication of time and resources during start-up• Commitment to process, cost, product line and plant space• Coordination with existing processes and operations

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Reasons for the Purchase of Capital Goods

• Capacity• Economy in operation and maintenance• Increased productivity• Better quality• Dependability in use• Savings in time or labor costs• Durability• Safety, environmental and emergency protection

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Source Selection

• Total cost of ownership (TCO) analysis- Purchase cost may only represent 20 to 60 percent of TCO

• Engineering Service- Presale and postsale service

• Design and R&D capabilities and costs• Legal considerations

- patents, liability for lost sales, health & safety

• Disposal at end of useful life

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Reasons for Buying Used Equipment

• When price is important- Differential between new and used is great or - Limited funds available

• For use in a pilot or experimental plant• For use with a special or temporary order• Where the machine will be idle for a substantial amount of time• For use with apprentices• For maintenance departments, not production• For faster delivery/availability• When a used machine can be modernized easily or is already

the latest technology

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Conditions of Sale

• “As is” and “where is”- “No warranty, guarantee or representation of any kind, expressed

or implied, as to the condition of the item offered for sale”

• With certain specific guarantees

• Guaranteed and rebuilt

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Sources for Used Equipment

• Dealers and manufacturers that accept used equipment as trade-ins

• Directly from users/owners

• Equipment brokers

• Auctions

• Equipment dealers

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Advantages of Leasing

• Tax considerations- Lease rentals are expenses for income tax purposes

• Small initial outlay• Availability of expert service• Reduced risk of obsolescence• Adaptability to special and seasonal jobs• Test period provided before purchase• Burden of investment shifted to supplier• Leasing company has greater purchasing clout

- e.g., automobiles

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Disadvantages of Leasing

• Final cost may be higher- Higher financing costs, fees

• Surveillance by lessor entailed• Less freedom of control and use• Tax considerations

- Some leases may not be deductible

• Penalties and fees for early lease termination- Limits flexibility

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The Full Service Lessor

Bank

Lessee

Lessor

ManufacturerBank

Lessee

Lessor

Manufacturer

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The Finance Lease Company

Bank

Lessee

Lessor Manufacturer

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The Captive Leasing Company

Bank

Lessee

Lessor

Manufacturer

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Bank Participation

Bank

Lessee

Lessor

Manufacturer

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Reasons for Captive Leasing

• To secure wider distribution or a higher margin• To reduce credit risk• To sell a full line or to increase the volume of sales of supplies• To control the secondhand market• To stabilize growth• To control servicing • To protect a patent position

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Lessor Evaluation

• Reasonable and fair in dealing with customers?

• Devoting as much attention and money to research as alleged?

• Strong financially?

• If a sole source, prone to be arbitrary in the periodic adjustment of rental and other fees?

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Issues for RFQs and RFPsin Construction Purchasing

• Include appropriate drawings• Identify when and how work changes are determined and

accepted- include costing procedures

• Acceptance criteria• Procedures for submitting and pricing modifications• Clearly identify decision criteria

- e.g., cost, completion time frame, expertise, past history

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Issues for RFQs and RFPsin Construction Purchasing

• Payment process• Insurance and bonds• Establish termination criteria including violation of contract

requirements• Establish project schedule, including start and completion dates• Site inspection/walk-through• List of subcontractors

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Issues for RFQs and RFPsin Construction Purchasing

• Liquidated damages in the event of delays

• List of acceptable pricing options

• Clearly define the supplier’s responsibility in a statement of work