Chapter 16 Capital Goods

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

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

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

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

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

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Sources for Used Equipment Dealers and manufacturers that accept used equipment as trade- ins Directly from users/owners Equipment brokers Auctions Equipment dealers

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

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

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Full Service Lessor Bank Lessee Lessor Manufacturer Bank Lessee Lessor Manufacturer

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Finance Lease Company Bank Lessee LessorManufacturer

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Captive Leasing Company Bank Lessee Lessor Manufacturer

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Bank Participation Bank Lessee Lessor Manufacturer

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

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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?

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Issues for RFQs and RFPs in 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

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Issues for RFQs and RFPs in 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

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Issues for RFQs and RFPs in 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