Procurement’s role in capital equipment procurement
At this point, we can conclude that Procurement function plays a distinctly different role in the acquisition of capital equipment than it does in the acquisition of production materials and supplies. In the procurement of capital equipment, the Procurement function acts to a great extent in a service capacity as a gatherer of information, a process coordinator, a procurement consultant to management and finally a contract administrator.
1. Source of information
No department is in a better position than Procurement to keep abreast of the general developments occurring in major equipment industries. Through daily contact with both salespeople and current trade literature, alert buyers pick up considerable information of value to operating department management. In large firms, one buyer may specialise solely in capital equipment procurement. A good Procurement function makes a point of regularly relaying information concerning new developments in the capital equipment area to appropriate operating executives.
Once a requisition has been initiated, it is Procurement’s responsibility to locate competent suppliers and secure the information required by the user in making a preliminary analysis. Suppose the quality control manager wants to buy an expensive microscope. With his or her knowledge of the market, the capital equipment buyer can easily obtain the basic data needed for analysis. Moreover, a good buyer should be able to arrange a side-by-side display or demonstration of major competitive models so that quality control personnel can test and compare them.
2. Liaison service
During investigation of various manufacturers’ equipment, an operating manager frequently finds it advantageous to discuss technical details with a manufacturer’s representative. A customary and sound practice is for the appropriate buyer to act as a liaison in arranging meetings between potential suppliers and operating departments. As a rule, the capital equipment buyer should sit in on these meetings, or at least be kept informed of significant developments. It is his or her responsibility to ensure that no premature commitments are made by line departments; likewise, the buyer must at all times be aware of the current status of all negotiations if he or she is to function effectively in the buyer’s role.
3. Requirement description development and bids
One of the advantages of formally establishing a buying team is the fact that more cooperative action usually is generated in attacking the buying problem. This can be extremely useful in development of the equipment requirement descriptions, particularly when the buyer is genuinely involved. As a part of this involvement, when requirement descriptions are nearing completion and invitations for bid are to be issued, a good buyer should also function in the role of an informal auditor. Although technical requirements predominate, the buyer should make every effort to see that specifications are written as functional as possible. Most users hold biases for and against specific types of equipment. Every effort should be made to exclude such personal biases from the requirement descriptions. The nature of many capital equipment requirements limits the number of possible suppliers in the first place. This number should not be further reduced by arbitrarily excluding types or make of equipment on the grounds of prejudice alone.
To function effectively in this role, the buyer should have participated in most of the technical discussions between the firm’s line personnel and the various suppliers/manufacturers, and he or she must have a basic understanding of the significance of the technical problems involved. The buyer’s job is still one of challenging questionable requirement description inclusions. Ironically, however, a buyer’s success in this endeavour depends less on technical knowledge than on skill in understanding and dealing with people. In the realm of technical matters, the buyer is at a disadvantage because he or she is dealing with professionals in this area. Therefore, the long-range approach should focus on an attempt to gain the cooperation of technical managers. The buyer must persuade them that unbiased functional requirement descriptions serve the firm’s best interests.
Once specifications are completed, the buyer is responsible for arranging comparison demonstrations and for securing bids from a reasonable number of qualified suppliers.
4. Qualitative analysis
Some suppliers are more qualified than others. The degree of qualification should be considered carefully by the review team in deciding which equipment to procure. Procurement department normally gathers and analyses such information for the team. The buyer must first determine, usually with engineering assistance, the level of a supplier’s technical and production capabilities. This is of utmost importance.
Second, the buyer must assess the supplier’s capability and willingness to provide any engineering service required during the installation and start-up of the new equipment. This is an extremely important financial consideration when complex, expensive equipment is involved. Closely related to this factor is the necessity of training operators and what service the supplier is willing to provide in this area.
Another important consideration is the reliability of a supplier in standing behind its guarantees. Once the equipment is installed, unexpected problems beyond the buying firm’s control sometimes add significantly to the total cost of equipment. Finally, what is the supplier’s policy on providing replacement parts? When the equipment is superseded by a new model, what will be the availability of obsolete parts?
In practice, unfortunately, such considerations frequently play a minor role in the initial selection of equipment, only to assume major proportions at a later date. It is the Procurement function’s responsibility to evaluate potential suppliers in light of these qualitative factors and to bring significant considerations of this kind before the evaluating team for adequate appraisal. After the equipment is procured, the wise buyer works closely with the maintenance department in keeping and interpreting historical records of equipment performance. Data of this kind are valuable in making similar future analyses.
5. Bid tabulation and economic analysis
When bids are received, the buyer tabulates them and makes any adjustments necessary so they can be interpreted on a comparable basis by the team responsible for the final recommendation.
The finance department frequently assumes responsibility for conducting the total profitability study. However, once management has selected the types of analysis to be used, the Procurement function might more effectively prepare, interpret and present the complete package of price, cost and profitability for the team’s consideration. This needs to be done since the buyer has a complete understanding of the total cost situation from his or her involvement in the preceding technical discussions till the requirement descriptions preparation.
6. Negotiation, contract preparation and administration
After top management has approved a proposal for the procurement capital equipment, the buyer assumes his or her customary responsibility for negotiating the final price, delivery and related terms of contract. The purchase order or contract should be written with particular care, specifying the responsibility of both parties for equipment performance and postsale activities. Acceptance testing and inspection methods, acceptance timing, equipment specifications and performance standards and guarantee conditions should be clearly stated. Similarly, supplier responsibility for post-sale service pertaining to installation, start-up, operator training, maintenance checks and replacement parts should be spelled out clearly so that there is no question about what is expected.
In the event that Procurement involves a lengthy manufacturing period, a special follow-up and expediting program should be developed. This may call for periodic plant visits and in-process inspection of the work. Responsibility for monitoring this activity often rests with the Procurement function.
Viewing the situation in total, procurement’s role in the acquisition of capital equipment assumes a considerably greater staff orientation and a lesser decision-making orientation than is customary in the procurement of standard production materials and supplies.