Strategic Sourcing

chasing of Various Types of Equipment/Material

Strategic Sourcing & Negotiation Skills by Sheikh Irfan

(smikhi@yahoo.com) 1
 Industrial Products
Industrial Products may be sub-divided into:
A. Capital Equipment (Capital Goods and Capital Assets)
B. Production Material
Capital Equipment include industrial and office machinery, transportation equipment, furniture, fixtures, etc. Capital
Equipment have 3 distinct features:
1. Tangibility (can be physically touched or handled)
2. Productivity (of Goods and Services)
3. Durability (life longer than a year)
Capital Equipment can be categorized into:
1. Buildings
2. Installation Equipment (Plant, Machinery, etc.)
3. Accessory Equipment (depends on the use of equipment. Aircraft example)
4. Operating Equipment (Special footwear, goggles, Photocopy machine, cars, PCs, etc.)
5. Tools and Instruments (Timing machine, calibrating equipment, etc.),
6. Furnishing and Fittings (Carpets, floor coverings, furniture, shelves, etc.)

Some capital equipment may be placed in more than one category. Example from Class

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 Capital Equipment
Characteristics of Capital Expenditure:
1. Cost per item is high
2. Item bought is used gradually over a period of time
3. Capital Expenditure is financed from long term sources i/o working capital
4. Tax considerations
5. Government financial assistance
6. Often postponable
7. Requires consequential decisions

Factors to be considered when buying Capital Equipment

Purpose Flexibility Spares
Standardization Life Compatibility with existing Equipment
Reliability Durability Product Quality
Cost of Operation Cost of Installation Cost of Maintenance
Miscellaneous (appearance, space requirements, sound level, safety, ergonomics, etc)

Strategic Sourcing & Negotiation Skills by Sheikh Irfan (smikhi@yahoo.com) 3

 Controlling the Acquisition of Capital Equipment
Acquisition of Capital Equipment may be
Transformational new equipment requiring fundamental change in the working of whole organization
OR
Incremental which means new or replacement machinery will not fundamentally affect the entire org.

Since acquisition of a capital equipment requires considerable deliberations, it follows that certain heads should be
formed of Types of Capital Equipment:

1. Strategic New Equipment

2. Operational New Equipment
3. Replacement Equipment
4. Vehicles and transportation (new or replacement)
5. Administrative Equipment (Office machinery, fixtures and fittings)
6. Miscellaneous (of fixed asset nature but with lesser value that can not fall in any of the above category)

Strategic Sourcing & Negotiation Skills by Sheikh Irfan (smikhi@yahoo.com) 4

 New or Used Equipment
• Factors to be considered when buying new or used Equipment

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 New or Used Equipment
Advantages and Disadvantages of Used Equipment

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 Financing Capital Equipment
Capital Equipment may be financed by:
1. Straight Purchase
2. Hire Purchase
3. Leasing
1. Straight Purchase

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 Financing Capital Equipment
2. Hire Purchase

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 Financing Capital Equipment
Leasing: Financial vs. Operating Lease.

Strategic Sourcing & Negotiation Skills by Sheikh Irfan (smikhi@yahoo.com) 9

 Evaluating Capital Investments
Although evaluating capital investments is the field of Management Accountants but buyers must have an
understanding of the methods usually applied for such evaluation. Generally 3 methods are used:
1. Payback period
2. Average Rate of Return (ARR)/Return on Capital Employed (ROCE)
3. Net Present Value (NPV)

Payback period: In how many months/years the net cash inflow (before depreciation) from
an investment will equal the outflow. It is the simplest way of financially evaluating Capital
Investments.

ARR: Average annual net profit after depreciation, as a percentage of investment cost

NPV: The value of future annual cash inflows, as of today (discounting is required)

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 Buyer and Capital Investment Purchases
• Capital Equipment is more likely to be purchased centrally than products of relatively
continuous consumption.
• Such purchasing decisions may be made by buying centers in consultation with user.
• With increased technicality of the equipment, influence of technical staff may be greater.

Despite the above facts, purchasing professional can play his role as follows:

1. Emphasis on Lifecycle considerations relating to capital purchase

2. Countering prejudice of purchaser in favor of one make
3. Provision of commercial, contractual and negotiation expertise.
4. Identification of alternative to purchasing new machine (second hand, leasing, subcontracting, etc.)
5. Identification of government grants (if any) for the purchase of capital equipment
6. Investigation on cost of sourcing capital equipment abroad
7. Assisting with the disposal of existing assets.

Strategic Sourcing & Negotiation Skills by Sheikh Irfan (smikhi@yahoo.com) 11

 Dynamics of Buying Construction Supplies
Buying of construction supplies are different in may ways from other supplies:

1. They are purchased for a location distant from office. May be in another country.
2. Many construction material have high bulk relative to their value.
3. Because of high cost of transport, it is desirable to purchase from a nearer sources.
4. At construction sites, temporary arrangements are required for electricity, gas water, sewerage etc.
5. Specifications of construction material is given by Client or consultant.
6. For the purpose of security, these materials should be bought as close to their use as possible.
7. Because of distance, procedure for recording for receipt and issues will have to be formulated.
8. Some construction supplies may be issued by client which needs to be controlled separately.
9. Sub-contracting may be an important part of construction projects.
10. Some construction supplies may involve intra-company purchasing.
11. Supplies may be transferred from one site to another. It is therefore important to know what is
available where.
12. Some authorities must be allowed to site engineer/site manager for procurement activities.

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 Dynamics of Buying Services

• Services are different from Goods :

Services Goods
An activity or process A physical object
Intangible Tangible
Simultaneous production/consumption separate production and consumption
Customer participate in production Customer may/not participate in production
Heterogonous Homogenous
Can not be stored Can be stored for future use

Examples of Services are Utilities, Insurance, Sales promotion, travelling, Medical

treatment, etc.

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