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CHAPTER 14
Capital procurement
Objectives of this chapter
• To identify procurement’s contribution to the acquisition of capital equipment
• To outline the differences between the procurement of capital and non-capital goods
• To appreciate leasing and hiring as a means of employing capital goods
• To appreciate the importance of ‘performance’ specifications and how dealing with
them can be simplified by tabulation
• To involve procurement from the earliest stage of identifying a need through the
process of supplier selection, commercial input into contract clauses and appraisal of
after-sales service
• To discuss the concept of lifetime cost
• To assess the various methods of investment appraisal
List of Cases, Research Boxes and Figures in this chapter
Mini Case Studies
Nil
Research Boxes
Nil
Figures
• Figure 14.1 Contributors to capital equipment decisions
• Figure 14.2 Format of a particular requirements section of a specification
Note: Table A lists specified requirements. The information provided in Table B forms the basis
of the vendor’s technical offer. Comments in brackets provide clarifications of information
required.
Abbreviations: RWT = return with tender; VTA = vendor to advise; incl = including the
following; m = minute; min = minimum value; max = maximum value.
(Source: Adapted from Moore, 1993).
• Figure 14.3 Some elements of the lifetime cost of a capital item
Instructor’s Manual
Teaching Notes
Some organisations have historically appeared to believe that in the acquisition of capital
equipment they need not involve their procurement professionals. In such cases, engineers and
production staff have tended to be closely involved. Procurement staff were drawn in simply to
sign the contract or get a discount. Yet the commercial implications of capital purchases are as
important as the commercial implications of production materials or components.
The main emphasis of this chapter is, therefore, concerned with explaining the role of
procurement.
In order to appreciate the complexities involved in capital procurement, it is necessary to
concentrate on the following learning points:
The role and contribution of procurement in the acquisition of capital equipment
• Definition of capital items
• Specification of capital equipment
• Project approach
• Investment appraisal
• Payback period
• Discounted cash flow