Following factors are to be taken into consideration while selecting the source selection or vendor selection.
1. Total economic analysis
2. Operating characteristics of the equipment
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3. Qualitative consideration
4. Engineering features of the equipment.
1. Total Economic Analysis:
Economic analysis of the investment on purchase of major capital equipment is to be done only after several acceptable pieces of equipment are found. One of the most important considerations is not simply to compare the cost of the equipment that is involved at the time of purchase, but to consider also the cost of modifications or additional fittings required, the total operating cost involved in total plan of the equipment’s economic life and estimation of cost of maintenance. Usually, cost of maintenance is to be included along with the cost of operation.
The specific mention of the cost of maintenance is due to the fact that cost of operation can be forecasted definitely while forecasting maintenance cost is difficult and subjective. Hence, in the economic analysis, the total cost that is involved over the whole life of the equipment and the return it brings in the form of revenue or profit over its life-span are considered.
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Several methods of economic analysis are available for evaluating investments. These are:
(a) Payback period approach
(b) Return on investment
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(c) Internal rate of return
(d) Discounted cash flow method.
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2. Operating Characteristics of the Equipment:
This is by far the most influential factor in selecting the supplier for a particular production machine. Once the production and engineering departments clearly establish the function the equipment is to perform, design and operating capability are paramount in selecting the specific machine to be purchased.
Design and operating features for a given type of equipment can differ markedly among the machines available from different vendors. For this reason, the number of vendors willing to manufacture a machine capable of meeting every aspect of a purchaser’s operating requirements is frequently limited.
This, of course, is more likely to be the case for specialised equipment than for general purpose equipment. Nevertheless, this is one reason why a purchasing department usually finds the freedom of its source selection activities reduces considerably in obtaining capital equipment as compared with buying production materials.
3. Qualitative Consideration:
Certain qualitative factors concerning potential suppliers are important in making any purchase. However, not all the factors important in selecting sources for production materials weigh as heavily in selecting sources for capital equipment. Capital equipment purchases do not normally require a continuing effort by the supplier.
Neither does the supplier, as a rule become an integral participant in the purchaser’s operation. These conditions tend to dilute the significance of such qualitative factors as location of the supplier’s plant, his financial health, his willingness to render special services or grant technical co-operation, and so on.
These factors are still meaningful because the purchaser may require installation assistance, replacement parts, and possibly a warranty adjustment. They are however; considerably less critical than when a continuous stream of production materials is being purchased. There are exceptions of course the purchase of electronic data processing equipment is a good example.
4. Engineering Features of the Equipment:
Engineering features of the equipment must be compatible with the buyer’s existing equipment, process and plant layout. They must also be in accordance with standards established by government agencies. A few major engineering considerations are as follows:
i. Specific process capabilities
ii. Safety features
iii. Physical size and mounting dimensions
iv. Power requirements
v. Flexibility
vi. Maintenance
vii. Pollution characteristics
i. Specific process capabilities:
Is performance compatible with that of existing machines, thus minimising process coordination problems? Will use of the new machine produce capacity imbalance problems?
ii. Safety features:
Does the machine have any unsafe features? Does it meet standards, and is its general safety level comparable with that of existing equipment?
iii. Physical size and mounting dimensions:
Will the machine fit into existing available space satisfactorily? Can it be tied into existing supporting structures without difficulty?
iv. Power requirements:
Can existing power supplies be used?
v. Flexibility:
Can the equipment be moved and relocated without excessive difficulty?
vi. Maintenance:
Are lubrication fittings and adjusting mechanisms conveniently located? Is any special maintenance required that cannot be handled by existing maintenance programs?
vii. Pollution characteristics:
Does the equipment perform in accordance with EPA requirements concerning pollution and contamination discharge levels?
The general question to be answered is: How does this piece of equipment fit in with the existing operation? Will many costly modifications be involved in adopting the equipment to the existing system?