What is the Procedure of Purchasing the Capital Equipments? (9 Steps)

Purchasing procedure of capital equipments involves the following steps (Fig. 23.1).

STEP-I: Need Generation of the Equipment:

The first thing to do when procuring capital goods is to evaluate the need. This may arise for one of the following reasons.

(a) Starting of a new manufacturing activity.

(b) Expansion of existing manufacturing facilities.

(c) Replacement of old machinery and equipment; and

(d) Change over to a new process of manufacture.

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STEP-II: Obtaining the Preliminary Information:

Rarely is the need for capital equipment absolute; it can usually be post­poned until conditions for purchase become favourable. Although the initial inquiry may come to purchasing in the form of a requisition, more often than not the purpose at this point is only to obtain general information about the equipment in question, not to make an immediate purchase. The purchasing department consequently obtains general sales and operating literature, together with approximate price and delivery information.

STEP-III: Study to Preliminary Information:

The using department studies the preliminary information obtained by purchasing and determines the feasibility of pursuing the matter further.

STEP-IV: Drawing of Detailed Specifications:

If the decision is affirmative, detailed specifications then should be drawn up jointly by the using and engineering departments. Specifications should spell out unambiguously the required performance characteristics, desired operating features, and any unique design characteristics, necessitated by the current situation.

STEP-V: Requesting Proposals from Selected Vendors:

When the investigation is complete and specifications are firm, the Purchasing department formally requests proposals from the selected vendors. In the event that only one or two vendors can produce an acceptable machine, the buyer might very well choose to negotiate rather than bid the purchase.

STEP-VI: Economic Analysis of Various Feasible Alternatives:

An economic analysis- of the various feasible alternatives is made at this point. The finance department typically makes this analysis, based on operating and technical information provided by the purchasing, engineering and using departments.

STEP-VII: Evaluation of Alternatives for Final Selection:

The necessary facts are now ready for evaluation by the departments participating in the decision. In small companies, evaluation is frequently an informal affair while in large organisations, a formal committee meeting is the typical method of operation.

STEP-VIII: Preparation of Written Report:

The end result of the evaluation should be the preparation of a written report justifying the recommendation that a certain machine be purchased. The report should include a description of where and how the machine will be used, why it is required, estimated figures for its utilisation and its life, cost data for the existing operation and for the several alternatives considered.

Financial computations concerning the rate of return on investment (or other similar measures of profitability), together with any qualitative comments from the participants, should constitute the last section of the report.

STEP-IX: Report Submission to Top Management:

The written report is submitted to top management for a decision.