Lecture Purchasing and supply chain management (3rd/e): Chapter 16 - W. C. Benton

Chapter 16 - Equipment acquisition and disposal. In chapter 16 a step-by-step capital acquisition process is given. The steps are based on requisition, company objectives, new product ideas, cash flow analysis, an economic evaluation, a financial plan analysis, and expenditure control.

Chapter16: EquipmentAcquisition andDisposal PurchasingandSupplyChainManagement 3rdedition PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. PurchasingandSupplyChainManagement3rdedition,Copyright2013W. CapitalEquipmentAcquisition The acquisition of capital equipment is a major decision  in most firms • Made at a vice president level and above • Involve an expert equipment buyer • Industry specific • Significant long term expectation of  returns PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. TheProcesses DepartmentRequisition Adepartmentrequestsequipmentreplacementsandexpansions Involvestheplantmanagerortheexecutiveinchargeofthe department CompanyGoalsAndObjectives Tocomparetheacquisitionrequestwiththeoveralllongưrun objectivesofthefirm e.g.,maximizeprofitability PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. TheProcesses(cont.) New Project Ideas • Capital projects categories: • Replacements • • Expansion (new products) • • Increase quality, reduce operating expense, and provide more  efficiency Expand into a newly introduced product line Expansion (existing products) • An alternative to replacing the current equipment • Other (heating system for plant) • Other(newconstruction) PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. Other(renovation) TheProcesses(cont.) CashưFlowAnalysis Evaluateafterưtaxcashinflowsandoutflowsofeachcapital project alternative • Evaluation criteria: • • The net cash investment • The net cash flow • The economic life of the project Lifecyclecosting Anevaluationmethodusedtoevaluatealternativecapital acquisitions Basedonthetotalcostoftheequipmentovertheexpectedlifeof PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. theproduct TheProcesses(cont.) Economic Evaluation • Formal process of evaluating capital equipment or projects • 5 common evaluation methods for individual projects: a) Payback b) Average rate of return c) Net present value d) Internal rate of return e) Profitability index Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            Comparison of Evaluation Methods  Method Payback Good Features • • • ARR • • • NPV • • IRR • • • Pl Easily understood  Easy to calculate  Provides a crude risk screen Easily understood  Easy to calculate  Considers past­payback cash  flows Relatively easy to calculate Best method for mutually  exclusive ranking problems Easily understood intuitive economic meaning Okay on simple accept–reject  problems Bad Features • • • • • • • Ignores the time value of pre­payback  cash flows Ignores past­payback cash flows Ignores the time value of any cash  flows Hard to understand May not work well in capital rationing  problems Tedious to calculate Does not work well on non­simple  problems Relativelyeasytocalculate Hardtounderstand Bestmethodforoneưperiodcapital Doesntworkwellinsomemutually PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. rationingproblems exclusive choice situations • The Processes (cont.) Selection of Projects  • A accept–reject decision based on competition for limited funds • The hurdle rate may be based on:  • Thecostofcapital Theopportunitycost Otherconceptualstandards PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. TheProcesses(cont.) FinancialPlanAnalysis • Activities: 1) 2) • First, a comprehensive comparison of the selected  alternatives Second, measure the planned project selections against the  initial company goals and objectives Finance methods: •) Lease •) Purchase Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            Decision Factors Related To Finance  methods  • Tax effect • Effects on future financing • Risk of obsolescence • Salvage value • Maintenance • Discount rate 10 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. EquipmentLeasing GeneralCharacteristics Duringafixedleaseperiod Lesseeusesthecapitalequipment Lessee plays a series of payments • • • e.g., monthly, semi­annual, or annual payments When the lease period ends, the equipment goes back to the  lessor  General Options: Buy 11 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. EquipmentLeasing(cont.) Typesofleases Operatingleases Capitalleases • • Short­term leases that can be cancelled during the contract  period Cannot be cancelled during the lease period without a significant  penalty Financial leases • A source of financing for companies that require positive cash  flows during the lease period 12 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. DisposalofCapitalEquipment Ingeneral,mostfirmshavenotyetdesignedaclean processforthedisposalofusedequipment Forsomefirms,purchasingisusuallychargedwiththetaskof scrappingorsellingretiredequipment For others, it is the vendor’s responsibility 13 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            ... Thehurdleratemaybebasedon: Thecostofcapital Theopportunitycost Otherconceptualstandards PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. TheProcesses(cont.) Financial Plan Analysis ... Second, measure the planned project selections against the  initialcompanygoalsandobjectives Financemethods: ) Lease ) Purchase PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. DecisionFactorsRelatedToFinance... Forsomefirms,purchasingisusuallychargedwiththetaskof scrappingorsellingretiredequipment Forothers,itisthevendorsresponsibility 13 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved.