The rapid pace of digitalization and the need for more efficient, sustainable processes is forcing many manufacturers to rethink their equipment investments.
This decision-making process presents a significant challenge for chemical manufacturers, given their plants often house equipment that has been operating reliably for decades. Ensuring that future investments are equally dependable is a critical factor in the buying decision.
Specification and requisition documents serve as critical navigational tools in the procurement process. Preparing these documents requires careful attention to ensure the equipment meets each plant’s operational needs.
Numerous factors also come into play during the bidding and purchasing process to maximize return on investment. That's important when you consider that process equipment is expensive, often in the multimillion-dollar range.
The following steps can help decision makers within chemical operations gain a better understanding of the equipment purchasing process and key factors to consider when making new capital investments.
Step 1: Specification
In this step, customers will specify all major requirements, including technical needs, reliability expectations, performance characteristics and technology preferences. Some examples include subsystems, components and auxiliaries – such as the lubrication system, the seal system, driver sizing, dynamic/vibrational outlines and condition-monitoring requirements. Buyers will also need to define their desired capacity, pressure, flow, estimated power and minimum required efficiency. All of these particulars will need to be noted in the data sheet, along with some details of control and operation, such as alarms and trips.
Step 2: Proposals and Scope of Supply
Specification and requisition documents should be sent to qualified vendors. In response, vendors prepare and deliver bids or proposals. The scope of supply and services is a key figure in any bid. Many vendors usually supply a lump-sum price for major parts in the scope. It is often useful to ask vendors to specify the price breakdown. Ideally, vendors should provide a price for each item based on the provided list. Many vendors may not want to provide such costing details. If the vendor declines, simplify the pricing details by grouping some of the items. The key point is that each vendor should clearly confirm the scope of supply and service individually.
Step 3: Focus on Deviation Lists
The list of deviations and scope exceptions is an extremely critical part of any proposal. This is closely related to the total cost and delivery schedule. Unfortunately, some vendors reduce the scope of supply and delete some items from the scope and put them on exception or exclusion list of the bid. In this scenario, a vendor might offer the lowest total price. But, in reality, this vendor actually offers a lower price for a smaller scope.
While this tactic may result in an ostensibly lower total price, it effectively signifies a reduced scope of supply. Consequently, post-purchase order placement, these excluded items often incur additional costs, frequently surpassing their initial bidding stage prices. Such occurrences precipitate cost overruns and protracted delays. Recognizing that cost plays a critical role in vendor selection, many vendors exploit this by employing various strategies to navigate or circumvent the cost-driven bidding process.
In practice, these strategically excluded scope items—often cursorily mentioned in exclusion lists—present an optimal avenue for vendors to recoup substantial discounts secured during contract negotiation and provide justification for extending the compressed delivery schedule. Thus, the section detailing exceptions and deviations in a bid emerges as its most crucial component, necessitating thorough scrutiny, exploration and verification. Moreover, the scope of supply should be definitively confirmed by each participating vendor to ensure uniformity across all bids. Failure to do so renders bid comparison and tabulation an exercise in futility, akin to comparing apples to oranges. This prerequisite establishes a foundational framework for impartially evaluating all bids.
Step 4: List of Options
Encourage vendors to propose any supplementary services they deem necessary for improved and more dependable machinery operation. This request extends beyond the predefined scope of supply and services. These additional items or services are presented as optional offerings at an additional cost. However, there exists a risk that a vendor might substitute an item from the scope with an alternative presented as an option. For this reason, meticulous scrutiny and validation of both the scope and optional items are imperative. Essentially, each vendor should initially affirm all items within the scope of supply and service outlined in the specification before delineating any additional items or services in a separate inventory.
Step 5: Bidding Process and Selection
Of course, price is always a primary factor during the selection process. Central to this consideration is the concept of total cost of ownership, encompassing all expenses associated with acquisition, subsequent operation and maintenance over the machinery's service lifespan. This entails not only the initial purchase cost but also ongoing operational and maintenance expenditures. In essence, the evaluation process should factor in estimated operational costs, such as efficiencies and power or fuel requirements, alongside maintenance expenses when making the selection.
Step 6: Cost of Lost Production
A decisive factor that often is missed or overlooked is the downtime cost. This is the cost of lost production due to the equipment’s unscheduled shutdown. In modern, large plants, this cost is often the most important consideration. This is closely related to reliability and availability of the proposed machinery or package. For instance, as a rough indication, the cost of a three-day production loss of a large, modern chemical processing plant due to an unscheduled shutdown of critical machinery, such as a large compressor, would be $2 million to $7 million.
This represents a significant cost and serves as a pivotal factor when considering machinery during the bidding phase. Anything that a vendor introduces that may impact the reliability and availability of the equipment could significantly impact value to the operator. It’s reasonable to ask a vendor to provide guaranteed reliability or availability of the machinery. But many vendors may not agree to this, in which case a vendor should at least provide estimated reliability metrics. Additionally, the frequency and duration of scheduled shutdowns for necessary maintenance, often referred to as "overhaul" or "major maintenance," should be scrutinized. It’s also important to ask vendors about scheduled maintenance and how much downtime each task will require.
Other Considerations
A crucial aspect during the bidding phase is assessing the level of support that can be expected from the vendor post-purchase, particularly in terms of operational and maintenance assistance. It’s important to evaluate the vendor's overall aftersales performance record and reputation. Another consideration is vendor diversity. Procuring equipment from a single vendor has some advantages. For instance, it may streamline processes, such as installation, commissioning, operation, maintenance and spare-part management. But there are instances where diversifying sources can help reduce risk associated with a single supplier should that vendor face supply chain disruptions or other issues that could impact its ability to deliver on agreements.
Stay tuned for part two of our two-part Spring Equipment Buying series. In the next article we will discuss the post-sales process, including after-order collaboration with vendors and final delivery tips to ensure timely receipt of the equipment.
