Capital Equipment

Capital equipment purchasing involves buying assets intended for use exceeding one year. There are several categories of capital equipment purchases. The first includes standard general equipment that involves no special design requirements. Examples include general-purpose material-handling equipment, computer systems, and furniture. A second category includes capital equipment designed specifically to meet the requirements of the purchaser. Examples include specialized production machinery, new manufacturing plants, specialized machine tools, and power-generating equipment. The purchase of these latter items requires close technical involvement between the buyer and seller.

Several features separate capital equipment purchases from other purchases. First, capital equipment purchases do not occur with regular frequency. A production machine, for example, may remain in use for 10 to 20 years. A new plant or power substation may remain in operation over 30 years. Even office furniture may last over 10 years. A second feature is that capital equipment investment requires large sums of money. This can range from several thousand dollars to hundreds of millions of dollars. Highdollar contracts will require finance and executive approvals. For accounting purposes, most capital equipment is depreciable over the life of the item. Finally, capital equipment purchasing is highly sensitive to general economic conditions.

Buyers can rarely switch suppliers in the middle of a large-scale project or dispose of capital equipment after delivery because of dissatisfaction. Furthermore, the relationship between the buyer and supplier may last many years, so the buyer should also consider the supplier’s ability to service the equipment. The consequences of selecting a poorly qualified supplier of capital equipment can last for many years. The reverse is also true. The benefit of selecting a highly qualified capital equipment provider can last many years.