Global Equipment Procurement for Capital Projects

Natalia Zwart

While equipment prices have stabilized over the last several years, the current increase in project activity in North America is putting upward pressure on pricing and delivery times. Past experience shows that during hot markets prices increase rapidly and equipment quality suffers. During these periods, owners have to deal with overstretched vendors, a decline in skill levels at the fabrication shops, and a limited number of contractors with the capability to transport and install heavy pieces of equipment. Ultimately, this leads to a decline in capital project cost performance as well as schedule, and operability results.Procurement of major equipment is important to capital project effectiveness. Equipment represents a significant investment—on average, at least 20 percent of a capital project’s total cost is made up of procured equipment. Reduction of equipment costs reduce project costs and provide the competitive advantage. Timely delivery of  equipment is needed to achieve schedule goals. Equipment quality is an important factor in how well the facility starts up and operates.

Over the last decade, capital equipment procurement has undergone rapid and profound changes. The Industry saw significant escalation in equipment pricing, from 2003 to mid-2008. Figure 1 shows the composite equipment procurement trend based on the data collected by IPA. Various equipment types had different levels of escalation, with the highest levels by fabricated equipment, which at the height of the market in 2008 was 2.4 times higher than its 2003 levels.

>Another procurement challenge is the rise in Asian sourcing. Figure 2 shows that the percentage of equipment sourced from Asia has more than doubled. While Asia offers lower prices, the cost savings are often offset by quality problems, long delivery times, and high transportation costs, as well as duties and taxes. Equipment delivery cycle times have also increased over the last decade. The equipment procurement delivery cycle time is a key factor in project effectiveness. Delivery of vendor data is critical for engineering progress; delivery of the right equipment to the job site when required is critical for construction effectiveness. Problems with equipment delivery tend to have a negative effect on both cost and schedule performance. The last decade also saw an increase in equipment delivery schedule slip.

IPA’s previous research on procurement focused on developing reliable benchmarks for equipment prices; identifying practices that yield better process, faster schedules, and more profitable results; and evaluating the impact of various organizational structures and purchasing practices. IPA is launching a new Global Equipment Procurement for Capital Projects study to assess the current trends in the market for equipment procurement. The study will:

  • Advance Industry’s understanding of the current trends and practices in equipment procurement for capital projects. Identify practices that reduce equipment costs without sacrificing quality or delivery schedule duration or predictability. The caveat — without sacrificing quality or schedule — is critical because it is easy to reduce equipment costs by buying equipment of lesser quality or from less reliable vendors.
  • Evaluate industry practices aimed at improving procurement efficiency, such as organizational structures, procurement approaches, and contracting strategies.

Figure 3 shows a simple framework, which we propose to use to guide the analysis. The framework was developed, in part, from conversations IPA had over the last several months with procurement leads in a number of companies. The framework will be further detailed once we have an understanding of the specific interests of the companies involved in the study and have the access to information and resources. Nevertheless, the framework below is useful to assess how and which issues we plan to address. IPA’s proposed study will provide an in-depth evaluation of each of the procurement related elements and its impact on project outcomes.

Key Questions to Answer

Current Procurement Trends and Outcomes

  • What are the current equipment cost trends, delivery times, quality, and operability metrics? What are the regional advantages, if any, for equipment procurement? Do these advantages still exist if we factor in the total cost of procurement, including equipment purchase price, transportation costs, taxes, customs and duties (or any other tariffs and/or taxes), costs associated with quality inspections, expediting, and other?
  • What are the best approaches to identify procurement related risk, including political risk, vendor quality risks, and currency fluctuations, among others? What are the most effective approaches for risk mitigation?

Purchasing Practices

What are the current major approaches to purchase equipment, including competitive bid, sole source, and standing agreement/alliance suppliers? What is the optimal number of bidders to achieve competitive outcomes?

  • Do project characteristics, such as project size, complexity, degree of innovation, use of proprietary technology, and others, defi ne vendor selection approaches?
  • What are the primary vendor selection criteria and how do they affect project outcomes? What is the optimal timing for vendor involvement and is it affected by project characteristics and other factors? What are the current vendor capacities, capabilities, and quality performance?

Procurement Organization Structure and Staffing

  • Should procurement be led by owner or contractor? Which party achieves better results in vendor selection and qualification? Which party should lead expediting, acceptance testing, and quality control efforts?
  • Do procurement organizational structures affect the level of procurement resources available to develop and maintain market intelligence as well develop and manage vendor relationships? Do they also affect the level of procurement resources deployed on capital projects?
  • What are the best approaches to fi nd the right balance and risk tolerance between procurement objectives and project-specific objectives?

After its completion, IPA’s study on Global Equipment Procurement for Capital Projects will provide decision makers with the appropriate information (metrics) available to support and validate current procurement practices and to develop (or maintain) competitive advantage.

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