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Week of 20 January 2020: Leveraging Capital Negotiations

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I know a company, known for long term expansion plans that, when procuring a paper machine, buys not one but two. One for delivery now and one for delivery in a defined future window. There are built in cancellation clauses and so forth for that future machine in case conditions change. However, this arrangement works out well for both the procurer and the supplier. The procurer receives a good price and the supplier can do some planning to fill their workshops in the future.

If you have the corporate foresight to do so, leveraged buying can provide tremendous savings for the procurer and savings for the supplier as well. Have a fleet of eight machines and plan on adding another? No doubt your fleet has a steady, annual replacement budget of pumps, valves, switchgear and other regularly replaced items. Include this purchasing need for the next two years in the specifications for your new machine procurement bid documents.

You'll get some suppliers excited. For suddenly you are not just buying quantities for one machine, but likely quantities in some cases that would reflect the needs of two or three machines. You'll attract more bidders and they will behave enthusiastically to supply your needs.

This type of activity requires careful coordination amongst the new machine's project management team as well as the maintenance and procurement teams of all portions of your fleet brought under this umbrella. Depending on their final use, the procured items will likely need to be assigned to different profit or cost centers and treated differently for tax purposes. However, if this is done carefully and efficiently, it will make up for the small amount of administration time.

This is not a new idea by any means. Nearly fifty years ago, when I went to work for consumer products company's Central Engineering Division, one of the first assignments I had was to be the assistant engineer on the company's annual Air Handling Unit Blanket Order Procurement Team. With new plants and maintenance needs in many areas of the company each year, we bought Air Handling Units (AHUs) on a Blanket Order. At the time, our need was close to $4 million dollars per year (around $21 million in today's dollars) of AHUs of various sizes and configurations. There were three domestic suppliers and we visited them all. We had their attention. We got good prices.

Notice, we were not buying a quantity of identical units, in fact, in any given year, it was likely that only two or three units would be of the same configuration. What got the suppliers' attention was that we were helping them fill their shop time. We were the base load.

If you are a decent size company, you can do this, too, with almost any item that you buy in quantity. Leveraging a new capital project with this idea saves money across the company. The suppliers are happy, too, for you are filling their base load.

For safety this week, fifty years ago OSHA was just coming into being, so we did not think too much about the safety aspects of procurement. Today, if you procure as I have outlined above, you should be able to negotiate some extra special safety aids, such as videos, animations and so forth.

Be safe and we will talk next week.


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