There are primarily three reasons why a device manufacturer would want to buy surplus/used equipment.

1.The original equipment manufacturer (OEM) no longer manufacturers the model of equipment required

2.New equipment cannot be delivered in time

3.The cost of used equipment is less than the cost of new equipment

Reasons #1 and #2 are easy to confirm because of the availability of new equipment when it is required.Reason #3 is much more difficult to accurately quantify and would be more correct if it read “total cost” and not simply “cost”.

Many companies make the decision to buy a piece of used equipment based solely on the acquisition price quoted by the dealer.And all too often,the total cost of finally placing the equipment into production ends up being much more expensive than if the buying company had purchased the equipment new from the OEM.

For Example

Let us assume that the price of a new machine from the OEM is quoted for $410,000 and a used equipment broker quotes the same model of equipment for $205,000.On the surface that sounds like a pretty good deal because the buyer only needs half as much capital to purchase the machine.The manufacturing manger is happy because he is saving money and the buyer in the purchasing department is happy because her performance is measured on how much she saves the company.Being able to report a 50% savings will make both of them look good,or will it?

In our example,the decision is made to purchase the used piece of equipment for $205,000 and the OEM is notified to cancel the new equipment order,which he does.A few days later the broker contacts the buyer and says that there has been an unfortunate mistake made in preparing the price quotation.The seller of the used system is asking $250,000,not $ 205,000.The buying company is obviously very unhappy but rationalizes that $250,000 is still better then $410,000 and since the order for the new machine has already been cancelled,the buyer sends the broker an additional check for $45,000.

The buying company now sets out to pick up the used machine that they have just purchased,only to discover that the equipment is still installed in the seller's wafer line.For confidential reasons,the seller will only allow the OEM into the wafer fab to de-install the equipment.Having no choice,the buyer agrees to have the OEM de-install the equipment for a fee of $35,000.

However,during the de-install,the OEM discovers that the equipment had become contaminated while in the fab and it will need to be decontaminated before it can be shipped.The decontamination can be done locally for $25,000.

The decontaminated equipment is soon ready for crating and shipping to a refurbisher.The crating and shipping fee is $15,000.

Once the equipment arrives at the refurbisher's facility,it is discovered that several more components need to be replaced than were in the original estimated and the revised refurbishment fee will be $60,000.And in addition,the refurbisher discovers that the software license isn't transferable and the OEM is asking $40,000 for the rights to the software.

The refurbished tool is finally ready to ship and be installed at the buyer's facility.The shipping fee is $10,000 and a local technician is found who agrees to install the equipment for $15,000.

I assume you have been adding the costs as we have gone along and have figured out by now that the “good deal”the buyer thought he had found is not such a good deal after all.The refurbished tool is going to cost the buyer a total of $450,000,which is $245,000 over the original price and $40,000 more than the cost of the equipment if purchased new.

But our example is not over yet.

Four months after the equipment is installed,it quits working.Since the refurbisher has only warranted the refurbished tool for 90 days,the OEM is asked to come back and repair the machine.The OEM agrees to fix the machine but since the machine was not purchased through the OEM,the buying company will need to purchase a service contract for an additional fee of $50,000 .Reluctantly,the buyer agrees.

The total cost of the $205,000“goog deal”is now $500,000.

The Moral of the Story

What is it that we should hope to learn from this example?That buyers should stay away from used equipnt and only purchase new equipment?

No,because as I explained at the beginning of this article,there are times when new equipment is no longer available,cannot be delivered in time,or even on a total cost basis is significantly more expensive than used equipment.

The lesson to be learned here is that the buyer must do a thorough job of researching and identifying the “total cost”when purchasing used equipment.The buyers of used equipment need to be much more experienced and knowledgeable in all aspects of the procurement process,even more so than buyers of new equipment.However,device manufacturers are often so caught up in the excitement associated with new equipment that they many times under resource the used equipment procurement function and then wonder why they end up owning a “bad deal.”