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ACS meeting symposium participants debate the merits of strict contractual purchase agreements for scientific instruments "The end-status rationale of all pur chasing activities is the reduction of uncertainty: We seek assurances from the vendors that the equipment will do what they say it will, that delivery will be as stated, that the cost will be firm, and that there will be no added charges," explained Purdue Universi ty purchasing agent David R. Hodge at a recent symposium. And at the same session, Purdue chemistry pro fessor Robert E. Santini pointed out what is perhaps the most crucial as pect of purchasing from the research er's perspective: "When somebody buys a half-million-dollar instrument, they don't want to discover that this very expensive piece of equipment really doesn't do what they want it to do." Both men spoke about the art and science of instrument purchasing at a symposium on how to buy—and how not to buy—an analytical instrument. The symposium, organized by W. E. Baitinger of Purdue University and chaired by Fred Lytle and Jonathan Amy, both also of Purdue, was held in Chicago, 111., at the 190th National Meeting of the American Chemical Society. Performance envelopes Santini suggested a structured, sci entific approach to instrument selec tion that involves use of a perform ance envelope, a two- or three-dimen sional representation of a system's performance that makes it possible to evaluate a number of instrumental performance parameters in combina tion: "Especially with large-ticket items," he said, "you should be taking a look at a whole range of parameters. Ask yourself where your average sam ple will fall relative to the boundaries of an instrument's performance enve lope."
Although recommending this some what complex approach, Santini ad mitted that it has not yet caught on widely: "The one time I saw somebody generate performance envelopes was when a manufacturer wanted to know the limitations of his own instru ment." However, Santini disclosed af ter the symposium that his group is currently working on a performance envelope calculation method that will
If somebody has just bought a $500,000 piece of equipment, about the last thing he's going to tell his friends and competitors is that he really should have bought a different product. -Robert Santini be broadly applicable to major analyt ical instrumentation purchases. Ac cording to Santini, the goal of this ef fort is a method "that will allow users to fulfill their exact needs, and, at the same time, be equally acceptable to instrument manufacturers." Santini sees the performance enve lope concept as a potential replace ment for what is perhaps the most es tablished method of analytical instru ment evaluation, the word-of-mouth recommendation."There is a problem with asking people about equipment," Santini explained. "If somebody has just bought a $500,000 piece of equip ment, about the last thing he's going to tell his friends and competitors is that he really should have bought a different product. Instead, he'll tell you it's great. Then, the next thing you know, he'll be calling you up and
1484 A · ANALYTICAL CHEMISTRY, VOL. 57, NO. 14, DECEMBER 1985
saying, Ί understand you have the same three problems that we do. What do you do to get around those prob lems?' " Buyer-salesman interactions Many instrument purchasing prob lems arise from the nature of the rela tionship between buyer and salesman. One such problem mentioned by Pur due purchasing agent David Hodge re lates to a classic marketing concept, selective perception. "If you have a fa vorable opinion of a firm or of a sales man, you will accept their sales pre sentation more easily," he said. "You will even support the sale by asking the appropriate questions and guiding the presentation. Conversely, if you find a company or salesman objection able, even the best product is very dif ficult to accept." One of Hodge's pet peeves involves the buyer who prematurely discloses purchasing intelligence to an instru ment company salesman. "I would suggest," he explained, "that there is no reason whatsoever to prematurely divulge an instrument selection until the purchase order is ready to go in the mail. Every once in a while, I'll hear through the grapevine that a salesman has been informed that he is getting the order, long before we're done with the process. This is an outand-out no-win situation. If, by some odd chance, we come across a better instrument, it's literally impossible to try to convince the scientist to change his mind after he has divulged his de cision to the salesman." The four commandments In his presentation at the sympo sium, E. C. Olson, a laboratory direc tor from the Upjohn Company in Kal amazoo, Mich., cited four basic tenets of instrument purchasing for anyone 0003-2700/85/A357-1448A$01.50/0 © 1985 American Chemical Society
Focus contemplating a major capital equipment expenditure (over $100,000): • Make sure it's necessary. The instrument should fulfill an important need, not just be a "nice" addition. • Specify hardware that will minimize personnel costs, because, in the long run, people are usually far more expensive than instruments. • Don't buy serial number one of anything. • Don't buy the last serial number of anything.
Our specifications are generally considerably more rigorous than those set by the manufacturers, who, quite naturally, tend to set specifications so that all or nearly all production models will pass. - E . C. Olson Later on, Amy, an instrumentation specialist at Purdue and, until his recent semiretirement, the university's longtime director of chemical instrumentation, countered Olson's third point by pointing out that somebody has to buy the number-one instrument. "We have had many," said Amy, "and we have worked closely with manufacturers to correct faults. The good part is that you can do things nobody else can for a period of time, a real plus in competitive research environments. People who do this also perform a service to the rest of the scientific community by helping to establish a technique and to define the required instrumentation." The ironclad purchase contract Olson went on to describe a rigorous purchase contract that Upjohn's physical and analytical chemistry research unit uses in its dealings with instrument companies. The terms of this contract commanded rapt attention among conferees and became the focus of comment and debate for the remainder of the symposium. The purchase agreement is used for major equipment purchases—"certainly anything over $100,000," said Olson, "perhaps less." Although lengthy, the ten main points of this agreement are well worth repeating here: • The contract begins by voiding all the manufacturer's standard terms and conditions, including performance specifications, unless those terms and
conditions are specifically incorporated by later reference. • The equipment is then described according to a set of Upjohn-written performance specifications. "Our specifications are generally considerably more rigorous than those set by the manufacturers," said Olson, "who, quite naturally, tend to set specifications so that all or nearly all production models will pass." • Delivery dates are established. Prior to shipment, however, the instrument must pass a set of performance tests conducted by Upjohn personnel. After these tests have been completed, the vendor still cannot ship the product until it receives Upjohn's written authorization to do so. Equipment shipped to Upjohn without this authorization is not accepted. "We have the option to waive the preshipment test," said Olson; "the vendor does not." • Partial deliveries and the payments for such, if permitted, are defined. "Vendor engineers are encouraged to make a site visit to our laboratories to establish the suitability of the proposed site to house their instrumentation," said Olson. • Title passes to Upjohn upon delivery to their research loading dock in Kalamazoo, Mich. If there are any problems in transit, it is thus the vendor's responsibility to deal with the carrier. However, Upjohn assumes all transportation and insurance costs. • Post-installation acceptance tests and specifications are clearly defined, as are the conditions for return of the equipment to the vendor, at the vendor's expense, in the event these tests cannot be satisfactorily completed in a defined period of time. • If a poorly performing instrument is not sent back to the vendor, a liquidated-damages clause kicks in. This clause requires the vendor to pay a penalty, usually 1/1000 the cost of the instrument per day, seven days a week, until the instrument is accepted, if it cannot be made to meet specifications within a defined period of time. • "We insist that we have a complete set of schematics and other documentation for our instrument, as built, prior to making the final payment," said Olson. "We also insist on the right to copy this documentation for our own use." • Upjohn usually specifies a 50% down payment at the time of arrival of vendor personnel to begin installation, not upon delivery or upon receipt of an invoice. The other 50% is paid after satisfactory completion of the installation and after the instrument passes all performance specification tests.
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Performance in Kalamazoo must be as good as or better than performance prior to shipment. "Our accounts payable people are instructed not to pay invoices without our written authorization to do so," said Olson. • "We generally insist on a one-year warranty," Olson concluded. "In my opinion, a 90-day warranty on a halfmillion-dollar piece of equipment is totally ridiculous. The warranty period never starts until the day following acceptance." One might think it would be impossible to get an instrument vendor to agree to a contract such as this. But, to the contrary, Olson said, "To date, we have not found a single vendor with whom we have not been able to negotiate a satisfactory purchase agreement. Nor has there been a single case where it was necessary to invoke the liquidated-damages clause. We did tell one vendor that we would do so within 10 days if certain problems were not corrected. Miraculously, problems that had defied solution for three months were corrected in two days." Acceptance statements Amy points out that he particularly admires the Upjohn contract's provisions for carefully defined, minimum acceptable performance specifications. "Modern instruments have many modes of operation, accessories, configurations, and software options," he
In my opinion, a 90-day warranty on a half-million-dollar piece of equipment is totally ridiculous. - E . C. Olson
said, "and it is impractical, if not impossible, to check all of these in a final test. This is why it is so important that the purchase order specify what you need to do with the instrument, so that this can be checked and demonstrated. Acceptance can be defined in terms of the manufacturer's own specifications or in terms of what it is that the customer must do with the equipment, but it should be defined in advance." Hodge agreed with Olson and Amy that "every order for a complex instrument system should contain a statement of some sort defining acceptance: 'When thus and so happens, the order will be considered complete and payable and the warranty will com-
Focus mence.' I envy Upjohn if they have that built into their system, because we do not. It sounds so beautiful. The statement must be definitive from a scientific and technical standpoint, meaning it must be prepared by the user. And, of course, it must also be acceptable to the vendor." Hodge pointed out that in the absence of a definitive statement of acceptance, vendors will routinely make partial shipments and then expect cash for the equipment delivered. "You won't have a completely usable installation," he complained, "and yet, without an acceptance statement in the contract, we're obligated to pay. There should be some statement that we will not pay for this instrument unless it is installed, checked out, and operating to our satisfaction, and that must be done up front. "I still contend," Hodge continued, "that some manufacturers intentionally provide untested equipment. And, under the terms of the warranty, if the instrument doesn't work properly we're obligated to return it to the firm's facility, at our expense, for them to reassemble it and check it out." Hodge feels that problems are espe-
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cially likely to arise when the purchasing department is bypassed in the early, crucial stages of the negotiating process. "Ideally," he said, "the purchasing department should be in-
return responsibility back to the vendor at the time of installation. In that instance, I think the vendor should retain responsibility from the factory, clear through delivery, installation, and checkout. At that point, ownership transfers and the warranty commences."
There should be some statement that we will not pay for this instrument unless it is checked out, installed, and operating to our satisfaction, and that must be done up front. -David Hodge
90-day warranties A new wrinkle in instrument sales, according to Hodge, is the 90-day warranty, with a surcharge for extended warranty privileges. "This bothers me no little bit," he said, "because this clearly indicates that the manufacturer has reservations about his ability to provide a piece of equipment that will last a reasonable period of time." But George Glenday, marketing manager for Hewlett-Packard's analytical instrument group, responded that many instrument company warranties are only intended to cover manufacturing defects and infant mortality. "We have found that most of the failures do occur in the first 90 days," said Glenday. "In fact, most of them occur in the first 60 days, so we put an extra 50% cushion on it." Amy defends the instrument vendors on this point. "The 90-day war-
volved with the transaction right from the opening minute." And he agreed with Olson that a vendor should retain responsibility for an instrument while it is being shipped. "In the case of an instrument that requires installation," said Hodge, "it's clearly silly for a buyer to accept ownership of the instrument at the shipping point [at the factory], be responsible for the instrument in transit, and then temporarily
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1488 A · ANALYTICAL CHEMISTRY, VOL. 57, NO. 14, DECEMBER 1985
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Focus ranty was a marketing decision that was made as an alternative to raising prices," he explains. "Frequently, warranty calls seem to come in at the end of the warranty period, no matter how long it is." Special terms mean special prices In a later comment on the symposium's proceedings, William E. Offenberg, director of North American sales for Perkin-Elmer Corporation's Instrument Group, agreed that negotiated purchase contracts may at times be appropriate for instruments that are custom-built, that represent new technology, or that cost over $100,000. However, he explained that "the vast majority of instrument sales involve low- to medium-priced products. These products are offered at a price calculated on margins that assume a sale governed by the vendor's terms and conditions, which typically include a 90-day warranty and a guarantee to meet vendor-published performance specifications. "Consider the purchase of a gas chromatograph," he continued. "These instruments are typically purchased and sold, in the vast majority of cases, by an exchange of forms. The
Changes t o . . . terms and conditions at the request of a buyer during negotiation must be recognized as materially affecting the vendor's cost and business risk. -William Offenberg
vendor provides the buyer with a quote, the buyer issues a purchase order, and, finally, the vendor responds with an order acknowledgment. Negotiating special terms and conditions is neither appropriate nor practical." Although instrument manufacturers can accommodate special buyer terms and conditions for higher-priced and customized instruments, Offenberg pointed out that a vendor's standard quoted prices assume a sale governed by the vendor's own terms and conditions. "Commitments to such things as warranty period, specifications, acceptance testing, payment terms, FOB point, and risk of loss are all factored into the pricing calculation," he said.
"Changes to these terms and conditions at the request of a buyer during negotiation must be recognized as materially affecting the vendor's cost and business risk. Therefore, negotiated changes will have an effect on the system price." For example, according to figures provided by Offenberg, an additional requirement for a one-year warranty in place of a standard 90-day warranty will increase the sales price 4.5-13.5%. And a requirement for a 30-day buyerspecified acceptance test will cost the buyer anywhere from 10% to 30% more. A m i x e d reception
The restrictive purchase agreements advocated by Olson and Hodge met' with a mixed reception from symposium participants. Some admired the consumerist orientation of these contracts, while others were troubled by their contentiousness. To Robert Santini, for example, this type of agreement tends to put a damper on cooperative ventures. "In the half-million-dollar range," said Santini, "you can go to a vendor and have a piece of equipment custom-designed to fit your needs, assuming that
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vendor can be convinced that there are at least two or three other people out there who need that type of instrumentation. I think you walk a narrow line between getting the contract clauses you want and establishing the kind of rapport that gets you to work together, which in fact pushes the state of the art of instrumentation. Sometimes you've just got to exercise a lot of judgment." Upjohn's Olson admitted that initial vendor reaction to his unit's rigorous purchase agreement was not very
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There's far less of an adversarial relationship if you define these things ahead of time instead of signing a contract under standard terms and conditions, and then asking the vendor later on, "Why can't you make the stupid thing do what you say?" - E . C. Olson
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1490 A · ANALYTICAL CHEMISTRY, VOL. 57, NO. 14, DECEMBER 1985
favorable: "The usual reaction was, 'What's the matter, don't you trust us?' However, I believe that working out all the details of a purchase, installation, acceptance, and warranty in advance of issuance of a purchase order is a sound way of doing business. We enjoy better relationships with more vendors now than in the past. There's far less of an adversarial relationship if you define these things ahead of time instead of signing a contract under standard terms and conditions, and then asking the vendor later on, 'Why can't you make the stupid thing do what you say?' "It is of course essential," Olson continued, "that both parties be reasonable and be willing to negotiate in good faith. If this is not the case, an impasse will be very quickly reached." Amy believes that "all instrument manufacturers are striving to design and produce a quality product. But some companies are better at this than others, which is why we need to specify what we need and expect." "We understand the need to negotiate a set of terms and conditions that are mutually acceptable and that protect the interests of both buyer and seller," concluded Offenberg. "Our goal in the negotiation is to create a profitable win-win situation in which both parties are comfortable and clearly understand each other's roles and responsibilities." S.A.B.
