The process of scaling up laboratory capacity, replacing old equipment, or purchasing new technology to help accelerate your team’s objectives must be accompanied by carefully evaluating the overall costs involved. But how should you determine whether a capital equipment purchase is the best option for your team, and how do you ensure your business case gives you the highest chance of success for approval? This article explores the key factors to consider when building a business case for capital equipment purchases, according to feedback from procurement leaders with a combined 30+ years of experience in the field.
When is Capital Equipment Purchase Needed?
The purchase of capital equipment significantly differs from the recurrent purchase of consumable materials and relatively low-cost equipment (e.g., a pH meter) that typically utilizes an operational budget. Instead, capital equipment is purchased through a department’s capital expenditure (CapEx) budget. Capital equipment can be described as a high-cost, fixed assets to be capitalized and depreciated over the equipment’s lifecycle (e.g., confocal microscope). In broad terms, a capital purchase can either satisfy a team's current needs or help meet new research or business objectives.
"When considering day-to-day business operations, two factors could determine a case for capital purchase: obsolescence and capacity. Is there a need to replace or update your existing base? Are you expanding your business? Alternatively, the business may be changing. Are you looking at new technology that will help drive a specific strategy for your department or division? Any of these situations would highlight a need for capital equipment purchase." — Robert Jerzewski, PhD, former Director of Equipment Commissioning and Qualification at Bristol-Myers Squibb
Using laboratory capacity as an example, the available equipment should be able to satisfy current project needs while considering headcount. However, if a laboratory is expanding or relocating into a larger space, capacity also increases, and a capital equipment purchase will be needed to ensure existing workflows continue running smoothly. In addition to capacity, different equipment involved in a single workflow must be compatible with each other and the relevant software. If the software is no longer supported by a department’s IT service or the manufacturer, that instrument becomes obsolete and will have to be replaced with a new model through the capital purchase process. Alternatively, team objectives may change by offering a new service, branching into a new market, or switching research fields. In this case, it is likely that needs cannot be met using existing equipment alone, and new technologies must be introduced.
Building a Business Case
All business cases for capital equipment purchase, regardless of the instrument in question or template being used, follow the same format and include three key sections: an executive summary, a situational analysis, and financial justification.
- Executive summary: a contextual introduction outlining the problem, proposing a solution, and stating the predicted results and benefits of the purchase
- Situational analysis: a more detailed review of the issue, supported by financial data and highlighting where the new instrument would have an impact. This should also include a discussion of potential risks to the proposed solutions and the alternatives available, such as upgrading the current technology
- Financial justification section: covers all the costs associated with the purchase, including installation and maintenance costs, as well as the predicted financial benefits and forecasted income and budgets associated with the new instrument
What to Consider During the Justification Process
When completing the justification documentation, it is important to consider the views and priorities of all individuals involved in the CapEx management and include expert input from laboratory personnel who will be using the new instrument. A decision matrix displaying the requirements and limitations of each individual or group involved in decision-making can be a useful tool to balance viewpoints, stay on budget, and ultimately support the business case for the best-suited supplier or equipment for the team.
Initially, direct users should confirm which technical specifications they require and pull together an executive summary focusing on instrument capabilities, quality, and additional supplier-provided services, such as maintenance plans. Those who will use the equipment are best suited to identify where new instrumentation is needed and research potential solutions. Various research teams within the same organization may require the use of the same instrument. For example, an HPLC instrument may be utilized by R&D, QC, QA, external projects, and internal testing teams. All these parties will have the same requirements for an instrument but demonstrating a piece of equipment’s multifunctionality will further support the business case.
Departmental leadership teams and procurement leaders will be focused on the financial side of the business case, taking into consideration all the additional organizational expenses and overall CapEx and operational budgets. In addition, facilities management and health and safety teams will inform on the installation and setup stages and compatibility with existing infrastructure.
Tallying Up the Costs
When putting together a business case for capital equipment purchase, a major consideration is the cost associated with the new equipment, not just in procurement but overall costs throughout its lifecycle.
"When building the business case, the technology and price are both important criteria. For both, it includes the equipment and services. I would always consider the total cost of ownership, including the price of the instrument and its upkeep." — Vice President, Head of Capital Investment at Pharma Company
The total cost of ownership includes the following:
- Purchasing: the initial cost of buying a new instrument, along with delivery. When scheduling delivery, it is also important to evaluate the options available. Site location and access will play into this and may incur additional costs
- Installation: does the instrument need to be installed or built into a lab, and can this be done in-house by facility management teams, rather than a specialist engineer from the manufacturer?
- Set up: can the new instrument be connected and integrated into existing systems and software by the user, or will this require a specialist engineer?
- Compatibility: is the new device compatible with the software currently used in the laboratory, or will the whole system require updating or replacing? Can current disposable materials be used with the new equipment?
- Insurance: most equipment will come with a form of warranty, but will it also require insurance? If so, does the manufacturer offer an insurance plan, or can the instrument be listed under the client’s existing insurance policy?
- Ongoing maintenance: some suppliers offer a maintenance plan with regular check-ups and ongoing support, while others simply provide a call-out service in case of emergencies. Each of these plans comes with a cost, dependent on the level of coverage and support. For most teams, the maintenance cost will come from the operational budget. If that budget is not increasing, maintaining the equipment may not be possible
A thorough business case should encompass the overall cost of ownership throughout the equipment lifecycle, views of all relevant stakeholders, and a comprehensive demonstration of how the particular instrument is the optimal choice for a specific laboratory. Incorporating each of these elements, alongside supporting evidence, is the best way to ensure your justification documentation is compliant and, therefore, most likely to be successful.
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