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Managing Obsolescence

One of the best approaches for proactively managing obsolescence is to develop and maintain a multiyear capital plan that explicitly designates a specific portion for instrument replacement each year.

by Wayne Collins
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Weighing the Benefits of Technological Improvements Against the Cost of a New Instrument to Determine ROI

While living in my house in Houston, Texas, I managed to keep the original builder's quality air conditioner, which is heavily used for approximately seven months per year, operating for nearly sixteen years. I learned to make repairs myself, replaced parts, and even did a complete rewiring when a relay fault started a fire and burned the original wiring. When the system was finally beyond repair, I grudgingly spent several thousand dollars to purchase a new high-efficiency system. It was only after I received the first electric bill after installation of this system that I realized how foolhardy I had been to preserve the original equipment for so long. The more than 50 percent reduction in the electric bill with the high-efficiency system means I would have saved thousands of dollars (not to mention hours of my time) if I had only replaced the old inefficient system years earlierbut the fact that it kept me cool in the summer heat, coupled with the expense of a new system, blinded me to the cost that I was incurring. As lab managers, how often do we make this same mistake by continuing to use lab instruments long after they are obsolete, simply because they continue to operate? These days, when budgets are shrinking and cost control is at the top of managers business issues, it is time to take a close look at these hidden costs of maintaining obsolescence.

While it is natural to focus on the high cost of replacing an instrument, the business benefits of updating obsolete technology might easily be overlooked. Technological improvements in instrumentation continue to bring real benefits that accrue from speed of analysis, increased capacity, labor savings, operational efficiencies, higher precision, greater ease of use, enhanced reliability, lower maintenance requirements, improved safety, reduced environmental impact, and numerous other intangibles. It behooves lab managers to weigh these types of benefits against the cost of a new instrument, to determine if replacement will yield a positive return on the investment. Table 1 summarizes some of the technological advantages that might come with a new instrument, as well as a few of the possible business benefits that it might deliver for the laboratory. Instrument salespeople can easily point out which technological advantages apply to their products, and the lab manager can estimate the worth of the benefit to the business. So, lets take a brief look at some of the advantages that might be realized by adopting these new technologies, in order to understand how they might affect lab operations.

Labs that measure customer satisfaction usually find faster sample turnaround time to be the number one improvement opportunity, or if not number one, almost surely among the top three. This is true even for labs that most managers would agree provide excellent service. Simply put, you can never get the answer back to the customer too soon. So, faster analyses are highly valued by lab customers who can use the data to solve problems or make decisions more quickly. In addition, faster analyses add value for the laboratory itself by extending the capacity of the instrument to allow more tests to be performed on it each day. And speedier methods may even allow testing to be consolidated onto fewer instruments, which can reduce maintenance, consumables, regulatory documentation requirements, and overall costs.

So, how much increase in the speed of analysis might a manager expect to gain by employing a new technology? Recognizing the benefits that accrue from speed, instrument manufacturers have developed technologies that in some cases reduce analysis time by as much as an order of magnitude. Rapid liquid chromatography and high heating rate/low thermal mass ovens in gas chromatography are but two examples of technologies that can significantly increase the speed of analysis without sacrificing test quality (in fact, possibly improving it). For commercial labs, speed translates directly into incremental revenue through higher volume and is easily assigned a dollar value. For captive labs, speed also has a monetary value, although pricing is less transparent. For example, speed might be priced in terms of reductions in analyst labor, typically valued at approximately $80/hour, or in terms of the even more valuable time saved in regaining control of an out-ofspec plant process, which can be worth tens of thousands of dollars per hour. It is hard to imagine a lab in which speed of analysis is not highly valued.

Table 1. Common business benefits derived from introduction of new technology

The green movement, along with other practical requirements, has inspired adoption of technologies that permit much smaller sample sizes without sacrificing measurement quality. Adoption of these technologies has both safety and environmental advantages for organizations. Reduced sample requirements can significantly reduce personnel exposure to potentially hazardous chemicals during sample preparation while also reducing waste disposal quantities and costs. Organizations are usually very receptive to funding these green initiatives, which can garner public praise for displaying social responsibility in the conduct of their business while simultaneously lowering their operating costsa double win. Technological advances that positively affect safety and/or environmental performance typically provide very strong business justifications for replacement and are sometimes expedited through the capital budget process.

One of the paradoxes of the laboratory instrument market is that as the technology has become ever more complex and sophisticated, the instruments have actually become easier to use. Nearly every instrument now has computer-running software that not only optimizes the performance of the instrument but also aids in the interpretation of the data. It is now possible for technicians to do material identifications using spectral libraries or to determine protein structures that required the skills of a highly trained chemist just a few years ago. Software is generally the first part of an instrument that becomes obsolete and thus become a major impediment to increasing productivity. This type of obsolescence is an especially insidious problem, becomes older instruments can lock labs into specific versions of software packages that are interfaced with other computer systems such as the LIMS, thereby limiting flexibility to upgrade. It is not uncommon to find labs that are held captive by obsolete software that severely limits their operational choices. Updating software should be a high priority because of both the advanced intelligence of newer versions and the potential reduction in the risks that are associated with maintaining obsolete versions. And lab managers can sometimes get these software upgrades funded through the IT budget rather than using lab funds.

Declining reliability is a sure sign of the impending need for replacement. As instruments age beyond a critical point, it is not uncommon to experience rising maintenance costs, the need for more frequent calibrations, more downtime, and other problems requiring intervention. Manufacturers may halt support for the instrument, and parts availability may become problematic. Prudent lab managers heed these signs as warnings that it is time to replace the instrument. However, relying solely on this replacement approach can be risky. First, many labs do not have an adequate data gathering and reporting structure to accurately identify the point at which reliability begins to decline, so the instrument may fail beyond repair before action is taken. Second, funding a new instrument typically requires a lead time of six months to a year in order to usher it through the capital budget process and obtain the necessary approvals. If the lab has no backup instrument, then it is best not to rely solely on conditional indicators to schedule replacement, lest customers be left without the data needed for their operations. Table 2 suggests several warning signs that should alert the lab manager to take a closer look at older instruments. These signs in and of themselves do not constitute grounds for replacement, but they should stimulate conversation about the state of obsolescence of the instrument.

Tax codes recognize the need for obsolescence in order for a business to remain competitive in the marketplace the purpose of depreciation is to set aside funds to replace equipment as it wears out or otherwise becomes obsolete. This does not imply that lab instruments are expected to be unfit for use beyond the time that they have been fully depreciated or that it is not good business practice to continue to use them. The depreciation schedule or rate at which assets are written off is driven primarily by financial considerations and is only loosely related to the actual useful lifetime of the item. However, full depreciation should signal the lab manager to begin looking at the business case for replacement, regardless of how well the instrument continues to function. Also, the business case must consider that the depreciation deduction for the new instrument will likely recover as much as 40 percent of the initial cost in tax savings over the scheduled period.

One of the best approaches for proactively managing obsolescence is to develop and maintain a multiyear capital plan that explicitly designates a specific portion, perhaps 20 percent, for instrument replacement each year. The list of fully depreciated equipment obtained from the organizations financial branch can identify candidates for this budget. Lab managers typically assign the chemist responsible for the depreciated instrument the task of evaluating potential replacement candidates by tabulating advantages such as those in Table 1. Assigning an approximate dollar value to the business benefits for each item and comparing that with the cost of replacement will produce a prioritized list based on return on investment. All that remains is to stage replacement of the highestpriority items (that is, those with the greatest financial potential over a three-to-five-year period) according to the expected available funds that can reasonably be devoted to replacement for each year. This simple evaluation process has the added advantage of providing excellent input into the development of the business case that will eventually be required to justify the selected capital items based upon the value that they bring to the business. And since replacements are scheduled over several years, the process provides a mechanism for maintaining a reasonable balance between acquisition of new capabilities and replacement of current assets within the allotted funds.

Table 2. Possible warning signs of obsolescence

Keeping the lab furnished with modern, technologically advanced equipment not only keeps laboratory operations competitive by increasing productivity; it also provides such intangible benefits as staff pride in the workplace and enhanced stature with customers. It is understandable that one might have a special fondness for those old reliable lab workhorses that have served so well for so many years, but lab managers must recognize that this devotion comes at a cost. And a five-year capital plan to quantify the cost and manage obsolescence is just smart business.