Andrew Sinclair
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The growing acceptance and adoption of disposable technologies raises the question, What is the cost impact of these technologies?
This question sounds simple but hides complexity, in terms of what is included in the cost evaluation and the evaluation methods
used.
METHODOLOGIES TO EVALUATE COSTS
Disposable technologies have the potential to significantly reduce plant complexity and initial start-up capital costs.1 The benefits of disposable technologies, however, extend beyond reducing start-up costs, and also can include:
- reduced time to market, based on a quicker build and validation of facilities
- reduced capital investment, resulting from reduced capital infrastructure
- reduced cost of operations
- improved flexibility in operation, in terms of managing process and product change
- improved compliance
- simpler material and people flows.
As a result, many companies now wish to understand the broader cost impact of disposables. The critical question is, What
is the best evaluation method?
To evaluate costs, a robust cost model is required, in which the methodology and assumptions are transparent. Such a model
will provide managers with better insight into the key cost drivers of the manufacturing process and the sensitivity of the
overall cost of goods to changes in these key parameters. A good model helps evaluate the cost impact of implementing different
technologies and the effect of process changes, such as increasing product titers and yields, and can be validated with financial
accounting data.
Some of the commonly used methods for evaluating projects are net present value (NPV), internal rate of return (IRR), return
on investment (ROI), and cost of goods sold (COGS). In biopharmaceutical manufacturing, the COGS model is by far the most
commonly used method. Although the COGS model has the merit that most people in the industry understand it, it is not the
most rigorous or sophisticated method. For example, a COGS model should not be used when there is a need to understand the
interplay among the expenditures, timing, and project risk.
The other three methods, NPV, IRR, and ROI, all provide useful tools for decision-making, particularly for capital investment
and project approval. NPV and IRR are particularly useful for evaluating potential long-term projects because they account
for the upfront investment required as well as the timing of future cash flows and the risk and opportunity cost of the project.
Given that disposables can delay and reduce capital expenditure, these methodologies are able to capture that benefit together
with the cash flows associated with manufacturing operations.
The NPV methodology is the best technique to analyze alternative technologies and manufacturing strategies, because it accounts
for the impact of delays in expenditures and properly accounts for the time value of money.
No matter which manufacturing cost model is chosen, it is important that certain management accounting techniques, such as
lifecycle cost analysis and activity-based costing, be incorporated into the model to account for the significant effect manufacturing
efficiency has on the cost of goods. For example, the number of successful production runs per year and the cost of facility
downtime and batch failure often have a much greater effect on overall manufacturing costs than changes in raw material or
labor costs. Also, one should exercise care in comparing cost figures from different sources. Common problems when comparing
data relate to consistency in methods and assumptions, especially when it comes to handling capital costs.
THE SCOPE OF THE ANALYSIS
Table 1. Operating sequence for a typical reusable column
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Once the optimum cost analysis model has been identified, the next step is to define the purpose of the analysis, for example,
technology evaluation, supplier evaluation, or operations optimization.
