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Case study-- Biopharma Inc.Presented by:Prateek Mittal 2010PMM111 Yatendra Singh 2010PMM115 Himanshu Bhatt 2010PMM132

Main points Problems faced in financial performance of biopharma Inc. Steep decline in profits. Very high costs at Germany and Japan plants. Stable demand across the globe. Company could no longer afford to have surplus capacity. Aims at having an efficient network. Cutting the costs is the top priority.

Background Biopharma Inc. is a global manufacturer of the bulk chemicals used in pharmaceutical industry. Two patents- - highcal and relax. Chemicals used by companies internal pharmaceutical divisions and also sold to other drug manufacturers. Currently all plants are setup to be able to produce both chemicals.

Plantwise Sales, Production, Capacity(2005)HighcalRegion Latin America Europe Asia w/o Japan Japan Mexico U.S Plant Brazil Germany India Japan Mexico U.S Capacity 18 45 18 10 30 22 Sales 7 15 5 7 3 18 Productio n 11 15 10 2 12 5 Sales 7 12 3 8 3 17

Relaxproductio n 7 0 8 0 18 17

Main points continued Japanese plant is best in terms of its ability to handle regulatory and environmental issues. Germany has got the best production ability. German plant has routinely had the highest yields.

Fixed and variable production costs at each Biopharma plant(2005)Plant Plant F.C ($ million) Highcal F.C Relax F.C ($ million) ($ million) 5 13 4 6 6 5 5 14 4 6 6 5 Highcal R.M ($/kg) 3.6 3.9 3.6 3.9 3.6 3.6 Highcal prd. ($/kg) 5.1 7 4.5 7.5 5 5 Relax R.M ($/kg) 4.6 5 4.5 5.1 4.6 4.5 Relax prd. ($/kg) 6.6 8.5 6 9 6.5 6.5

Brazil

20

Germa 45 ny India Japan Mexic o U.S 18 17 30 21

Transportation costs from plant to markets($/kg)From/to Brazil Germany India Japan Mexico U.S Latin America 0.2 0.45 0.5 0.5 0.4 0.45 Europe 0.45 0.2 0.35 0.4 0.3 0.3 Asia w/o Japan 0.5 0.35 0.2 0.3 0.5 0.45 Japan 0.5 0.4 0.3 0.1 0.45 0.45 Mexico 0.4 0.3 0.5 0.45 0.2 0.25 U.S 0.45 0.3 0.45 0.45 0.25 0.2

Main points continued If a plant maintains the capability to produce a particular chemical, it incurs the corresponding product related fixed costs even if the chemical is not produced. The variable production cost of each chemical consists of two components- RM & Prd. If any plant is idled, it would only incur fixed cost. Import duties are imposed acc. to import tariffs of the market region. Local production within each region is assumed to result in no import duty.

Import tariffs

Latin America 30%

Europe 3%

Asia w/o Japan 27%

Japan 6%

Mexico 35%

U.S 4%

Questions ?How should biopharma have used its production network in 2005? Should any other plants be idled? What is the annual cost of your proposal including import duties? Ans: If :n = no. of potential factory locations m= no. of market or demand points Dj= annual demand from market j Ki= potential annual capacity of factory j Fi= annualized fixed cost of keeping factory i open Cij= cost of producing & shipping one unit from factory i to market j (cost includes production, RM & transportation) Xij=quantity shipped from factory i to market j Xij=Si Wij { Si= %age acceptable or yield of factory i} & {Wij=actual quantity produced} Uj= import duty in the jth market yi= 1 { if factory i is open else 0} Z= 0 { if i=j else 1}

ContinuedMinimize { Fi yi + Cij Xij + i=1 to n i j UjCij Xij . Z } i j

Constraints : Xij = Dj for j= 1, ..m ..(1) Xij Ki Yi for i= 1, n .(2) Xij Wij .(3)

Yi {o,1} for i=1 n (4) Z {0,1} for j=1 .m & j I ..(5)

Contd FindingAs estimated manually we found that Germany plant should be partially closed as it should manufacture only highcal and Japan plant should be completely idled as it will decrease the fixed plant cost and fixed chemical cost. According to this after meeting the demands of different markets through different factories, min. cost was found out to be $1272.74 millions.

CalculationsRegion Latin America Europe Asia Japan Mexico U.S Plant (capacities) Brazil (18) Germany (45) India (18) Japan (10) Mexico (30) U.S (22) Highcal (sales/production) 7/11 (+4) 15/15 (0) 5/10 (+5) 7/2 (-5) 3/12 (+9) 18/5 (-13) Relax (sales/production) 7/7 (0) 12/0 (-12) 3/8 (+5) 8/0 (-8) 3/18 (+15) 17/17 (0)

Continued.. 64.5 lacs is the cost incurred if : i. 12 Mexico to Europe ii. 5 (India)+ 3 (Mexico) to Japan 74.5 lacs is the cost incurred if : i. 5(India)+ 7 (Mexico) Europe ii. 8 Mexico to Japan In case of highcal minimum transportation cost is incurred if 5 units are transferred from India to Japan and 9+4 units are transferred to U.S from Mexico and Brazil respectively.

Cont..RelaxR.M Euro pe Japa n Brazi l 55.2 Prd. 78 Tran s 3.6 Duti es Total R.M 58.5 Prd. 105

HighcalTran s 3 Duti es 0 Total 166. 5 44.5 2 62.3 41.5 26.4

4.01 140. 4(mx 9 c) 5.31( 93.9 ind- 6 mxc) 0 0 0 0 79.8 32.1 33.9 190. 4

36.3

49.5

2.85

18

22.5

1.5

2.52 (Indi a) 0 0 0

32.2

46.2 18 19.5 110. 5

1.4 0.6 0.6 3.4

25.2 18 10.8 64.8

37.7 22.5 15 90.4

1.4 1 0.6 5.05

India 13.5 Mexi 13.8 co U.S 76.5

4.65( 164. brz- 9 mxc)

Contd.. Total cost incurred (Rm, Prd, Trans, Duties)= $1077.14 million. Fixed cost i. Brazil 30 ii. Germany 45+13+2.8 iii. India 26 iv. Japan 5.8 v. Mexico 42 vi. U.S 31 Total cost incurred = $1272.4 millions.

Question 2. How should Phil structure his global production network? Assume that the past is the reasonable indicator of the future in terms of exchange rates. Ans: The distribution would probably remain the same if the exchange rates do not change but if the country where the plant is working faces a hike in its currency value as compared to the country where the product is being sold then it will be a costly affair to handle as the margins of the company will be lowered. This also applies to the case if the opposite happens i.e., if there is a decline in the currency value of the market country.

Question 3 Is there any plant for which it may be worth adding a million kgs of additional capacities at a fixed cost of $3 million/year ? Ans: Yes, it will be worth to add an additional capacity (highcal) of 1 million kgs to India as it will supply that surplus 1 million kg to Japan which is idled otherwise.

Question 4 How are your recommendations affected by the reduction of duties? Ans: As we see the objective function of the developed model total cost incurred is certainly reduced if the duties in the region which is importing the product are reduced.

Question 5 The analysis has assumed that each plant has 100% yield. How would you modify your analysis if the yield varies? Ans: The condition for yield has been incorporated in the objective function of the model so if the yield varies it will be accordingly included in the objective function keeping in mind the related constraint.

Question 6 What other factors should be accounted for while making your recommendations?

Ans: After going through the case it is observed that the factors of production are no where mentioned in this case so there is no scope for the change of production in any plant. Every estimation has been done keeping the production in any plant constant, regardless of its capacity so it would be better to deal with the case if the factors of production in data are mentioned because as seen in the case U.S, Japan & Germany are not utilizing their full capacities so there should be reasons given for the capacity under utilization of these plants. Following may be the relevant factors:Labor availability, exchange of resources, raw material availability, available technology and other resources like availability of machines & equipments etc.

Thank you