Case study-- Biopharma Inc.

Prateek Mittal 2010PMM111Yatendra Singh 2010PMM115

Himanshu Bhatt 2010PMM132

Presented by:-

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)

Region Plant Capacity Sales Production

Sales production

Latin America

Brazil 18 7 11 7 7

Europe Germany 45 15 15 12 0

Asia w/o Japan

India 18 5 10 3 8

Japan Japan 10 7 2 8 0

Mexico Mexico 30 3 12 3 18

U.S U.S 22 18 5 17 17

Highcal Relax

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($ million)

Relax F.C($ million)

Highcal R.M($/kg)

Highcal prd.($/kg)

Relax R.M($/kg)

Relax prd.($/kg)

Brazil 20 5 5 3.6 5.1 4.6 6.6

Germany

45 13 14 3.9 7 5 8.5

India 18 4 4 3.6 4.5 4.5 6

Japan 17 6 6 3.9 7.5 5.1 9

Mexico

30 6 6 3.6 5 4.6 6.5

U.S 21 5 5 3.6 5 4.5 6.5

Transportation costs from plant to markets($/kg)

From/to Latin America

Europe Asia w/o Japan

Japan Mexico U.S

Brazil 0.2 0.45 0.5 0.5 0.4 0.45

Germany 0.45 0.2 0.35 0.4 0.3 0.3

India 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

Europe Asia w/o Japan

Japan Mexico U.S

30% 3% 27% 6% 35% 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 locationsm= no. of market or demand pointsDj= annual demand from market jKi= potential annual capacity of factory jFi= annualized fixed cost of keeping factory i openCij= 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 jXij=Si × Wij { Si= %age acceptable or yield of factory i} & {Wij=actual quantity produced}Uj= import duty in the jth marketyi= 1 { if factory i is open else 0}Z= 0 { if i=j else 1}

Continued…

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

Constraints :

∑ Xij = Dj for j= 1,…..m …..(1) ∑ Xij ≤ Ki Yi for i= 1,…n ….(2)

Xij≤ Wij …….(3)

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

Contd…

• Finding- As 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.

Calculations Region Plant (capacities) Highcal

(sales/production)Relax (sales/production)

Latin America Brazil (18) 7/11 (+4) 7/7 (0)

Europe Germany (45) 15/15 (0) 12/0 (-12)

Asia India (18) 5/10 (+5) 3/8 (+5)

Japan Japan (10) 7/2 (-5) 8/0 (-8)

Mexico Mexico (30) 3/12 (+9) 3/18 (+15)

U.S U.S (22) 18/5 (-13) 17/17 (0)

Continued..

• 64.5 lacs is the cost incurred if :i. 12 – Mexico to Europeii. 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.. R.M Prd. Tran

sDuties

Total R.M Prd. Trans

Duties

Total

Europe

55.2 78 3.6 4.014(mxc)

140.9

58.5 105 3 0 166.5

Japan

36.3 49.5 2.85 5.31(ind-mxc)

93.96

18 22.5 1.5 2.52(India)

44.52

Brazil 32.2 46.2 1.4 0 79.8 25.2 37.7 1.4 0 62.3

India 13.5 18 0.6 0 32.1 18 22.5 1 0 41.5

Mexico

13.8 19.5 0.6 0 33.9 10.8 15 0.6 0 26.4

U.S 76.5 110.5

3.4 0 190.4

64.8 90.4 5.05 4.65(brz-mxc)

164.9

Relax Highcal

Contd..

• Total cost incurred (Rm, Prd, Trans, Duties)= $1077.14 million.

• Fixed cost –i. Brazil – 30 ii. Germany – 45+13+2.8iii. India – 26 iv. Japan – 5.8v. 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