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Transcript of biopharma lnc.
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