Isaac Walker BioPharma, Inc. case study October 20, 2011 A. Set 1 Questions: 1. Discuss the financial status of BioPharma, Inc. in 2009 As of 2009, BioPharma is looking to reduce costs across the board. Profits have been steeply declining while production costs are high, especially at its German and Japanese facilities. With exception of India, demand is expected to remain relatively stable for the short-term future, so BioPharma can no longer afford its costly surplus capacity. BioPharma produces and sells two chemicals in bulk.
Each plant they currently have is capable of producing both chemicals. They are willing to idle production at the Germany and Japan plants on one or both chemicals in order to reduce costs. They are also willing to reallocate which plant makes how much of each chemical and where they are distributed to. 2. Map the supply chain network of BioPharma, Inc. See attachment B. Set II Questions: 1. How should BioPharma have used its production network in 2009? Should any of the plants have been idled? What is the annual cost of your proposal, including import duties?
Optimization was performed using Excel to determine what production/distribution allocation would minimize the overall cost while accounting for fixed and variable cost of production, as well as transportation and import costs. My particular optimization determined that Japan should be idled on production of both chemicals while Germany (Europe) should be idled on production of Relax. The following shows the amount of each chemical that each region should make as well as plant capacity in millions of kg. Region |Plant |Capacity |Highcal |Relax | |Latin America |Brazil |18 |12 |6 | |Europe |Germany |45 |17 |0 | |Asia |India |18 |6 |12 | |Japan |Japan |10 |0 |0 | |Mexico |Mexico |30 |15 |15 | |U. S. |U. S. |22 |5 |17 | Based on these levels of production and cost factors, it was determined that the following distribution patterns should be made in order to minimize overall cost. Production (Million kg) |H |R |H |R |H |R |H |R |H |R |H |R | |From/To |LA |LA |Eu |Eu |A |A |J |J |M |M |US |US | |L.
America |6 |6 |0 |0 |0 |0 |5 |0 |0 |0 |1 |0 | |Europe |0 |0 |15 |0 |0 |0 |2 |0 |0 |0 |0 |0 | |Asia |0 |0 |0 |1 |5 |2 |0 |7 |0 |0 |1 |2 | |Japan |0 |0 |0 |0 |0 |0 |0 |0 |0 |0 |0 |0 | |Mexico |1 |0 |0 |11 |0 |0 |0 |1 |3 |3 |11 |0 | |US |0 |1 |0 |0 |0 |1 |0 |0 |0 |0 |5 |15 | | If you include import tariffs, this scenario would have an annual cost of $1,308,100,000. Please see the attached printouts for a breakdown of how that cost is distributed amongst fixed, variable, transportation, and import costs. 2. How should Phil structure his global production network? Assume that the past is a reasonable indicator of the future in terms of exchange rates. Phil should try to allow those countries with lower variable rate cost on raw materials and production to produce the supplies for their own regions as much as possible. This will help reduce transportation and tariff costs.
These countries also have lower demand, so an excess production can be used to supply the needs of larger demand regions such as Europe, US, and Japan. Based on the history of exchange rates, this would mean that whenever possible, maximizing production in Mexico would be beneficial. This way the amount of US dollars spent would be increasing in local currency over the short term future, providing more “bang for your buck”. 3. Is there any plant for which it may be worth adding a million kg of additional capacity at a fixed cost of $3M per year? Yes, as it stands right now, India receives all 5 units of Highcal from its own region but due to capacity reasons, must import one unit of Relax from the US to meet its demand.
Increasing their capacity by 1 unit would allow them to produce all their demand in region while reducing transportation costs and eliminating import costs for India. This savings would drop the overall cost of the global supply network to $1. 301 billion annually. 4. How are your recommendations affected by the reduction of duties? My recommendations would not be that affected by a reduction in duties. The US, Europe and Japan already have relatively low import duties, thus why they depend on imported supply from other regions. And while Latin America, India, and Mexico might be able to import more if tariffs were lowered, they still are heavily relied on for production, so transportation cost and any tariffs could be saved by utilizing the production that is already taking place in those regions.
The only way this would change would be if the production costs in the those regions begins to increase to the point where it’s cheaper to produce in other regions, but this is not the case at the moment. 5. The analysis has assumed that each plant has 100% yield. How would you modify your analysis to account for yield differences across plants? We could incorporate yield into the capacity aspect of production. Creating a new category called adjust capacity could factor in yield percentage. So if the Mexico has a capacity of 30 but has an effective yield of 90%, its adjusted capacity would be only 27. The optimization could then be rerun, accounting for adjusted capacities of each region based on yield.
This would drive down the effective capacity of those plants with poor quality yield, thus making it necessary to find other resources to account for that production. 6. What other factors should be accounted for when making your recommendations? It might be necessary to account for the ability to expand capacities. If India is going to be growing in demand over the next few years, being able to increases its capacity could help reduce import and transportation costs that would be needed to fill the shortage in supply. It might also need to account for responsiveness measures such as lead times, likelihood of having production stopped due to political issues, work shortages, or even natural disasters.
All of these are risks that might need to be incorporated into optimization of production and distribution networks. C. Final Question Explain how the lessons learned from the case could be applied in improving your or any or your teammate’s affiliated organization supply chain performance (efficiency and responsiveness) It is critical to under the relationship ship that all these variables play in how you get your product to your customers. You have the efficiency side that accounts for capacities as well as demand needs. Then you take into account how you can fill all these demands while minimizing costs based on the variables that come into play. As managers in the medical device industry, this is a very practical problem.
At Medtronic, we have several production facilities at various locations. They all have different capacities, quality yields, and costs associated with them. Likewise, we also distribute how goods to various locations across the globe. One of the issues being faced right now is that our largest production facility in terms of capacity is already operating at maximum capacity and we have difficulty meeting demand in different regions. Perhaps using an optimization similar to this would provide a low cost solution that prevents us from missing sales opportunities or having to delay orders due to production issues. Mapping the BioPharma Supply Chain [pic]
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