Eli Lilly and Company, Inc. Case Analysis

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Eli Lilly and Company, Inc. Adani Institute of Infrastructure Management Case Analysis

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Eli Lilly and Company, Inc. Case Analysis

  1. 1. Eli Lilly and Company, Inc. Managerial Written Communication Prepared by, Neeraj Mehra Submitted to: Prof. Mukul Vasavada & Dr. Nayana Shah On 08 December 2011
  2. 2. 1 To, Manufacturing Strategy Committee From, Steve Mueller Manager, Strategic Facilities Planning Date: November 6, 1993 Subject: Decision report on the type of manufacturing facility to be built I am here by submitting the decision report on the type of manufacturing facility to construct for new products. All the options have been analysed in detail. Please let me know if you have any further questions.
  3. 3. 2 DecisionSummary Eli LillyandCompanyisfacinga difficultsituationtoremaincompetentinthe pharmaceutical industry.The pharmaceutical industry hasbecome highlycompetitive inthe pastfew yearsandthe growthrate of the industryhassloweddown. Eli Lillyand Companyhas to make a decisiononthe type of manufacturingfacilitiestobe built. The optionsavailable are tohave a Specialised,Flexible oraHybridmanufacturingfacility. Each of the above optionshasbeenevaluatedintermsof theirimpactonreductionindevelopment lead-time andmanufacturingcostsandtheirimpactonrevenue. On the basisof thisevaluation,it hasbeen recommendedthatEli LillyandCompanyshouldbuild hybridmanufacturingfacilitiesforitsproducts. Word Count:120
  4. 4. 3 Table of Contents Serial Number Title Page Number 1 Situational Analysis 4 2 Problem Statement 4 3 Options 4 4 Criterions of Evaluation 5 5 Evaluation of Options 5 6 Recommendation 7 7 Action Plan 7 8 Contingency Plan 7 9 Exhibits 8
  5. 5. 4 Situational Analysis Eli LillyandCompanyranksamongst the topsix pharmaceutical companiesinUnitedStates. The US pharmaceutical industryhadgrownatan average annual rate of 18% betweenthe periodof 1982 and 1992. But, due to variousfactorsthe industrygrowth isexpectedtoslipto8-12% range from1993 onwards. The factors whichledtoslownessin the industrygrowthrate includeddiminishingpricingflexibility, slowingrate of innovation, growingcompetitionwithinthe drugclasses,competitionfromgeneric substitutes,increasingcostof manufacturingpharmaceuticalsandgovernmentintervention. Eli LillyandCompanydecidedtoreduce the time tomarketfor new productand cost of manufacturingtomaintaintheirprofitmargin. The company’scurrentblockbusterproductswere nearingthe endof theirlivesandthe companyneedstodevelop new productssoontoremain competitiveinthe industry. The dilemmafacedby the companyiswhat type of manufacturingfacilitiesshouldbe constructedto produce the three new pharmaceutical products andthe future productsof the company. The three newproductswhich would be launched in1996 are Alfatine,Betazine andClorazine. The decision regardingmanufacturingfacility iscritical since itdecidesthe costsof operation,time- to-marketfornewproducts,capital investment,flexibilityinprocesscontrol,etc.andwouldimpact the companyin both,shortterm as well aslongterm. Exhibit8 showsthe SWOT analysisof the manufacturingfacilities. ProblemStatement Eli LillyandCompanyneedstoimprove the profitmargintosustaintheirbusiness inthe competitive pharmaceutical industry. Options 1. Buildspecialized manufacturingfacility 2. Buildflexible manufacturingfacility 3. BuildFlexibleandSpecialized Hybridmanufacturingfacility
  6. 6. 5 Criterionsof Evaluation 1. ReductioninDevelopmentLead-time andManufacturingCosts:Whateffectthe type of facilitywill have onthe DevelopmentLead-time and ManufacturingCosts? 2. Effecton Revenue:Howwillthe type of manufacturingfacilityimpactthe revenue of the company? Evaluation of Options 1. Buildspecializedmanufacturingfacility a) ReductioninDevelopmentLead-time andManufacturingCosts If the companydecidesinthe favourof specializedfacilityformanufacturing,there will be no reductioninthe developmentleadtime asanew facilitywillhave tobe createdforeach newproduct. Also,since the facilityisbuiltonlyforaspecifictype of product,there isno flexibilityinoperationsof aspecialisedfacility. However,theyhave anadvantage intermsof the total costsinvolved.The total costforthe three newproducts peryearis $ 9.3 mill (Exhibit2) overthe life of the products(15 years). Exhibit4 explainsaboutthe costperkgof the product if producedina specialisedfacility.In thiscase itis $930 inthe firstyear andthenreducesto $433 inthe later years.Itis important to note that the total capacity of the specializedfacilityis24000 kilogramsandthe expected demandnevergoesbeyond21000 kilograms.Hence,we don’thave anylossinsalesbecause of insufficientcapacityof the facility. These typesof dedicatedfacilitieshave afixedavailable capacityfor aproduct.From Exhibit 1, it shouldbe notedthatduringthe earlieryearsthe utilisedcapacityisnothigh.Hence,this will resultinwastage of resourcesaswell. b) Effecton Revenue A specializedfacilityplantwouldhave higheroutputperrigas comparedto a flexible facility.Alsothe utilizationrate ishigherforaspecializedfacility (Exhibit2and 3). There is no directimpacton the revenue if specializedfacilityischosen.
  7. 7. 6 2. Buildflexible manufacturingfacility a) Reductionin DevelopmentLead-time andManufacturingCosts For the three productson the pipeline,therewillbe noreductioninthe development lead-time butthe developmentleadtimewouldreduceforthe future products.Exhibit 3 showsthe average total cost peryearas $19.48 mill. Eventhoughthe total cost/kgreducedovertime,itisstill higherinthe case of flexible facilityascomparedto specialisedfacility(Exhibit 4and5). In thiscase the facilitysuffersfromundercapacity fromyear2000 onwards;the facility reachesthe maximumcapacityandcan’t handle more production.Thisleadstolost salesas the companyisnot able to fulfil the marketdemandforthe productbecause of insufficientproductioncapabilities. On the otherhand,we shouldalsonote that there isno loss relatedtowastage of available resourcesunlike thatof specializedfacilities. b) Effecton Revenue For the three productsthere will be noadvantage intermsof the leadtime butthe subsequentnew productswill come tothe market1 yearearlier. Sothere will be a revenue improvementbecauseof the advantage associatedwithgettinganew product to the marketearlier.Gettinganew drug tomarket one yearsoonermeantone year’s salesgained. Exhibit1 showsthe capacityutilisationof the facilityinthe yearbyyearbasis.We can safelyassume thatbringingthe productone yearearlierwillgive anadditional advantage of the 16th yearrevenue,whichshouldbe aroundthe revenuerecognisedfor 50% (assumption)capacity utilisationof the facility. 3. Buildhybridmanufacturingfacility a) ReductioninDevelopmentLead-time andManufacturingCosts It ishighlyrecommendedtohave a hybrid systemwherein,we willhave Flexiblesystem duringthe earlierlife of the productbutafterfew years(inourcase 5th year) a dedicated specialisedfacilitywill be usedforthe same product. Inthiscase we make a dedicated facilityforAlfatineonly.
  8. 8. 7 Thiswill helpinreducingthe manufacturingcostsduringthe earlierpartof the product, since onlythe marketdemandwill be cateredandhence,there will be nowastage of available capacity. b) Effecton Revenue Since the duringthe earlieryearsof the product,itwill be manufacturedinthe flexible facility,we willhave the 1year advantage aswe saw inthe case of the flexible facility. Duringthe laterpart of product’slife,havingthe specialisedfacilitywill boostupthe available capacitysothatmarketdemandcan be fulfilledandhence will addtothe revenue generated. However,itshouldbe carefullyunderstoodthatthe hybridsystemshouldonlyapplyto the product which are expectedtohave consistentlyhighdemandinthe future.For otherproductswhichdon’tmatch the criteria shouldbe manufacturedinaflexible manufacturingfacility only. Exhibit6and 7 explainsthe effectof havingahybridfacility withAlfatine havingaspecialisedfacilityfrom5th yearonwards. Recommendation Eli LillyandCompanywill be mostbenefittedif theyintroduce ahybridfacilitysystemwhere the productis manufacturedinthe flexible facilityuntil the 4th year andthenin a dedicatedspecialised facilityforrestof its life. Action Plan 1. The firststepshouldbe to start buildingthe flexible manufacturingfacility. 2. Thenwe have to start building specialisedfacilityfor‘Alfatine’drugtomake it functional from5th year onwards (Exhibit6and7). ContingencyPlan In the worstcase scenario,if all of the three productsfail, the flexible plant couldthen be usedto manufacture genericdrugs. Word Count:1200
  9. 9. 8 Exhibits Exhibit1: ProductionCurve forSpecializedManufacturingFacility Years Facility Capacity Utilisation (%) 1 18 2 45 3 75 4 79 5 85 6 92 7 98 8 100 9 98 10 95 11 84 12 80 13 79 14 65 15 58
  10. 10. 9 Exhibit2: Costsin SpecializedManufacturingFacility ConstructionCosts(USDMillions) 37.5 Annual OperatingCosts(USD Millions) 6.8 CapacityinRigs 1.5 MaximumOutput(kilograms) 24000 Output per Rig= 24000/1.5= 16000 kilograms Total OperatingCostsfor15 years:15*6.8= $ 102 mill Total Costs=$ 139.5 mill Total Cost per year= 139.5/15= $ 9.3 mill *Compositionof CapacityinRigs(Total 1.5) – Alfatine:1;Betazine:0.25; Clorazine:0.25 Average UtilizationRate=80% Exhibit3: Costsin Flexible ManufacturingFacility ConstructionCosts(USDMillions) 150 Annual OperatingCosts(USD Millions) 9.48 CapacityinRigs 3 MaximumOutput(kilograms) 14625 Output per Rig= 14625/3= 4875 kilograms Total OperatingCostsfor15 years:15*9.48= $ 142.2 mill Total Costs=$ 292.2 mill Total Cost per year= 292.2/15= $ 19.48 mill Average UtilizationRate=65%
  11. 11. 10 Exhibit4: Specialized ManufacturingFacility:DemandandProduction Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Expected Production (Kg) 10,000 11,200 12,750 13,850 21,000 21,000 21,000 21,000 21,000 21,000 VolumesRequired (kg) 10,000 11,200 12,750 13,850 21,000 21,000 21,000 21,000 21,000 21,000 Excess Capacity (kg) 14000 12800 11250 10150 3000 3000 3000 3000 3000 3000 Total Cost ($ millions) 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 Cost/Kg ($) 930 830 729 671 443 443 443 443 443 443 Exhibit5: FlexibleManufacturingFacility:DemandandProduction Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Expected Production(Kg) 10,000 11,200 12,750 13,850 14,625 (max) 14,625 (max) 14,625 (max) 14,625 (max) 14,625 (max) 14,625 (max) VolumesRequired (kg) 10,000 11,200 12,750 13,850 21,000 21,000 21,000 21,000 21,000 21,000 Excess Capacity (kg) 0 0 0 0 0 0 0 0 0 0 Total Cost ($ millions) 19.48 19.48 19.48 19.48 19.48 19.48 19.48 19.48 19.48 19.48 Cost/Kg ($) 1,948 1,739 1,528 1,406 1,332 1,332 1,332 1,332 1,332 1,332 Exhibit6: HybridManufacturingFacility:DemandandProduction Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Expected Production(Kg) 1,948 1,739 1,528 1,406 1332 1332 1332 1332 1332 1332 Total Cost ($ millions) 19.48 19.48 19.48 19.48 6.66 6.66 6.66 6.66 6.66 6.66 Cost/Kg ($) 1,948 1,739 1,528 1,406 1332 1332 1332 1332 1332 1332
  12. 12. 11 Exhibit7: SpecialisedPlantforAlfatinefrom5th year onwards Years 2000 2001 2002 2003 2004 2005 OperatingCost($ millions) 4.53 4.53 4.53 4.53 4.53 4.53 Constructioncost/year($ millions) 1.67 1.67 1.67 1.67 1.67 1.67 ExpectedDemand(Kg) 16000 16000 16000 16000 16000 16000 Total Cost($ Millions) 6.20 6.20 6.20 6.20 6.20 6.20 Cost/Kg($) 387.5 387.5 387.5 387.5 387.5 387.5 Exhibit8: SWOT Analysisof SpecialisedandFlexibleManufacturingFacility SpecialisedFacility Flexible Facility Strengths Outputperrig is higher; Cost/kgislesser; Effective Utilisationis80% Flexible initswayof operating: The same facilitycanbe usedto produce differenttype of products. Weaknesses Usually,the total capacityis eitherunderutilisedorover utilised; Time pressuresinlaunching newproducts Outputperrig is lower; Total Costperyear ishigher; Effective Utilisationis65% Opportunities Total Costperyear islesser Neversuffersfromwastage of available capacityasitcan handle all types of products; Reducedleadtime for manufacturingnew products. Threats Inflexible waysof operating:A facilitycan’tbe modifiedto produce anothertype of product. Has much lessercapacitythana specialisedcapacity,Hence can leadto lostsalesforgeneric type of products whichhave incrementallyincreasing demandbeyonditscapacity.

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