BioPharma – A Global Supply Chain Network

Executive Summary We have analyzed the supply chain of BioPharma with respect to the costs incurred to meet the

global demand. The report finds that the current configuration is not cost effective and is

increasing the costs to meet the demand of the two chemicals globally. This is leading to a dip in

the profits even when the demand is stable and expected to increase in some markets. The aim of

this report is to present an alternative, more effective global network configuration which will

reduce the costs for the supply of chemicals globally using only the existing network. Using the

constraints of supply production and the minimization of costs, we have presented a optimum

configuration by correcting the current production and supply.

We have found that shutting the Japan plant will save some substantial costs for the company

while the demand can be served from manufacturing facilities like Germany, India and Mexico.

The German plant also has very high production costs, due to which we recommend that it only

produce one chemical which is HighCal. Both these recommendations in tandem will ensure

demand matching supply at reduced costs.

The future demand in the growing Asia without Japan market can be met by the German plant in

the future. The same can be altered if the Indian plant can be improved through some capital

investment in the Indian plant which has the lowest costs of production. This will help save costs

and also meet the demand in the Asia without Japan market.

We have presented excel files for the solution along with the working using the constraints as

given.

Contents Executive Summary ....................................................................................................................................... 2

List of tables: ................................................................................................................................................. 4

Background ................................................................................................................................................... 5

Objectives ..................................................................................................................................................... 6

Issues identified ............................................................................................................................................ 7

As-Is Situation ............................................................................................................................................... 8

Optimized Situation ...................................................................................................................................... 9

Case question-answers ............................................................................................................................... 10

Recommendations ...................................................................................................................................... 14

Appendix ..................................................................................................................................................... 15

List of tables: Table Name Page Number

Table 1 7

Table 2 7

Table 3 11

Background BioPharma is a chemical manufacturing company with manufacturing setups across the world.

The company supplies two types of chemicals known internally as HighCal and Relax across the

globe and also manufactures the same at its different locations. Lately, the company has been

running into financial problems. Although the demand for the products of the company has

remained stable for most of the regions, the profits being posted by the company have reduced.

This has been due to increased costs related to production and distribution at its manufacturing

locations and the subsequent distribution to the regional areas across the globe. The company

currently is producing more than the demand of the chemicals in the market and holds a

substantial surplus capacity across its manufacturing locations.

Some manufacturing locations like Japan hold a technological advantage for the company in

terms that it hold the ability to conform to ever changing regulatory and environmental issues.

This makes the Japanese plant important strategically. Some of these developments have been

transferred to other plants routinely so that the technology is shared across plants for

implementation. The German plant for BioPharma has the biggest capacity for production

amongst all its plants and also has the best yields regularly and its quality performance is

amongst the best.

The manufacturing plants across the globe have different capacities and different levels of

technology. Some plants like Brazil and India have a outdated machinery and are in need of

technological improvements. Some other like Japan are advanced but do not have much capacity.

The German plant has excellent capacity but does not have a competitive cost to match the

demand on a global scale.

Objectives After analyzing the case, we arrive at the following objectives for BioPharma:

Reduce the costs for production and supply of the chemicals.

Identify the sources of the decrease in profits for the company even when the demand is

stable.

Identify problems in the supply network of chemicals across the globe.

Design an optimum network which meets all the demands for the chemicals and also

reduces the costs for the company.

Make recommendations to improve the supply chain design for the company to make it

lean and cost effective.

To summarize the above, the company needs to better plan it demand supply management to

meet demands across the globe while also reducing the costs associated by better planning and

shutting down plants which do not provide cost effective supply.

Issues identified

BioPharma is facing increased costs of production due to inefficient supply chain planning and

supply demand management. The company has many manufacturing facilities which have excess

capacity to the demand in the market. This is increasing the fixed costs required to keep the plant

running and also the variable costs involved in production of the chemicals.

The company has a major demand primarily in the European and the US markets where the two

chemicals are selling the most. But, the production facilities in the US do not match the demand

of the market in the US. This leads to the company sourcing the excess demand from other

facilities from around the world. Importing a chemical from another facility into any other

country faces import duties and exchange rate related costs for BioPharma. Hence, the costs

related to supplying the chemical increase when imported from other manufacturing facilities.

The case with the European markets is a bit different. Faced with the maximum demand of the

geographical area, the company has a plant with the maximum capacity in Germany. This plant

is also very advanced with regards to the yield and can provide chemicals at an exceptional

operating efficiency. But, the downside is that the cost of producing a chemical in Germany is

very high per kg as compared to other manufacturing units across the world. So, although the

demand can be supplied by the German plant alone, the costs related to the plant do not allow the

company to effectively use the plant for demands in Europe and other countries.

Due to the above reasons, the company is currently sourcing chemicals for demand at an

inefficient rate. Forced to keep some of its plants open even when the production is not much

result in the company losing profit margins. The plants face the fixed costs which add to the cost

expenditure to meet the same demand which can be better served through some other

manufacturing facility at a better cost to revenue ratio.

As-Is Situation Currently, the supply chain is not optimized to reduced costs in delivering the chemicals across

the global regions. This can be seen in the variable costs table below:

Total Variable Cost including Duties for Highcal

From / To

Latin America Europe

Asia w/o Japan Japan Mexico U.S.

Brazil 8.9 9.4 11.7 9.8 12.3 9.5

Germany 14.8 11.1 14.3 12.0 15.1 11.6

India 11.2 8.7 8.3 8.9 11.6 8.9

Japan 15.5 12.2 14.9 11.5 16.0 12.3

Mexico 11.7 9.2 11.6 9.6 8.8 9.2

U.S. 11.8 9.2 11.5 9.6 11.9 8.8 *Table 1

As seen in the table for Highcal, the variable costs including duties shows that the cost of

manufacturing HighCal and transporting to other regions has extra costs associated. It also shows

that the German plant, although of high quality and capacity, has the most variable cost across

the board. Assuming the flow of current system of manufacturing as given below:

Highcal Quantity Shipped From / To

From / To Latin America Europe

Asia w/o Japan Japan Mexico U.S.

Brazil 7.0 0.0 0.0 0.0 0.0 4.0

Germany 0.0 15.0 0.0 0.0 0.0 0.0

India 0.0 0.0 5.0 5.0 0.0 0.0

Japan 0.0 0.0 0.0 2.0 0.0 0.0

Mexico 0.0 0.0 0.0 0.0 3.0 9.0

U.S. 0.0 0.0 0.0 0.0 0.0 5.0 *Table 2

Taking into account the various fixed costs into consideration as given in the attached excel

working and the decision matrix, using the solver, we come to the conclusion that the current

costs come out to be $1488.54 which is hitting profits due to this high cost. We obtain the said

cost by factoring the variable costs per chemical including import duties, fixed costs for the

plants and using the same along with the decision matrix and the supply table. This data is then

fed into the formula which uses the SUMPRODUCT and comes to the cost as given in the excel

file.

Optimized Situation The optimized situation uses the solver function to come at the optimized supply mechanism for

the global regions. The aim of the optimization technique is to reduce the costs. Hence, the

constraints used are the supply capacity along with the costs associated with the production

including both fixed and variable costs. This is then fed into the decision matrix system which

looks whether a manufacturing facility is shut down for one chemical, both chemicals or if it is

working at producing both the chemicals.

We also use a supply demand constraint table which maps whether all the demand has been met

and also checks if the supply of the manufacturing facilities is exceeding the production possible

at the given location. Hence, we maximize the production possibility and also simultaneously

minimize the costs associated with the maximum production to come at minimum cost-

maximum production. The logic used is that the manufacturing locations should be producing

and delivering based on lowest fixed and variable costs including the import suties to send the

chemicals across the globe to its facilities.

We have arrived at the cost of $1296.75 using this optimizer and also met all the demands across

the globe. To summarize, we have:

Shut down the Japanese plant which reduces the fixed and variable cost. This can be

possible as the technology of the plant has already been shared with other plants.

We have not used the German plant to produce Relax, thus saving the product related

variable and fixed costs.

We have ensured that the Japanese market is served with chemicals using the Indian plant

and the Mexican plant for the two chemicals. For HighCal, we have also used the high

capacity available in the German facility to give two units to the Japanese facility.

The Mexican facility is also used solely to supply Relax to the European market as it is

more cost efficient this way without producing the same at the German facility.

After doing all this, we still have a capacity of 28 available at German facility and also

have the entire Japanese facility to use for further growths in Japan if needed.

Case question-answers 1. The BioPharma management should have used cost as a deciding factor in managing the

supply chain network for the chemicals. It is not enough to just have good technology and

capacity to ensure profits for the company. The fixed and the variable costs of the

manufacturing plants should be used to plan a cost effective way of delivering chemicals

across the globe to meet the demands. The Japanese plant should be made idle and should

not be producing anything currently as the variable cost differential of sourcing the

chemicals from India should be not be much and would save the fixed costs of operating

the plant. The Japanese plant can be used when the Asian market increases in demand by

10pc every year. Similarly, the German plant will not manufacture Relax chemical and

will only produce HighCal. Other manufacturing facilities will produce both the

chemicals to the full production capacity.

The annual costs of the new proposal of this report bring down the costs of supplying the

same amount of chemicals to the global market efficiently to $1296.75 without letting

demand overtake supply. This includes the various import duties to send the chemicals

from one economic region to the other where there is demand for the chemical.

2. The current structured outlined in this report – which makes two major changes to idle

the Japanese plant and to limit the German plant to only one chemical can be used in the

foreseeable future. With demand being stable as projected in the case, the supply should

be enough to meet the demand. Currently, only the Asian market is expected to rise. This

can be handled by restarting the Japanese plant at an appropriate time when importing the

additional chemical from Germany becomes costlier than producing the same at Japan.

With respect to exchange rates, there should not be any major effect if the exchange rates

remain stable at around the current rates in the future. But, the capacity and the supply

will have to be re planned if the currency of the production country reduces with respect

to the dollar. This will lead to more costs of production in the country of production

leading to increase in costs. Hence, the supply chain will have to re planned in case of

major changes in exchange rates.

3. Currently, Japan faces a shortage due to the plant being kept idle. Also, the German plant

is the only plant with additional capacity, hence the chemical has been sourced from

Germany for the shortage at Japan. This ensures that the fixed costs with respect to Japan

are not incurred, while sourcing some extra units from German plant at no extra fixed

costs. Currently, India is one the most cost effective production facilities of the

manufacturing units of BioPharma. The unit has the lowest variable costs for both the

chemicals and also has one of the lowest fixed costs related to production. Although the

plant is a bit outdated, a small amount of capital investment to improve its technology

and to improve its production will help to supply the growing Japanese market. If the

capacity can be increased such that the German plant need not supply HighCal to Japan

and the Indian plant can keep up with the additional increases in Asian demands without

lowering the supply to other regions, it will make the network even more cost effective

than proposed leading to better profits from increased demand along with lowered

production costs. The Indian plant can also be used to check the increasing demand in the

emerging markets of the world which are primarily in the Indian subcontinent.

4. The reduction of duties will affect the way supply chain is planned. Currently, the

maximum import duty is in Latin America, Mexico and Asia without Japan. But, as can

be seen from the production chart these are also the countries with the maximum

production capacity for the regions. Hence, we do not see chemicals coming into these

regions from other areas. Therefore, the reduction of import duties in these regions will

not affect the cost pricing of the supply network. The import duties in the US and the

Europe, where most of the chemical flows into, in relatively much lower. Hence, even if

it reduces further, there will not be a marked decrease. Hence, there won’t be any major

change on recommendations due to reduction of duties.

5. The yield assumed now is 100pc across the plants. If the yield decreases, the output of the

plant for per unit of raw material decreases. This means that more raw material is

required to get the required production output from the plant to meet the same level of

demand. This increases the costs of production in the plant as the raw material inout

grows without growth in the output. Hence, the costs across the network will increase

with the decrease of the yield. Hence, the relationship of yield with the costs of

production is inverse, as one increases, the other decreases and vice-versa.

6. Some of the other factors to be considered while making the recommendations are the

sales projections and the inflation. The emerging markets are a source of increased sales

in the next few years with the industrial growth of the countries like the BRIC nations.

Also, the factors of production are not given anywhere in the case study. Hence, the

economies of scale have not been considered. Given the positive cost benefits of the

economies of scale, the cost will come down if the economies of scale are incorporated

into the analysis.

7. In 2015, when the demand in Asia without Japan has stabilized, using a 10 per cent

growth over 5 years gives us the figures of 8.1 and 4.8 as the demand for the HighCal and

Relax chemicals respectively in the region. To supply for this additional demand, we

have already exhausted the production capacities for all the production plants except for

Japan and Germany. Taking this into account, the Japanese plant will have to be started

completely to supply the demand or the German plant will have to start producing Relax

along with additional HighCal for the difference in demand. As per the cost effective

constraints, the following is recommended:

Highcal Quantity Shipped From / To

From / To Latin America Europe

Asia w/o Japan Japan Mexico U.S.

Brazil 7.0 0.0 0.0 0.0 0.0 4.0

Germany 0.0 15.0 3.1 2.0 0.0 0.0

India 0.0 0.0 5.0 5.0 0.0 0.0

Japan 0.0 0.0 0.0 0.0 0.0 0.0

Mexico 0.0 0.0 0.0 0.0 3.0 9.0

U.S. 0.0 0.0 0.0 0.0 0.0 5.0

Relax Quantity Shipped From / To

From / To Latin America Europe

Asia w/o Japan Japan Mexico U.S.

Brazil 7.0 0.0 0.0 0.0 0.0 0.0

Germany 0.0 0.0 1.8 0.0 0.0 0.0

India 0.0 0.0 3.0 5.0 0.0 0.0

Japan 0.0 0.0 0.0 0.0 0.0 0.0

Mexico 0.0 12.0 0.0 3.0 3.0 0.0

U.S. 0.0 0.0 0.0 0.0 0.0 17.0 *Table 3

Hence, the cost for this configuration is $1383.90. We can also see that this is due to the

production constraints of other manufacturing facilities.

Recommendations

The recommendations can be summarized as below:

The current configuration of network supply is not cost effective.

The Japanese plant needs to be idled for both the chemicals completely. This will save

the plant fixed costs along with the variable costs also.

The German plant should only be producing HighCal which along with the production

capacity should be enough to supply the shortage in Japan and increased supply in Asia

in the future.

The Indian plant should be increased in terms of capacity as it has the lowest production

costs so that the costs can be further cut down.

Appendix

Excel File for As-Is situation:

As-Is.xls

Excel File for optimum configuration:

Optimum Config.xls

Excel file for question 7:

Question-7.xls