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 Brazil Germany India Japan Mexico U.S.
Latin America 8.9 14.8 11.2 15.5 11.7 11.8
Europe 9.4 11.1 8.7 12.2 9.2 9.2
Asia w/o Japan 11.7 14.3 8.3 14.9 11.6 11.5
Japan 9.8 12.0 8.9 11.5 9.6 9.6
Mexico 12.3 15.1 11.6 16.0 8.8 11.9
U.S. 9.5 11.6 8.9 12.3 9.2 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 Brazil Germany India Japan Mexico U.S.
Latin America 7.0 0.0 0.0 0.0 0.0 0.0
Europe 0.0 15.0 0.0 0.0 0.0 0.0
Asia w/o Japan 0.0 0.0 5.0 0.0 0.0 0.0
Japan 0.0 0.0 5.0 2.0 0.0 0.0
Mexico 0.0 0.0 0.0 0.0 3.0 0.0
U.S. 4.0 0.0 0.0 0.0 9.0 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 costmaximum 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 Brazil Germany India Japan Mexico U.S.
Latin America 7.0 0.0 0.0 0.0 0.0 0.0
Europe 0.0 15.0 0.0 0.0 0.0 0.0
Asia w/o Japan 0.0 3.1 5.0 0.0 0.0 0.0
Japan 0.0 2.0 5.0 0.0 0.0 0.0
Mexico 0.0 0.0 0.0 0.0 3.0 0.0
U.S.
Asia w/o Japan 0.0 1.8 3.0 0.0 0.0 0.0
Japan 0.0 0.0 5.0 0.0 3.0 0.0
Mexico 0.0 0.0 0.0 0.0 3.0 0.0
U.S.
4.0 0.0 0.0 0.0 9.0 5.0
Relax Quantity Shipped From / To
From / To Brazil Germany India Japan Mexico U.S.
Latin America 7.0 0.0 0.0 0.0 0.0 0.0
Europe 0.0 0.0 0.0 0.0 12.0 0.0
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
