Applichem's Manufacturing Network Decision

Case Summary

Eli Lilly and Company, global leader in the pharmaceutical industry, is caught in a difficult situation to remain competent in the industry as the industry has become very competitive amidst the rivalry among existing and new players. In the past few years, industry’s growth rate has slowed down to an average of 18% and the growth rate is expected to slow down further post 1993 owing to the long period of time required to develop a new drug. Other important factors which are leading to slow down are diminishing price flexibility, slowing rate of innovation, glowing competition with the drug classes, competition arising from generic drug market, rising cost of manufacturing facilities and lastly, government interferences in various processes involved.

It is deciding to reduce the time required to develop and market the new product and to reduce the manufacturing cost to enhance its profitability. The current dilemma faced by the company is what type of manufacturing facility to be built to develop its three new drugs which are expected to be the future of the company.

Eli Lilly is contemplating options to make a decision on the type of manufacturing facilities to be built; it can either go for a specialised facility or a flexible manufacturing facility. This decision is critical to the company owing to the fact that it will decide the cost of operation, time to build and market new products, flexibility, capital investment, etc thus impacting the company in the long run.

What is the value of flexibility to Eli Lilly?

1. Impact on revenue- By building a flexible facility, there will be an impact on revenue as the new products can be brought to the market earlier by one year, hence revenue will improve. The point to be noted here is that there will not be any profit for the three products but for subsequent products.
2. Lead time- The development lead time will reduce for future products but not for the three new products, thus future products can be brought to the market one year ahead and sales can be gained for that one year.
3. Manufacturing cost- The total manufacturing cost is higher for flexible facility than that of specialised facility. In this case the facility will suffer from under capacity and it will reach its maximum capacity and thus won’t be able to handle further production. This will result in lost sales because of insufficient production capacity, and the market demand will not be fulfilled.

 How much is Lilly paying for this?

Do you support the adoption of flexible facilities option to provide an efficient manufacturing capability?

No, adoption of flexible facility to provide an efficient manufacturing capability is not recommended because of higher manufacturing cost and the fact that it will run out of production capacity in the future and won’t be able to fulfil market demand after 2001.