Eli Lilly and Company: The Flexible Facility Decision (1993)

The case focuses on a difficult decision which is faced by Steve Mueller, manager of strategic facilities and planning at Eli Lilly, about the type of manufacturing facility to construct for the three new pharmaceutical products that the company is planning to launch in 1996. A number of growing industry and company specific conditions have been forcing them to look to reduce costs to make profits and hence made this decision particularly relevant and have sparked debate with management and throughout the company. In response to these conditions, Lilly management decided to establish a set of company-wide goals that focused on improving time to market for its products in development and a reduction of manufacturing costs. Specifically, these goals were:

a) Reduced new product time to market by 50% from the current 8 -12 year process

b) Reduce the cost of manufacturing by (25%)

Issues in U.S Pharmaceutical industry

• The current market scenario of prescription drugs in the United States is undergoing a change in many ways and as a result the major pharmaceutical companies, which rely heavily on Research & development and marketing of indigenous drugs, are facing pressures in terms of market shares as well as the bottom line of the business. Industry's average annual growth rate in 1982 through 1992 was 18%; however, this rate is expected to slip to the 8% to 12% range in 1993. Correspondingly, Eli Lilly's profit margin was expected to fall to 15%, from 22% by 1996.

• This decline in rate is the consequence of increased pressure on drug margins because of diminishing price flexibility, slowing rate of innovation, and increased competition within the drug class and generic rivals.

• Moreover, the cost of developing a pharmaceutical product has increased 299% over the past 5 years. Similar trends are seen in the cost of manufacturing; 60% increase as a percentage of sales by the year 2000.

• Eli Lilly & Co. is under pressure all the more since the number of drugs in pipeline is much more than those ready for marketing and sales.

• As generic replacement drugs are entering the market, earlier than the actual patent expiry and at 30% to 60% lower prices, the revenues for Eli & Lilly Co. are expected to stagnate.

• Due to rising competition, the pricing flexibility is also reducing and thus products have to be priced lower. The Government is proposing ‘price caps’ which may further push revenues downward

• Since the newer drugs are more complex and have higher potency, the manufacturing costs are higher due to use of sophisticated machinery & equipment to ensure conformity to stringent FDA norms. The emphasis on environmental safety is also forcing greater expenditure on equipment for treatment of waste and pollution control.