Eli Lily and Company: The Flexible Facility Decision

Case Study: Eli Lily and company: The flexible Facility Decision     Yi Ting Chen (Isaac)

        Eli Lily is the world well-known pharmaceutical company. In 1993, the company faced a critical decision on the type of manufacturing facilities for three new pharmaceutical drugs, Alfatine, Betazine, and Clorazine. During that time, the environment of pharmaceutical industry was also facing big changes.  The fierce competition was one of the challenge. Government intervention and the power of HMOs and buyers were another influence on drugs profit margin. Besides, Pharmaceutical companies had to deal with increased investment in R&D and the cost of manufacturing. Therefore, Steve Mueller had to make a precise decision.

        In order to stand out from competition, the two corporate goals of Eli Lily were shortening time to market by 25% and reducing manufacturing by 50%. In addition, the company should also consider utilization of facilities and timeline for project development. Based on these initiatives, the company got two options, one specialized facility or one flexible facility. If Eli Lily decide to build a specialized facility for three products, the company would enjoy less cost of construction and operation. Besides, a specialized facility would have more output and higher utilization, but it may waste resources as well. On the other hand, there is no flexibility since the facility is built specially for three products. If the drug fail to the market, it costs a lot to retrofit the facility. It’s also hard to design the facility before product final decision, as a result, there is severe time pressure to avoid delaying product launch time. Constructing a flexible facility costs five times higher than a specialized one, and the annual operation expense is also 1.4 times higher. Although the capacity and utilization is lower than a specialized one, a flexible facility can be used to produce other products, so it won’t have excess capacity. This also brings the advantage of allocating resources of the company. Since the flexible plant eliminates the processes of design and construction of the factory which was on the critical path, another significant advantage is to reduce lead-time for manufacturing new products. This strength brings the flexibility to process development and lower the risk of failing products.