Case Study BioPharma, Inc$\mathrm{.}2$

$2$ This case was inspired by Applichem $($A$),$ Harvard Business School Case $9-685-051,1985.$

$[$Return to reference$]$

In $2013,$ Phillip $($Phil$)$ Landgraf faced several glaring problems in the financial performance of his company, BioPharma, Inc. The firm had experienced a steep decline in profits and high costs at its plants in Germany and Japan. Landgraf, the company$$s president for worldwide operations, knew that demand for the company$$s products was stable across the globe. As a result, the surplus capacity in his global production network looked like a luxury he could no longer afford.

Any improvement in financial performance was dependent on having the most efficient network in place, because revenues were unlikely to grow. Cutting costs was thus a top priority for the coming year. To help design a more cost$-$effective network, Landgraf assigned a task force to recommend a course of action.

Background

BioPharma, Inc. is a global manufacturer of bulk chemicals used in the pharmaceutical industry. The company holds patents on two chemicals that are called Highcal and Relax internally. These bulk chemicals are used by the company$$s pharmaceutical division and are also sold to other drug manufacturers. There are distinctions in the precise chemical specifications to be met in different parts of the world. All plants, however, are currently set up to be able to produce both chemicals for any part of the world.

For $2013,$ sales of each product by region and the production and capacity at each plant are shown in Table$6-18.$ The plant capacity, measured in millions of kilograms of production, can be assigned to either chemical, as long as the plant is capable of producing both. BioPharma has forecast that its sales for the two chemicals are likely to be stable for all parts of the world, except for Asia without Japan, where sales are expected to grow by $10$ percent annually for each of the next five years before stabilizing.

Table $6-18$ Sales by Region and Production$/$Capacity by Plant of Highcal and Relax $($in Millions of Kilograms$)$

Highcal

Relax

Region

Plant

Capacity

$2013$ Sales

$2013$ Production

$2013$ Sales

$2013$ Production

Latin America

Brazil

$18\mathrm{.}0$

$7\mathrm{.}0$

$11\mathrm{.}0$

$7\mathrm{.}0$

$7\mathrm{.}0$

Europe

Germany

$45\mathrm{.}0$

$15\mathrm{.}0$

$15\mathrm{.}0$

$12\mathrm{.}0$

$0\mathrm{.}0$

Asia w$/$o Japan

India

$18\mathrm{.}0$

$5\mathrm{.}0$

$10\mathrm{.}0$

$3\mathrm{.}0$

$8\mathrm{.}0$

Japan

Japan

$10\mathrm{.}0$

$7\mathrm{.}0$

$2\mathrm{.}0$

$8\mathrm{.}0$

$0\mathrm{.}0$

Mexico

Mexico

$30\mathrm{.}0$

$3\mathrm{.}0$

$12\mathrm{.}0$

$3\mathrm{.}0$

$18\mathrm{.}0$

U$.$S$.$

U$.$S$.$

$22\mathrm{.}0$

$18\mathrm{.}0$

$5\mathrm{.}0$

$17\mathrm{.}0$

$17\mathrm{.}0$

The Japanese plant is a technology leader within the BioPharma network in terms of its ability to handle regulatory and environmental issues. Some developments in the Japanese plant had been transferred to other plants in the network. The German plant is a leader in terms of its production ability. The plant has routinely had the highest yields within the global network. The Brazilian, Indian, and Mexican plants have somewhat outdated technology and are in need of an update.

Current Plant Costs at BioPharma

After considerable debate, the task force identified the cost structure at each plant in $2013$ U$.$S$.$$ are as shown in Table $6-19.$ Each plant incurs an annual fixed cost that is independent of the level of production in the plant. The fixed cost includes depreciation, utilities, and the salaries and fringe benefits of employees involved in general management, scheduling, expediting, accounting, $$maintenance$,$ and so forth. Each plant that is capable of producing either Highcal or Relax also incurs a product$-$related fixed cost that is independent of the quantity of each chemical produced. The product$-$related fixed cost includes depreciation of equipment specific and other fixed costs that are specific to a chemical. If a plant maintains the capability to produce a particular chemical, it incurs the corresponding product$-$related fixed cost even if the chemical is not produced at the plant.

Table $6-19$ Fixed and Variable Production Costs at Each BioPharma Plant in $2013($U$.$S$.$ $$)$

Highcal

Relax

Plant

Plant Fixed Cost $($million $$)$

Highcal Fixed Cost $($million $$)$

Relax Fixed Cost $($million $$)$

Raw Material $($$$/$kg$)$

Production cost $($$$/$kg$)$

Raw Material $($$$/$kg$)$

Production cost $($$$/$kg$)$

Brazil

$20\mathrm{.}0$

$5\mathrm{.}0$

$5\mathrm{.}0$

$3\mathrm{.}6$

$5\mathrm{.}1$

$4\mathrm{.}6$

$6\mathrm{.}6$

Germany

$45\mathrm{.}0$

$13\mathrm{.}0$

$13\mathrm{.}0$

$3\mathrm{.}9$

$6\mathrm{.}0$

$5\mathrm{.}0$

$7\mathrm{.}0$

India

$14\mathrm{.}0$

$3\mathrm{.}0$

$3\mathrm{.}0$

$3\mathrm{.}6$

$4\mathrm{.}5$

$4\mathrm{.}5$

$6\mathrm{.}0$

Japan

$13\mathrm{.}0$

$4\mathrm{.}0$

$4\mathrm{.}0$

$3\mathrm{.}9$

$6\mathrm{.}0$

$5\mathrm{.}1$

$7\mathrm{.}0$

Mexico

$30\mathrm{.}0$

$6\mathrm{.}0$

$6\mathrm{.}0$

$3\mathrm{.}6$

$5\mathrm{.}0$

$4\mathrm{.}6$

$6\mathrm{.}5$

U$.$S$.$

$23\mathrm{.}0$

$5\mathrm{.}0$

$5\mathrm{.}0$

$3\mathrm{.}6$

$5\mathrm{.}0$

$4\mathrm{.}5$

$6\mathrm{.}5$

The variable production cost of each chemical consists of two components: raw materials and production costs. The variable production cost is incurred in proportion to the quantity of chemical produced and includes direct labor and scrap. The plants themselves can handle varying levels of production. In fact, they can also be idled for the year, inCase Study BioPharma, Inc$\mathrm{.}2$

$2$ This case was inspired by Applichem $($A$),$ Harvard Business School Case $9-685-051,1985.$

$[$Return to reference$]$

In $2013,$ Phillip $($Phil$)$ Landgraf faced several glaring problems in the fina