Problems:
Financial performance
A steep decline in profits
High cost at its plant in Germany and Japan
No stable in Japan
Surplus capacity in his global production - company’s products were stable across the globe
except Japan
Last question
-supply chain design decisions are long-term and expensive to reverse
Executive Summary
In this report, we will be identifying and analysing issues with BioPharma’s current
production network, and provide them with a recommendation. A summary of the case study,
objectives, issues identified, network analysis options and recommendations for an optimised
supply network is provided. Through the given data, we have calculated the total annual cost
of BioPharma’s current production network in 2019 and discussed in the report if their
optimised network would be impacted by different variations in the future. The report also
mentions factors to take into consideration when making our recommendations. After
thorough analysis, we would make a recommendation of the best fit network along with an
estimate of the annual cost.
India increase capacity
Japan close down entire production plant
German close ativan plant
Table of Contents
List of Figures
List of Tables
Summary of Case
BioPharma is well known for supplying bulk chemicals on a global scale. The two main
chemicals are Ativan and Xanax, which are sold in various parts of the world. BioPharma's
president's goal is to set up plants and supply chemicals around the world to meet global
demand. However, the company's plants in Japan and Germany are costly and significantly
less profitable due to the different needs of each plant, which has affected the company's
profit. Although there is a high demand for both chemicals in Japan, their production does not
show a potential amount. And Germany was expected to have a positive increase in profits
due to its production ability, but its results were underestimated and maintenance cost is the
highest. Besides that, the plants in other countries (Brazil, India, and Mexico)were reported
as having outdated technology and need an update. So, there are the factors that are causing
BioPharma's poor profits. Due to its revenue is unlikely to grow, cutting costs becomes the
smart way for BioPharma to make a profit revenue. Specifically, some plants will be
considered unused, some will operate in certain parts, and some will have to work at
maximum productivity. However, the president of BioPharma cannot decide which is the
more cost-effective network for allocating plants. They have developed various scenarios to
predict the outcome. Therefore, this report will use quantitative analysis to determine the
thorough implementation of each option and provide the recommendation for an alternative
way to help BioPharma in designing the more cost-effective network.
Objectives
The purpose of this study is to devise a more cost-efficient production network to improve
the financial performance of BioPharma. This is done with the help of Excel and its Solver
add-in function. Several scenarios which may help to improve revenue are listed in the case
study. In order to find the best fit solution, we will be investigating how different variables
such as material, production, transportation costs, import duties and currency exchange rates
affect the current production structure of BioPharma.
Issues Identified
Biopharma’s prevailing supply chain has stagnant profits due to numerous problems. The
Japanese plant is a prominent technology figurehead within BioPharma’s network but
requires high costs for production and maintenance. Meanwhile, the German plant’s capacity
is the highest among all plants, however, they have high maintenance costs. The Mexico,
India, and Brazil plants have outdated technology. All plants are established to produce both
chemicals, and they have to pay a yearly fixed cost, as well as a product-related fixed cost. If
a plant chooses to retain the means to produce a chemical, it will have to pay the relevant
product-related fixed cost even if they do not manufacture the chemical. Furthermore,
production price also increases due to import tariffs on raw materials, transportation costs and
currency exchange rates.
Network Option Analysis
After identifying the issues related to the case study, we need to find which is the best option
for the BioPharma’s network. The first thing we need to do is to use the solver to help
calculate the total annual cost for the current network where all the plants and production of
both chemicals are in operation, which accounted for $1,432.65m USD.
The next step is to find the optimized network options, which we can expect to have a lower
total cost than the previous one. With the help of the Excel Solver, we get the total cost of
this optimised network is $1380.44m USD, which is much lower than the previous network.
As a result, the new network suggested that the Japan plant has to be idled and the Germany
plant has to stop producing Ativan as shown in figure 5.
As considerations, we are tasked to find out how the exchange rate from 2012 to 2019 will
impact the network and total costs, we found out that when the currency in that country
appreciated, the total cost increased and cause the network to change so that the cost is
minimized. We also need to find out if any plants are worth adding 1m kg of capacity for an
extra $3m fixed cost, where we find out it is worth adding an extra 1m kg of capacity to the
India plant for an extra $3m fixed cost. And also by reducing the import duties we can see
that the total cost has significantly reduced and also change the network option, as it makes
trading across regions to be much cheaper and more attractive.
Another aspect to be considered is the capacity of each plant. Where we simulate what will
be the total cost and network option when there is a reduction in the capacity due to major or
minor machine breakdowns.
The last consideration is to see the change in the total cost and the network in 2025 when the
demand for Asia without Japan will only be stable after 2024. As a result, the total cost in
2025 is accounted for 1,453.02m USD and the Japan plant has to be idled and the Germany
plant has to stop producing Xanax to obtain this minimum total cost.
Recommendations
The issues of this case study have been identified and critically discussed. There are several
applications and predictions of the results. In each case implementation, the president of
BioPharma was advised to close down the entire production of the Japan plant. In addition, it
was recommended that the Germany plant focus on the production of Xanax and close down
the production of Ativan. According to BioPharma's sales and production figures for 2019,
while there is a significant demand for both chemicals in the Japan plant, its production does
not show a potential number. In the same way, the Germany plant has a high sales value, but
its production cannot meet expectations compared to other smaller plants. Therefore, the
Germany plant focuses on increasing the productivity of one of its chemical (Xanax) as a
solution to reduce costs. In a nutshell, it is recommended that the centralised production of
both the Germany plant and the Japan plant should be idled to minimise costs.
Conclusion
This case study shows the various factors that can affect supply chain networks, such as fixed
and variable costs, transportation costs, exchange rates, and import tariffs. Whereas changes
in production and capacity can directly impact the adequate management of the supply chain.
We have used quantitative analysis to determine the optimal solution and then provide some
recommendations to improve the less cost-effective network in this case. Thus, this report
provides a detailed explanation of logistics concepts and how to deal with the complex data
in the problems encountered. In conclusion, it is important to carefully evaluate the
interaction of each factor on supply chain management as we can investigate the results and
give alternative solutions to deal with the uncertainty of changes in the supply chain.
Answer to the case study
Question 1
The total annual cost for the current production network of BioPharma is $1432.65 million.
For this as-is situation, we will take into account that all the plants are On, and there are no
import duties for local delivery. Firstly, the variable costs from each plant to each location
including the raw material, production, and transportation costs plus import duties are
calculated in excel.
The variable costs for local delivery, we have the formula below,
Variable costs = (Material cost + Production cost + Transportation cost)
The variable costs for oversea delivery, we have the formula below,
variable costs = (Material cost + Production cost + Transportation cost) * (1 + Import Tariffs)
Table 1 - Variable material, production, and transportation cost plus import duties (in
US$/kg) for Ativan
Table 2 - Variable material, production, and Transportation cost plus import duties (in
US$/kg)for Xanax
The next step is to set and defined the decision variables, and constraints. We make some
constraints to ensure that all market demands are met and no plant produces more than its
capacity. The objective function is the total annual costs which is the sum of the total variable
cost and fixed cost. According to the information given in the case study, the fixed cost
remains 25% if the plant is shut down, therefore the fixed cost varies based on the status of
each plant.
Objective function:
Minimum Total annual cost = Total Fixed costs + Total Variable costs
Total Fixed costs = 0.25 * Fixed cost of (plant/Ativan/Xanax) + 0.75 * the status of each
plant/Ativan/Xanax (1/0) * Fixed cost of (plant/Ativan/Xanax)
Total Variable costs = Number of production of (Ativan/Xanax) from each plant to each
location * variable costs from each plant to each location
Constraints:
Each plant production of (Ativan & Xanax) = Each plant production of (Ativan & Xanax) in
2019
Total amount of (Ativan & Xanax) receive by the location from each plant = Sale of (Ativan
& Xanax) in each location during 2019
All the plants and products (Ativan & Xanax) = 1 which is Open
Quantity shipped for (Ativan & Xanax) ⪰ 0
After using a solver to solve, we are able to obtain the minimum total annual cost of
1,432.65m USD shown in figure 3. Figures 1 and 2 show the quantity shipped of the products
(Ativan & Xanax) so that the annual cost is minimum.
Figure 1 - The Quantity Shipped for Ativan
Figure 2 - The Quantity Shipped for Xanax
Figure 3 - Total annual cost of the current production network in 2019
Question 2
Using almost the same information in question 1 and the calculation of total variable costs for
Ativan and Xanax in Tables 1 and 2. Assume that all market demands are met and no plant
produces more than its capacity. To get the optimised production network and the minimum
annual cost for 2019 by using the solver, we need to construct the following requirements.
Objective function:
Minimum Total Annual Cost = Total Fixed Costs + Total Variable Costs
Total Fixed costs = 0.25 * Fixed cost of (plant/Ativan/Xanax) + 0.75 * the status of each
plant/Ativan/Xanax (1/0) * Fixed cost of (plant/Ativan/Xanax)
Total Variable costs = number of production of (Ativan/Xanax) from each plant to each
location * variable costs from each plant to each location
Constraints:
Each plant production of (Ativan & Xanax) ⪰ 0
Quantity of products (Ativan & Xanax) for each location - Demand of each product (Ativan
& Xanax) for each location = 0
Excess Capacity ⪰ 0
All the plants and products (Ativan & Xanax) = Binary
Figure 4 shows the minimum total annual cost in 2019 is 1380.44m USD. To obtain an
optimised network of production, the Japan plant has to be idled and the German plant has to
stop producing Ativan shown in figure 5. As the production line maintenance cost for the
German plant is the highest whereas the Japan plant has the lowest capacity with high plant
fixed cost. Although Brazilian, Indian and Mexican plants have outdated technology, they
have to fully operate at maximum capacity. Hence, the total cost optimised network of
production is cost-effective as it only costs $1380.44 million, which is 3.64% lower than the
current production network ($1432.65). Difference in 3.64 % cost brings a huge difference to
BioPharma, it helps to save costs and increase its revenue.
Figure 4 - Optimised minimum total annual cost in 2019
Figure 5 - Optimised network of production
Question 3
The fixed cost (Plant, Ativan & Xanax), raw material and production costs (Ativan & Xanax)
are affected by the exchange rate for the last eight years from 2012 to 2019. Transportation
cost is not affected by the exchange rate due to the cost is relatively small compared to other
costs. The calculation of total variable costs for Ativan and Xanax from 2012 to 2019 are
different due to fluctuations in the exchange rate.
The variable costs are calculated by using these formulae,
For local delivery, Variable costs = (Material cost + Production cost + Transportation cost)
For oversea delivery, Variable costs = (Material cost + Production cost + Transportation cost)
* (1 + Import Tariffs)
To get the optimised network of production and the minimum total annual cost for each year,
we make some constraints to ensure that all market demands are met and no plant produces
more than its capacity. The objective function is the total annual cost which is the sum of the
total variable and fixed costs.
Objective function:
Minimum Total Annual Cost = Total Fixed Costs + Total Variable Costs
Total Fixed costs = 0.25 * Fixed cost of (plant/Ativan/Xanax) + 0.75 * the status of each
plant/Ativan/Xanax (1/0) * Fixed cost of (plant/Ativan/Xanax)
Total Variable costs = number of production of (Ativan/Xanax) from each plant to each
location * variable costs from each plant to each location
Constraints:
Each plant production of (Ativan & Xanax) ⪰ 0
Quantity of products (Ativan & Xanax) for each location - Demand of each product (Ativan
& Xanax) for each location = 0
Excess Capacity ⪰ 0
All the plants and products (Ativan & Xanax) = Binary
Figure 6 shows the total annual cost for an optimised production network from 2012 to 2019.
2017 has the highest total annual cost as all the currencies appreciate except Japan Yen.
Figure 7 shows that Brazil, Mexico and U.S plants are open for these eight three years due to
they incur lower fixed and variable costs and have large production capacity. Although India
plant incurs the lowest fixed cost and variable cost but it has the lowest capacity compared to
Brazil, Mexico and U.S plants. Hence, Xanax production is closed for India plant from the
years 2012-2018.
These two tables show that the configuration of optimised production network of BioPharma
are affected by the fluctuations of exchange rates which also affects the total annual costs. It
is suggested that Japan plant has to close to when there is an appreciation of Japan Yen.
Brazil, Mexico and U.S plants are recommended to be open as they have large capacity with
lower fixed and variable costs although they have almost outdated technology. German plant
is recommended to produce only one chemical which is Xanax, as it has the highest
production maintenance cost although it is the leader in production. Hence, the optimised
production network in question 2 will be affected significantly by the fluctuations in
exchange rates in the future.
Figure 6 - Total annual cost from 2012 - 2019
Figure 7 - Production capacity of all plants
Question 4
We have modified the model by adding 1m kilograms to the capacity and $3 million to the
fixed cost of each plant. Table 3 shows the total cost after modifying the capacity and the
fixed cost of each plant:
Table 3 - New total cost of each case
From Table 3, the total annual cost for every plant is higher than the total annual cost in
question 2 ($1380.44 million) except Indian plant for an optimised production network.
Therefore it might be worth adding the additional 1million kilograms to the capacity and $3
million to the fixed cost of the India plant per year. Brazil, German, Japan, Mexico and U.S.
plants should remain at their original capacity and fixed costs as adding additional capacity
and costs do not show any improvement in the financial performance of BioPharma.
Question 5
Reduction in the import duties to 75%, 50%, 25%, and 0% brings benefits to the company in
terms of the total annual cost. Table 4 indicates that the lower the import duties the more the
company can save as compared to the optimised total cost in question 2 ($1380.44m). Figure
6 shows that the more reduction of import duties, the more production is off. The Japan plant
is not influenced by the import duties as some of its productions have been transferred to
other plants, therefore it is idled all the time. In conclusion, reduction in the import duties
does impact the total cost and also the network of production.
Total cost (reduce to 75%) 1,368.60m USD
Total cost (reduce to 50%) 1,355.07m USD
Total cost (reduce to 25%) 1,338.51m USD
Total cost (reduce to 0%) 1,320.35m USD
Table 4 - Total cost after reduction of import duties
Figure 8 - Network of production when import duties are at 75%,
50%, 25% & 0%
Question 6
Table 5 shows four different models to understand whether reduction in yield will affect the
production network and total annual cost.
Table 5 - Models with different percentage of yield
Figure 9 shows that models 1 & 2 are having minor machine breakdowns with about 15-30%
reduction in yield in all plants. The similarity between these two models is Japan stops
producing Xanax. However, when there is a 30% breakdown in India, the production will be
transferred to the U.S plant.
Figure 9 - Comparison between models 1 & 2 on operation of plants and lines
Figure 10 shows that models 3 & 4 have major machine breakdowns. Japan plant has the
highest yield reduction in model 3 whereas Germany has the highest yield reduction in model
4. When there is large breakdown in Japan plant, capacity of all plants will be fully utilised. It
will not affect much on the network production of BioPharma. When German plant has large
reduction in his production, there is excess capacity due to it has large capacity.
Figure 10 - Comparison between models 3 & 4 on operation of plants and lines
Table 6 shows that there is an increase in total annual cost when there is a breakdown in
plants as the production has to transferred to other plants to meet the demand of customers.
As they import more from different location the total cost be come higher.
Table 6 - Total annual cost for each model after reduction of yield
Question 7
What other factors should be accounted for when making your recommendations to
BioPharma in optimising the configuration of its production network?
There are many various types of global supply chain risks (Harland and Brenchley, 2001).
Thorough assessment of the tendency of these risks occurring should be done before making
supply chain decisions. Unpredictable disruptions is one such risk to a supply chain
(Christopher and Lee, 2004), this includes disasters, war, terrorism and labour disputes. Areas
which are dangerous make it hard for companies to purchase and source for materials, there
would also be higher material and transportation costs. Another significant factor is change in
government policy. A government may implement social regulation to standardise conduct
that may result in externalities, which may affect those not directly in the business activities
that cause the harm (Phares, 2021). They may also intervene with economic regulation
Moreover, delays and erratic resources will hinder a supply chain from functioning smoothly.
This causes unexpected shortages in inventory, leading to unhappy customers, hence
negatively affecting sales. One other factor to consider is demand forecasting, this prediction
should be as accurate and efficient as possible as it is directly connected to inventory and
customer service levels (Helms et al. 2000). Inaccurate forecasts may threaten a supply’s
chain functionality. This is linked to inventory, which is another factor in a company’s supply
chain decision. Inventories are used to hedge against uncertainties in not only demand but
also transportation costs (Lee et al. 2017). Having an unreliable inventory management
system may cause overproduction or stockouts. When planning for BioPharma’s production
network, we should take into consideration the rate of obsolescence of the chemicals as well
as their holding costs. Thus, we would take into consideration the above factors when making
recommendations to BioPharma on how to improve their production network.
Question 8
According to the information given, the demand for Asia without Japan will continue to grow
by 10% each year for another 5 years. Therefore, we need to calculate the demand for Asia
without Japan in 2024 to find the annual total cost and the network of production for 2025 as
the demand for Asia without Japan will be stable after 2024.
Using the following formula,
Demand in 2024 (Ativan & Xanax) = demand in 2019 (Ativan & Xanax) * 1.10 * 1.10 * 1.10
* 1.10 *1.10 = Demand in 2025 (Ativan & Xanax)
Figure 11 - Demand of Asia w/o Japan (Ativan & Xanax) in 2025
The total cost in 2025 is $1,453.02m USD shown in figure 12. Figure 13 shows that Japan
plant has to be idled and the German plant has to stop producing Xanax to obtain an
optimised network of production.
Figure 12- Total cost in 2025
Figure 13 - Network of production for 2025
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