CHAPTER SIX

BioPharma Case Questions

1. How should BioPharma have used its production network in 2013? Should any of
the plants have been idled? What is the annual cost of your proposal, including
import duties?

This solution was obtained using the spreadsheet bio-pharma solution. The results
are obtained in the worksheet solution-2013 and are displayed below. Note that
the Japanese plant is shut and Germany produced none of the Highcal product. All
other plants produced both products. The annual cost of this solution is $1,267
million.

Highcal Production
Asia
From / Latin w/o
To America Europe Japan Japan Mexico U.S.
Brazil 7.0 4.0 0.0 0.0 0.0 0.0
Germany 0.0 0.0 0.0 0.0 0.0 0.0
India 0.0 0.0 5.0 7.0 0.0 0.0
Japan 0.0 0.0 0.0 0.0 0.0 0.0
Mexico 0.0 11.0 0.0 0.0 3.0 13.0
U.S. 0.0 0.0 0.0 0.0 0.0 5.0

Relax Production
Asia
From / Latin w/o
To America Europe Japan Japan Mexico U.S.
Brazil 7.0 0.0 0.0 0.0 0.0 0.0
Germany 0.0 12.0 0.0 5.0 0.0 0.0
India 0.0 0.0 3.0 3.0 0.0 0.0
Japan 0.0 0.0 0.0 0.0 0.0 0.0
Mexico 0.0 0.0 0.0 0.0 3.0 0.0
U.S. 0.0 0.0 0.0 0.0 0.0 17.0

Total Plant Output

Plant Total
Brazil 18
Germany 17
India 18
Japan 0
Mexico 30
U.S. 22

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 2. How should Landgraf structure his global production network? Assume that the
past is a reasonable indicator of the future in terms of exchange rates.

Landgraf should note that the exchange rates have been fairly volatile over the
period from 2006 to 2013. Whereas the Japanese plant is recommended shut for
the exchange rates from 2009 to 2013, it is optimal to have had Japan open
between 2006 and 2008 exchange rates (see corresponding worksheets). Over all
exchange rate regimes (except for 2006), however, it is optimal to have the
German plant be dedicated to producing only Relax. Similarly, the U.S. plant
produces only Highcal under most exchange rate regimes. Given these
observations, it may be reasonable to maintain the capacity and flexibility in all
plants to deal with exchange rate volatility.

3. Is there any plant for which it may be worth adding a million kilograms of
additional capacity at a fixed cost of $3 million per year?

It doesn’t appear this improves the solution shown in Question 1. The plants that
are at capacity in part 1 are Brazil, India, Mexico, and the United States; adding a
million kilograms of capacity to those plants does not result in a lower overall
cost for the entire supply chain (when the $3 million increase in cost for the
additional capacity is accounted for). Given the excess capacity in the network it
does not seem worthwhile to add capacity in any location.

4. How are your recommendations affected by the reduction of duties?

A reduction in duties is likely to make trade across regions more attractive. As a

result, production is more likely to be concentrated. Change the Cells A47:F47 in
the worksheet input-2013 to 0 and run Solver on the worksheet solution-2013 to
obtain the optimal network without duties for 2013. For the year 2013, the
optimal network and production without duties is as shown below.

Highcal Production
Asia
From / Latin w/o
To America Europe Japan Japan Mexico U.S.
Brazil 0.0 0.0 0.0 0.0 0.0 0.0
Germany 0.0 0.0 0.0 0.0 0.0 0.0
India 0.0 6.0 5.0 7.0 0.0 0.0
Japan 0.0 0.0 0.0 0.0 0.0 0.0
Mexico 7.0 9.0 0.0 0.0 3.0 11.0
U.S. 0.0 0.0 0.0 0.0 0.0 7.0

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 Relax Production
Asia
From / Latin w/o
To America Europe Japan Japan Mexico U.S.
Brazil 0.0 0.0 0.0 0.0 0.0 0.0
Germany 7.0 12.0 3.0 8.0 3.0 2.0
India 0.0 0.0 0.0 0.0 0.0 0.0
Japan 0.0 0.0 0.0 0.0 0.0 0.0
Mexico 0.0 0.0 0.0 0.0 0.0 0.0
U.S. 0.0 0.0 0.0 0.0 0.0 15.0

Observe that the solution matrix is far less sparse than the case with duties. Both
the Japanese and Brazilian plants are shut down. Other than United States, every
other plant produces only one product. Mexico and India produce only Highcal
while Germany produces only relax. In general a reduction of duties is likely to
lead to a consolidation of global supply chain networks.

5. The analysis has assumed that each plant has a100 percent yield (percent output
of acceptable quality). How would you modify your analysis to account for yield
differences across plants?

To adjust for yields less than 100 percent, the capacity of each plant could be
adjusted down by the loss percentage. Another approach would be to leave
capacity as stated but adjust the amount shipped down by the scrap percentage.

6. What other factors should be accounted for when making your recommendations?

This global supply chain is exposed to a variety of risks as enumerated below.

Supply chain decisions should be made after careful assessment of the likelihood
of these events and the effectiveness of possible mitigation plans.
Disruptions—disasters, war, terrorism, and labor disputes
Delays—inflexibility or poor yield of supply and insufficient supply
Systems—IS breakdown and system integration issues
Forecast—inaccurate forecasting
Intellectual property—vertical integration and global sourcing
Procurement—exchange rate movement and industry-wide capacity issues
Receivables—number and financial strength of customers
Inventory—rate of obsolescence, holding costs, and uncertainty of demand
Capacity—cost and flexibility of capacity

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