In 2009, BioPharma Inc. experienced a significant decline in profits with high costs of production around the world. Due to a stable demand with little room for increased profitability, cutting costs was a top priority for the coming year. Changing and adapting BioPharma’s global production network was thus a priority in order to be successful and eliminate wasteful surplus.
BioPharma should have used their production network differently in 2009 in order to be as efficient as possible. Presented first will be how the structure of the current distribution network leads to room for improvement, followed by how exactly BioPharma should go about structuring their distribution network in order to maximize economic surplus.
Factors that need to be considered when evaluating a supply chain network is the location of the distribution/manufacturing facilities, the plant capacity for production, the actual plant production, and the costs of production and distribution. All of these factors are intended and designed to meet customer demand of the product.
In this case, the two particular products being considered are two pharmaceutical chemicals, Highcal and Relax. The costs of producing and distributing this product include fixed costs of the plant, chemical fixed costs, raw materials. production costs, transportation costs to markets, and import tariffs when shipping the product to another country.
The main point of improvement in order to cut costs for BioPharma is dealing with the allocation of matching production to customer demand in the most efficient way possible. The questions to be considered are which plants produce what quantity of chemicals and in what case should the product be imported from another region to maximize surplus. Due to a stable demand for the product across the globe, surplus capacity in Biopharma’s distribution network is not affordable.
However, there are certain assumptions that must be made in order to simplify the problem and make a tangible solution. First, all plants are currently set up to product both chemicals for any part of the world. Second, all plants first match domestic market demand before exporting to other regions. Third, if a plant maintains the capability to produce a particular chemical, it incurs all of the fixed cost even if the chemical is not produced by the plant. Fourth, a plant can be idled (incurring only fixed costs), shut down (only pay 20% of fixed cost of plant), and limited to producing only one chemical (paying only 20% of the other chemical’s fixed cost). And fifth, all numbers are in millions.
Below is an explanation on how BioPharma’s current network leads to inefficiencies in the supply chain.
Figure 1-1 shows the current breakdown of BioPharma’s annual costs in producing and distributing Highcal and Relax.
Plant/Region it ServicesProduction - HighcalProduction - Relax*Fixed Costs*Variable Costs*Transportation CostsTotal CostsBrazil/Latin A.11.07.0$30$174.1$4.6$208.7Germany/Euro.15.00$72$163.5$3$238.5India/Asia10.08.0$26$165$4.6$195.6Japan/Japan2.00$29$22.8$0.2$52Mexico/Mexico12.018.0$42$303$7.65$352.65U.S/U.S5.017.0$31$230$4.4$265.4 *Fixed costs include: fixed cost of plant and particular chemical being produced *Variable costs include: Raw materials and production costs *Transportation costs include: Cost of transporting product from plant to market
Also, import duties must be considered, which in this case deal with the product being imported into Japan (6%), the USA (4%), and Germany (3%). Duties apply to the raw material, production, and transportation cost components.
Imports to the USA: $116.25 x .04 = $4.65
Imports to Japan: $112.65 x .06 = $6.759
Imports to Germany: $136.8 x .03 = $4.104
Total Import Tariffs: $15.513
This leads to a Total Annual Cost of : (208.7+238.5+195.6+52+352.65+265.4) + (15.513) = $1328.363 million