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Naman Chhaya

IE 7325- Supply Chain Management


Case Study #2
Summary:
BioPharma, Inc. which is owned by Phillip Landgraf faced several glaring problems in the
financial performance of this company. Company had experienced a steep decline in profits and
very high costs at its plants in Germany and Japan. Phillip knew that demand for the
companys products was stable across the globe. So surplus capacity in his global production
network looked like a luxury he could no longer afford. Improvement in financial performance
was dependent on having the most effective network, because revenues were unlikely to grow.
Cutting costs were thus a top priority for the coming year. To help design a more cost-effective
network, Phillip assigned a task force to recommend a course of action.
BioPharma, Inc. is a global manufacturer of bulk chemicals used in plastic industry. The
company holds patent of chemicals called Highcal and Relax internally. These are used internally
by 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 recently set up to be able to produce both chemicals for any part of the world.
The plant capacity of production, can be assigned to either chemical as long as the plant is
capable of purchasing both. Company has forecast that its sales for the two chemicals are likely
to be stable for all the parts of the world, except for Asia without Japan, where sales are expected
to grow by 10 percent. The Japanese plant is a technology leader within the BioPharma network
in terms of its ability to handle regulatory and environmental issues. Some development in
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 The Brazilian, Indian and Mexican plants have somewhat outdated technology and are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.
After considerable debate, task force identified the cost structure at each plant in 2005. 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. 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 to a chemical and other fixed costs mentioned 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.
The variable production cost of each chemical consist of two components. Raw materials and
production costs. The variable production costs are incurred in proportion to the quantity of
chemical produced and includes direct labor and scrap. The plants themselves can handle varying

Naman Chhaya
IE 7325- Supply Chain Management
Case Study #2
levels of production. They can also be idled for the year. In which case they incur only the fixed
cost, none of the variable cost.
BioPharma Inc. transports the chemical in specialized containers by sea and in specialized trucks
on land. Given regional trade alliances, import duties in reality vary based on the origin of the
chemical. For simplicity, the task force has assumed that the duties are driven only by the
destination. Local production within each region is assumed to result in no import duty. Thus,
production from Brazil, Germany and India can be sent to Latin America, Europe and the rest of
Asia without Japan respectively, without incurring any import duties. Duties apply only to the
raw material, production and transportation cost component and not to the fixed component cost.
Thus, a product entering Latin America with a raw material, production and transpiration cost of
$10 incurs import duties of $3.
The task force is considering a variety of options for its analysis. One option is to keep the global
network with its current structure and capabilities. Other option includes shutting down some
plants or limiting the capability of some plants to producing only one chemical. Closing down a
plant eliminates all variable costs and saves 80 percent of the annual fixed costs. Similarly, if a
plant is limited to producing only one chemical, the plant saves 80 percent of the fixed cost
associated with the particular chemical. The two options being seriously considered are shutting
the Japanese plant and limiting German plant to a single chemical.

Questions:
1.) BioPharma Inc. need to consider fixed and variable costs for effective network of production.
It will efficiently deliver products globally and will meet demand. To meet demand production
costs should be taken into account over technology and plant capacity.
Plant in Japan should be idled because fixed and variable costs in India is quite lower and can
meet to meet the demand which would be cost effective.
The annual cost of proposal would be $1374.44

Above mentioned total cost of proposal is included all duties for all over globe it is being
shipped.
2.) Phil should keep idle the plant in Japan and let plant in India meet the demand in order to
save costs. He can also stop producing only one chemical in Germany plant. As per forecast
demand is stable which can be meet by efficient supply chain. It is said that Asian market can
rise in future for which Phil can start plant in Japan to meet rise in demand. If there is major
change in exchange rate it will be matter of concern and effective steps will be required to take to

Naman Chhaya
IE 7325- Supply Chain Management
Case Study #2
minimize costs. For example, if exchange rate reduces in country where plant is situated, costs
increases.

Ref: Excel Solver Solution

Ref: Excel Solver Solution

3.) India looks most cost effective plant for Biopharma Inc. This plant has lowest variable and
associated fixed cost as well as chemical costs. As it is said plant has not latest technology and
advanced equipment but if some money is invested it can provide better output to feed Asian
market. When Japan plant is idle it can use single product produce by Germany. If capacity in
Asia is increased there wont be requirement of shipping chemical product from Europe. Thus,
additional plant capacity in Asia would surely lead to profits which will be cost effective.
4.) Import duties are higher in Latin America, Mexico and Asia w/o Japan where there is lower
production and supply rate. On the other side, duties are lower in US, Japan & Europe are lower
where production and supply rate are higher. It can be concluded that there wont be any effect of
reducing duties where production network is lower and that wont be affected either change of
duties.
5.) If percent output of acceptable quality decreases, it will lead to loss of production and in term
increased cost. Similarly, if the percent output of acceptable quality increases, it will lead to
increase profit due to lesser non qualities and lesser material requirements. The increase in non-

Naman Chhaya
IE 7325- Supply Chain Management
Case Study #2
quality will require more material and which will increase cost. Thus, yield of acceptable quality
is inversely proportional to production cost.
6.) When making recommendations number factors should be accounted few of them are here.
- Individual countrys economic growth and government schemes.
- Mutual trade and business environment within countries and continents.
- Industrial growth in individual country and plant location.
- Labor law and wages all around plant locations.
- Crude and non-conventional raw material prices.
- Sales and marketing team and their analysis for future scope.

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