Eli Lilly and Company, Inc. Adani Institute of Infrastructure Management Case Analysis

1. Eli Lilly and Company, Inc.
Managerial Written Communication
Prepared by,
Neeraj Mehra
Submitted to:
Prof. Mukul Vasavada & Dr. Nayana Shah
On 08 December 2011

2. 1
To,
Manufacturing Strategy Committee
From,
Steve Mueller
Manager, Strategic Facilities Planning
Date: November 6, 1993
Subject: Decision report on the type of manufacturing facility to be built
I am here by submitting the decision report on the type of manufacturing facility to construct
for new products.
All the options have been analysed in detail.
Please let me know if you have any further questions.

3. 2
DecisionSummary
Eli LillyandCompanyisfacinga difficultsituationtoremaincompetentinthe pharmaceutical
industry.The pharmaceutical industry hasbecome highlycompetitive inthe pastfew yearsandthe
growthrate of the industryhassloweddown.
Eli Lillyand Companyhas to make a decisiononthe type of manufacturingfacilitiestobe built.
The optionsavailable are tohave a Specialised,Flexible oraHybridmanufacturingfacility.
Each of the above optionshasbeenevaluatedintermsof theirimpactonreductionindevelopment
lead-time andmanufacturingcostsandtheirimpactonrevenue.
On the basisof thisevaluation,it hasbeen recommendedthatEli LillyandCompanyshouldbuild
hybridmanufacturingfacilitiesforitsproducts.
Word Count:120

4. 3
Table of Contents
Serial Number Title Page Number
1 Situational Analysis 4
2 Problem Statement 4
3 Options 4
4 Criterions of Evaluation 5
5 Evaluation of Options 5
6 Recommendation 7
7 Action Plan 7
8 Contingency Plan 7
9 Exhibits 8

5. 4
Situational Analysis
Eli LillyandCompanyranksamongst the topsix pharmaceutical companiesinUnitedStates.
The US pharmaceutical industryhadgrownatan average annual rate of 18% betweenthe periodof
1982 and 1992. But, due to variousfactorsthe industrygrowth isexpectedtoslipto8-12% range
from1993 onwards.
The factors whichledtoslownessin the industrygrowthrate includeddiminishingpricingflexibility,
slowingrate of innovation, growingcompetitionwithinthe drugclasses,competitionfromgeneric
substitutes,increasingcostof manufacturingpharmaceuticalsandgovernmentintervention.
Eli LillyandCompanydecidedtoreduce the time tomarketfor new productand cost of
manufacturingtomaintaintheirprofitmargin. The company’scurrentblockbusterproductswere
nearingthe endof theirlivesandthe companyneedstodevelop new productssoontoremain
competitiveinthe industry.
The dilemmafacedby the companyiswhat type of manufacturingfacilitiesshouldbe constructedto
produce the three new pharmaceutical products andthe future productsof the company. The three
newproductswhich would be launched in1996 are Alfatine,Betazine andClorazine.
The decision regardingmanufacturingfacility iscritical since itdecidesthe costsof operation,time-
to-marketfornewproducts,capital investment,flexibilityinprocesscontrol,etc.andwouldimpact
the companyin both,shortterm as well aslongterm.
Exhibit8 showsthe SWOT analysisof the manufacturingfacilities.
ProblemStatement
Eli LillyandCompanyneedstoimprove the profitmargintosustaintheirbusiness inthe competitive
pharmaceutical industry.
Options
1. Buildspecialized manufacturingfacility
2. Buildflexible manufacturingfacility
3. BuildFlexibleandSpecialized Hybridmanufacturingfacility

6. 5
Criterionsof Evaluation
1. ReductioninDevelopmentLead-time andManufacturingCosts:Whateffectthe type of
facilitywill have onthe DevelopmentLead-time and ManufacturingCosts?
2. Effecton Revenue:Howwillthe type of manufacturingfacilityimpactthe revenue of the
company?
Evaluation of Options
1. Buildspecializedmanufacturingfacility
a) ReductioninDevelopmentLead-time andManufacturingCosts
If the companydecidesinthe favourof specializedfacilityformanufacturing,there will be
no reductioninthe developmentleadtime asanew facilitywillhave tobe createdforeach
newproduct. Also,since the facilityisbuiltonlyforaspecifictype of product,there isno
flexibilityinoperationsof aspecialisedfacility.
However,theyhave anadvantage intermsof the total costsinvolved.The total costforthe
three newproducts peryearis $ 9.3 mill (Exhibit2) overthe life of the products(15 years).
Exhibit4 explainsaboutthe costperkgof the product if producedina specialisedfacility.In
thiscase itis $930 inthe firstyear andthenreducesto $433 inthe later years.Itis important
to note that the total capacity of the specializedfacilityis24000 kilogramsandthe expected
demandnevergoesbeyond21000 kilograms.Hence,we don’thave anylossinsalesbecause
of insufficientcapacityof the facility.
These typesof dedicatedfacilitieshave afixedavailable capacityfor aproduct.From Exhibit
1, it shouldbe notedthatduringthe earlieryearsthe utilisedcapacityisnothigh.Hence,this
will resultinwastage of resourcesaswell.
b) Effecton Revenue
A specializedfacilityplantwouldhave higheroutputperrigas comparedto a flexible
facility.Alsothe utilizationrate ishigherforaspecializedfacility (Exhibit2and 3). There is
no directimpacton the revenue if specializedfacilityischosen.

7. 6
2. Buildflexible manufacturingfacility
a) Reductionin DevelopmentLead-time andManufacturingCosts
For the three productson the pipeline,therewillbe noreductioninthe development
lead-time butthe developmentleadtimewouldreduceforthe future products.Exhibit
3 showsthe average total cost peryearas $19.48 mill.
Eventhoughthe total cost/kgreducedovertime,itisstill higherinthe case of flexible
facilityascomparedto specialisedfacility(Exhibit 4and5).
In thiscase the facilitysuffersfromundercapacity fromyear2000 onwards;the facility
reachesthe maximumcapacityandcan’t handle more production.Thisleadstolost
salesas the companyisnot able to fulfil the marketdemandforthe productbecause of
insufficientproductioncapabilities.
On the otherhand,we shouldalsonote that there isno loss relatedtowastage of
available resourcesunlike thatof specializedfacilities.
b) Effecton Revenue
For the three productsthere will be noadvantage intermsof the leadtime butthe
subsequentnew productswill come tothe market1 yearearlier. Sothere will be a
revenue improvementbecauseof the advantage associatedwithgettinganew product
to the marketearlier.Gettinganew drug tomarket one yearsoonermeantone year’s
salesgained.
Exhibit1 showsthe capacityutilisationof the facilityinthe yearbyyearbasis.We can
safelyassume thatbringingthe productone yearearlierwillgive anadditional
advantage of the 16th
yearrevenue,whichshouldbe aroundthe revenuerecognisedfor
50% (assumption)capacity utilisationof the facility.
3. Buildhybridmanufacturingfacility
a) ReductioninDevelopmentLead-time andManufacturingCosts
It ishighlyrecommendedtohave a hybrid systemwherein,we willhave Flexiblesystem
duringthe earlierlife of the productbutafterfew years(inourcase 5th
year) a dedicated
specialisedfacilitywill be usedforthe same product. Inthiscase we make a dedicated
facilityforAlfatineonly.

8. 7
Thiswill helpinreducingthe manufacturingcostsduringthe earlierpartof the product,
since onlythe marketdemandwill be cateredandhence,there will be nowastage of
available capacity.
b) Effecton Revenue
Since the duringthe earlieryearsof the product,itwill be manufacturedinthe flexible
facility,we willhave the 1year advantage aswe saw inthe case of the flexible facility.
Duringthe laterpart of product’slife,havingthe specialisedfacilitywill boostupthe
available capacitysothatmarketdemandcan be fulfilledandhence will addtothe
revenue generated.
However,itshouldbe carefullyunderstoodthatthe hybridsystemshouldonlyapplyto
the product which are expectedtohave consistentlyhighdemandinthe future.For
otherproductswhichdon’tmatch the criteria shouldbe manufacturedinaflexible
manufacturingfacility only. Exhibit6and 7 explainsthe effectof havingahybridfacility
withAlfatine havingaspecialisedfacilityfrom5th
yearonwards.
Recommendation
Eli LillyandCompanywill be mostbenefittedif theyintroduce ahybridfacilitysystemwhere the
productis manufacturedinthe flexible facilityuntil the 4th
year andthenin a dedicatedspecialised
facilityforrestof its life.
Action Plan
1. The firststepshouldbe to start buildingthe flexible manufacturingfacility.
2. Thenwe have to start building specialisedfacilityfor‘Alfatine’drugtomake it functional
from5th
year onwards (Exhibit6and7).
ContingencyPlan
In the worstcase scenario,if all of the three productsfail, the flexible plant couldthen be usedto
manufacture genericdrugs.
Word Count:1200

9. 8
Exhibits
Exhibit1: ProductionCurve forSpecializedManufacturingFacility
Years Facility Capacity
Utilisation (%)
1 18
2 45
3 75
4 79
5 85
6 92
7 98
8 100
9 98
10 95
11 84
12 80
13 79
14 65
15 58

10. 9
Exhibit2: Costsin SpecializedManufacturingFacility
ConstructionCosts(USDMillions) 37.5
Annual OperatingCosts(USD
Millions)
6.8
CapacityinRigs 1.5
MaximumOutput(kilograms) 24000
Output per Rig= 24000/1.5= 16000 kilograms
Total OperatingCostsfor15 years:15*6.8= $ 102 mill
Total Costs=$ 139.5 mill
Total Cost per year= 139.5/15= $ 9.3 mill
*Compositionof CapacityinRigs(Total 1.5) – Alfatine:1;Betazine:0.25; Clorazine:0.25
Average UtilizationRate=80%
Exhibit3: Costsin Flexible ManufacturingFacility
ConstructionCosts(USDMillions) 150
Annual OperatingCosts(USD
Millions)
9.48
CapacityinRigs 3
MaximumOutput(kilograms) 14625
Output per Rig= 14625/3= 4875 kilograms
Total OperatingCostsfor15 years:15*9.48= $ 142.2 mill
Total Costs=$ 292.2 mill
Total Cost per year= 292.2/15= $ 19.48 mill
Average UtilizationRate=65%

11. 10
Exhibit4: Specialized ManufacturingFacility:DemandandProduction
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Expected
Production (Kg) 10,000 11,200 12,750 13,850 21,000 21,000 21,000 21,000 21,000 21,000
VolumesRequired
(kg) 10,000 11,200 12,750 13,850 21,000 21,000 21,000 21,000 21,000 21,000
Excess Capacity
(kg)
14000 12800 11250 10150 3000 3000 3000 3000 3000 3000
Total Cost ($
millions)
9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3
Cost/Kg ($)
930 830 729 671 443 443 443 443 443 443
Exhibit5: FlexibleManufacturingFacility:DemandandProduction
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Expected
Production(Kg)
10,000 11,200 12,750 13,850 14,625
(max)
14,625
(max)
14,625
(max)
14,625
(max)
14,625
(max)
14,625
(max)
VolumesRequired
(kg)
10,000 11,200 12,750 13,850 21,000 21,000 21,000 21,000 21,000 21,000
Excess Capacity
(kg)
0 0 0 0 0 0 0 0 0 0
Total Cost ($
millions)
19.48 19.48 19.48 19.48 19.48 19.48 19.48 19.48 19.48 19.48
Cost/Kg ($) 1,948 1,739 1,528 1,406 1,332 1,332 1,332 1,332 1,332 1,332
Exhibit6: HybridManufacturingFacility:DemandandProduction
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Expected
Production(Kg) 1,948 1,739 1,528 1,406 1332 1332 1332 1332 1332 1332
Total Cost ($
millions) 19.48 19.48 19.48 19.48 6.66 6.66 6.66 6.66 6.66 6.66
Cost/Kg ($) 1,948 1,739 1,528 1,406 1332 1332 1332 1332 1332 1332

12. 11
Exhibit7: SpecialisedPlantforAlfatinefrom5th
year onwards
Years 2000 2001 2002 2003 2004 2005
OperatingCost($ millions) 4.53 4.53 4.53 4.53 4.53 4.53
Constructioncost/year($
millions)
1.67 1.67 1.67 1.67 1.67 1.67
ExpectedDemand(Kg) 16000 16000 16000 16000 16000 16000
Total Cost($ Millions) 6.20 6.20 6.20 6.20 6.20 6.20
Cost/Kg($) 387.5 387.5 387.5 387.5 387.5 387.5
Exhibit8: SWOT Analysisof SpecialisedandFlexibleManufacturingFacility
SpecialisedFacility Flexible Facility
Strengths Outputperrig is higher;
Cost/kgislesser;
Effective Utilisationis80%
Flexible initswayof operating:
The same facilitycanbe usedto
produce differenttype of
products.
Weaknesses Usually,the total capacityis
eitherunderutilisedorover
utilised;
Time pressuresinlaunching
newproducts
Outputperrig is lower;
Total Costperyear ishigher;
Effective Utilisationis65%
Opportunities Total Costperyear islesser Neversuffersfromwastage of
available capacityasitcan
handle all types of products;
Reducedleadtime for
manufacturingnew products.
Threats Inflexible waysof operating:A
facilitycan’tbe modifiedto
produce anothertype of
product.
Has much lessercapacitythana
specialisedcapacity,Hence can
leadto lostsalesforgeneric
type of products whichhave
incrementallyincreasing
demandbeyonditscapacity.