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Elli Lilly Case

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Parinaz Kokabi
OP 300

“Elli Lilly and the Company: The Flexible Facility Decision” case analysis

Due to the fierce competition in pharmaceutical industry, Elli Lily has to change its product development process to retain its situation in the market. Steve Mueller, manager of strategic facilities planning, must suggest the company what type of manufacturing facilities to construct. These new facilities were needed for three new products (Alfatine, Betazin, and Clorazin), which the company expected to launch in 1996. His decision will be based on decreasing the lead-time by 50% and reducing the costs by 25%. According to the case, Mueller suggest three options: one option is to build one specialized facility; the second option is to build one flexible facility, and the third options which is stated under the second option is a combination of specialized and flexible facility. The first choice, building a specialized facility, will not reduce the production lead-time. In addition, since the facility is built only for one type of product, if that product cannot be launched to the market the part of the facility might have to be retrofitted to produce another product. Further, it can cause delays in production, which can cost the company millions of dollars in loss. However, this option is very productive (almost 16,000 kilograms of output per rig at 80% of utilization) because the plant is dedicated to a set of special products and there is no changeover. Moreover, building a special facility represent a lower construction cost of $37.50 million and an annually operation cost of $6.80 million (Exhibit 3). The second choice, building a flexible facility, will reduce lead-time only for subsequent new products and not for Alfatine, Betazine, and Clorazine. In addition the construction cost ($150 million) and operation cost per year ($9.48 million) of flexible facility is higher (Exhibit 3). Moreover, the expected utilization of a flexible facility will be 65%, which is lower than specialized facility. Also starting from the year 2000, a flexible facility cannot handle the market demand of 21,000 kilograms of bulk drugs (Alfatine, Betazine, and Clorazine) because the capacity of flexible facility is 14,625 kilograms. Therefore, the company will need to install new facilities to meet the demand, which is very costly. However, with this decision, the company does not have to worry about delaying the product launch because design and construction of the facility will not be an issue anymore. Thus, Eli Lilly’s new products can be launched to the market one year earlier. Therefore, the company will benefit from developing new products one year more. This option also represents a lower risk; if a product fails to develop, the plant decision will not be jeopardized. Since building specialized facility is less costly with higher risk and building flexible facility represent lower risk but so much costly, I believe that Mueller should go with its decision of a combination of two options, which is mentioned under the second option in the case. Under this option, new products can be produced in a flexible plant to reduce the costs and after a few years, when the market requires more volume of the products, they will be produced in a specialized facility to meet the market demand. For example, in this case Alfatine need its specialized plant. With this option, Eli Lilly will benefit of launching its new products one year earlier and in later years with using specialized facility, the company can increase the capacity to meet the market demand.

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