Biopharma Inc - Current Situation, Restructure and Exchange Rates, Reduction in Duties - Research Paper Example

Quantatitive Analysis Student’s Name Instructor College Course Date Executive Summary The result of the analysis showed that the German plant will be only viable in producing Highcal and the Japanese plant be shut down. When changing variables, the company should consider producing an extra one million kilograms by India plant which will cover the Japanese plant that was idle. The result also showed that production should be kept at 100% yield. TABLE OF CONTENTS Executive Summary 2 Table of Contents 3 List of Figures and tables 4 Background 5 Objectives 5 Current Situation 5 Analysis of the option Restructure and Exchange rates 7 Reduction in duties 7 100% yield and modification 9 Other factors 9 Conclusion List of Figures and tables Table 1: Transportation cost Table 2: production cost Table 3: Import duties Table 4: Highcal Production Table 5: Relax Production Table 6: Total Plant Output Table 7: excel file Background Biopharma Inc. is a company specialised in the manufacture of chemicals in bulk that are used in the production of drugs by pharmaceuticals. The company has plants across the world producing two chemicals Highcal and relax. The plants of the company can produce either the product. The costs of the company have gone up reducing the profitability, however the company projects that the demand for its products remains constant. Plants in Germany and Japan are seen as having high costs a compared to other plants. Therefore the company has taken cutting cost as top priority. The company intends to maintain 100% capacity in any plant which is not idled. Any plant that is let without production should be shut down because it will continue to incur fixed cost for the plant and 20% fixed cost for production. The sales are assumed to be the demand for the period. Objectives The main objective of the report is to provide information to the company on the best method of cutting costs having the most efficient supply network. Current Situation Currently the company is producing two products which incur some costs. The costs of production include; plant fixed cost, fixed costs associated with each product, raw materials and production costs. There is also a cost associated with transport of the finished products. These costs have been analysed in table 1,2,and 3 below. Table 1: Transportation cost TRANSPOR COST (millions) from/to Latin America Europe Asia Japan Mexico USA total Brazil 2.8 0 0 0 0 1.8 4.6 German 0 3 0 0 0 0 3 India 0 0 1.6 3 0 0 4.6 Japan 0 0 0 0.2 0 0 0.2 Mexico 0 3.6 0 1.35 1.2 2.25 8.4 USA 0 0 0 0 0 4.4 4.4 Table 1: production cost PRODUCTION COSTS Plant highcal highcal highcal highcal relax relax relax relax FC RM pro total FC RM pro total Brazil 5 39.6 56.1 100.7 5.00 32.2 46.2 83.4 German 13 58.5 105 176.5 14.00 0 0 14 India 4 36 45 85 4.00 36 48 88 Japan 6 7.8 15 28.8 6.00 0 0 6 Mexico 6 43.2 60 109.2 6.00 82.8 117 205.8 USA 5 18 25 48 5.00 76.5 110.5 192 Import duties Plant highcal highcal transport duties relax relax relax RM pro cost RM pro transportcost duties Latin America 0 0 0 0 0 0 0 0 Europe 0 0 0 0 60 55.2 3.6 3.564 Asia 0 0 0 0 0 0 0 0 Japan 18 22.5 1.5 25.2 36.3 49.5 2.85 5.319 Mexico 0 0 0 0 0 0 0 0 USA 46.8 65.4 4.05 4.65 0 0 0 0 Currently the import duty is 16.05 million while the production cost was 1162.6 million and plant fixed cost was 151 million totalling to 1330 million. Analysis has been done using the following variables; Let the number of plants be k Let the demand zones be m Let the demand from annual demand be D Let the factory capacity be presented as C Annual fixed cost of a factory while open be F Cost of production and transporting one unit from one factory to a market be T Quantity produced and shipped to a market be x Let import duty be p yi= 1 { if factory i is open else 0} Z= 0 { if i=j else 1} The objective function is to minimise the cost of production, transportation cost and import duties. Constraints The plants will not produce beyond capacity The market demand must be satisfied - ∑xi-k=∑Di-M 0 Amount shipped should be positive - ∑xi-k 0 Restructure and Exchange rates The company should strife to maintain the current distribution network because the exchange rate appears to be fairly stable. However in case there is change in currency of any country involved, then they should change the supply network. If there is hike in a currency of a market then the profits of the company will be lowered as well as increase the cost. Reduction in duties If there is reduction in the rate of duty, the cost of total production will go down making a urge profit. The table below shows the impact of reduction Highcal Production Plant Latin America Europe Asia w/o Japan Japan Mexico U.S. Brazil 1.20 2.28 0.62 1.20 0.00 4.90 Germany 1.52 2.90 1.23 1.52 0.95 2.98 India 1.12 2.50 .83 1.12 0.55 2.58 Japan 0.53 1.91 0.25 0.53 0.00 1.99 Mexico 1.52 2.90 1.23 1.52 0.95 2.98 U.S. 1.12 2.50 0.83 1.12 0.55 2.58 Total 7 15 5 7 3 18 Relax Production Plant Latin America Europe Asia w/o Japan Japan Mexico U.S. Brazil 1.20 1.48 0.00 1.48 0.00 3.65 Germany 1.52 2.46 0.95 1.66 0.95 3.03 India 1.12 2.06 0.55 1.26 0.55 2.63 Japan 0.53 1.47 0.00 0.67 0.00 2.04 Mexico 1.52 2.46 0.95 1.66 0.95 3.03 U.S. 1.12 2.06 0.55 1.26 0.55 2.63 Total 7 12 3 8 3 17 Total Plant Output Plant Total Brazil 18.00 Germany 21.67 India 16.87 Japan 9.93 Mexico 21.67 U.S. 16.87 While the production cost was 1162.6 million and plant fixed cost was 151 million totalling to 1314 million 100% yield and modification In the analysis an assumption was made that production was to have 100% yields while maintaining quality. However a modification is necessary in order to understand the sensitivity of each constraint. The constraints to consider are the production capacity and shipping amount. Production should take into account a loss by incorporating loss percentage during production. This will adjust the objective function of linear programming. The same will apply to shipping amount. Other factors Apart from quantitative financial factors, the company management should assess the probability of the events by considering various factors. They should consider the impact of labour disputes in case the brand is closed. The terrorist may also interrupt operations of some of the plants by either attacking or they may capture the ship that is transporting the products thus affecting sales. There are instances of disasters and political instabilities which may also be part of sources of disruptions. There may be delays during production because of outdated production plants of India and Brazil. This will lead to poor yield. When closing down a plant the system that is connecting all the plants in the breakdown thus it is necessary to consider the effects of the information system of the company. Highly probable issues that could arise during the closing down process are those of finance where instantly the organisation will burdened with a greater number of fixed expenses that is 205 of the closed plant: this huge instant burden is a significant issue. Another issue regarding human resources that we see here is one of conflict and overstaffing and certain people who might be functioning dual roles would have to leave – this would be a negative feeling and most probably the staff-member who is let go of might create ill-will for the company outside which would cause trouble. Another issue is of Customer Satisfaction is that of customers accustomed to one choice of products manufactured in certain country would not be satisfied with products from other countries. The accounting system and tax rates employed by countries differs and therefore its important for the company to look for the tax rate of a country before making a decision of closing down the plant. The sources of cheap labour, raw materials and technology should not be ignored in the process of decision making. There is also the issue of intellectual property where individuals may wish to be compensated in case the plant closes down and they make a loss in the process. The company should also consider the fact that demand is uncertain and it can change. The chemicals may have a high rate of obsolescence which should be considered when decision making. There is also the issue of stock hold in the store which should be given taken into account Conclusion A merger is always a complex issue and there are always hurdles that arise however a dynamic leader and a strategist too must always rise to meet the challenges. Whilst there may be hurdles at the same time there are great opportunities for growth and synergies that a merged entity would reap. Both entities stand to benefit and the merger may thus be a successful one. Read More