Flexible Facility Decision Eli Lilly Case Study

Eli Lilly is among the top 15 competitors in the $191 billion worldwide ethical pharmaceutical market and must decide on the type of manufacturing strategy for their new pharmaceuticals to remain competitive. Their objectives include increasing new product speed to market by 50% and reducing the cost of manufacturing by 25%.

The issues facing the company's manufacturing strategy decision are numerous. The pharmaceutical industry's average annual growth rate in 1982 through 1992 was 18%; however, this rate is expected to slip to the 8% to 12% range in 1993. Correspondingly, Eli Lilly's profit margin was expected to fall to 15%, from 22% by 1996. This decline in rate is the consequence of increased pressure on drug margins because of diminishing price flexibility, slowing rate of innovation, and increased competition within the drug class and generic rivals. Moreover, the cost of developing a pharmaceutical product has increased 299% over the past 5 years. Similar trends are seen in the cost of manufacturing; 60% increase as a percentage of sales by the year 2000.

The current manufacturing strategy implemented involves designing and building specialized plants. However, due to the declining market, increase costs and reduced share price Eli Lilly must implement a new manufacturing strategy in order to remain competitive within this market. Alternatives that have been considered include constructing a flexible facility; increasing volumetric efficiency of existing plants; building the manufacturing facilities at a much earlier stage; or reducing asset base.

After thorough analysis of the potential benefits and drawbacks of each alternative, the BioPHORs recommend a manufacturing strategy that comprises of an initial flexible facility followed by an impending specialized facility. This method will reduce lead time (flexible facility) as well as increase capacity as market demand increases (specialized facility). Such a facility would be used as a launch plant accommodating Alfatine, Betazine, and Clorazine and future products. In addition, this strategy will offset R&D expenditures by

Such a delay in obtaining market product time could cause a loss of millions of dollars. In addition, late changes to the manufacturing process are no longer an issue since flexible facilities can easily accommodate changes. As well, risk associated with specialized facilities can be avoided

 High risk

* Plant may become idle if regulatory process was delayed

Might have retrofitted - costly re-designed or re-equipped

Ultimately, this strategy will reduce time for manufacturing new products and

it would be beneficial for Eli Lilly to build a flexible facility in which many products can be manufactured.

 More adaptable

 Reduce lead-time

 Only 2 week change over (short)

Lower risk

o ~$359 million in 1992 (up from $120 million 5 years earlier)

- Cost of manufacturing a drug increases because...

o More stringent FDA regulation

o More sophisticated production equipment

o Costly containment facilities

o Complex molecules typically required more advanced production technology for large scale manufacturing

o Under utilization

- Total R&D grew drastically, but the number of novel drugs launched grew only slightly

o

- Lilly's profit margin were 22%, but were expected to fall to 15% by 1996.

- Challenges of capacity planning

o Output of rig varied

o Things to consider

 Demand