Planning Service & Manufacturing

Planning Service & Manufacturing

Paper details

SCENARIO:
Smitheford Pharmaceuticals
Smitheford Pharmaceuticals was founded by a former officer in the Civil War, General Robert Smitheford, in 1878. He moved his family to Colorado Springs to aid in his wife’s tuberculosis condition. At the time, it was believed that the sunshine and high altitude had curative effects.
The company quickly grew and expanded. To improve the economies of several growing towns in Colorado, General Smitheford built additional manufacturing facilities in Pueblo, Grand Junction, Fort Collins, and Durango, Colorado.

Smitheford was an excellent leader, as demonstrated by his rapid rise in the Union Army. He used management incentives and was an early follower of Frederick Taylor on methods improvement and employee satisfaction. The company has since adopted total quality management (TQM) philosophies but has done a poor job of implementing these principles in manufacturing.
By the 1950s, Smitheford Pharmaceuticals grew to become the 6th-largest pharmaceutical firm in the United States. Expansion in manufacturing occurred in the 1970s and 1980s with operations in Canada, Puerto Rico, France, Japan, Mexico, and Brazil.
Many challenges are facing the industry today. NAFTA impacted some advantages that Canadian manufacturing might have had. Stricter FDA guidelines have made transportation of partially manufactured products more complicated; drug interactions, especially for the elderly, can seriously affect whether or not to release a new product, and manufacturing equipment has become more sophisticated, and with the advanced technology comes increase fixed costs.
You are a midlevel manager of production operations at Smitheford. You will need to look at several methods to improve efficiency and effectiveness for its area of responsibility. You will use quantitative and qualitative methods to make recommendations for the improvements.
ASSIGNMENT:
Smitheford Pharmaceuticals is facing other issues. The company had not kept up with modern manufacturing technology and was in the process of modernizing the injectable manufacturing facilities in Pueblo and Colorado Springs. There were several modernizing scenarios under analysis. Perform cost-benefit analysis calculations for 2 equipment scenarios. The data are provided below.

Scheduling the various manufacturing operations has become more complicated. In the 1990s, the Pueblo plant expanded tremendously, based on forecasts for the growth of a promising osteoporosis medication, Osto54. The facility doubled in size, mostly with tanks and processing equipment. Osto54, however, caused heightened enzyme levels in the liver and led to seven deaths in the elderly because of drug interactions. Smitheford faced the loss of millions of dollars in liability suits and had excess intermediate manufacturing capacity in Pueblo.

Two years ago, a new immune system treatment, Ultamyacin, was discovered by a Smitheford researcher. The drug could be manufactured at the Pueblo facility for the bulk manufacturing, but the final manufacturing steps could be made in Puerto Rico for final purification and then sent to Fort Collins for final manufacturing into sterile bottles for injection.

Smitheford leadership has narrowed the decision making down to 2 options. The first is a higher technology option in one location, and the other is a lower technology option in several locations.

High Technology
Centralized Location Low Technology
Decentralized
Annual Fixed Cost $620,000 $110,000
Variable Cost/Product 16.31 18.89
Estimated Annual Production

(in number of products) Year 1 100,000 100,000
Year 5 170,000 170,000
Year 10 225,000 225,000

Use applicable business formulas to determine costs for both options.

Consider the following questions:
•Which is the lead cost alternative in Years 1, 5, and 10?
•How much would the variable cost per unit have to be in Year 5 for the automated alternative to justify the additional annual fixed cost of the automated alternative over the manual alternative?
•Determine what other factors should be considered when deciding the following: ?When to centralize manufacturing
?When to opt for higher technology options