Eli Lilly and Company: The Flexible Facility Decision
Profit & Solutions Management Research Publication
Series
Researched & Written by Deb (Debadip) Bandyopadhyay
Eli Lilly and
Company is an American pharmaceutical company headquartered in Indianapolis, Indiana, with offices in 18 countries. Its products
are sold in approximately 125 countries. The company was founded in 1876 by,
and named after, Col. Eli
Lilly, a
pharmaceutical chemist and veteran of the American Civil War.
Lilly's notable
achievements include being the first company to mass-produce the polio
vaccine developed
by Jonas Salk, and insulin. It was one of the first pharmaceutical companies to produce human insulin using recombinant
DNA including Humulin (insulin medication), Humalog (insulin
lispro), and the first
approved biosimilar insulin product in the US, Basaglar (insulin
glargine).
Lilly is currently
the largest manufacturer of psychiatric medications and produces Prozac (fluoxetine), Dolophine (methadone), Cymbalta (duloxetine), and Zyprexa (olanzapine).
The company is ranked
123rd on the 2019 Fortune
500.[5] It is ranked 221st on the Forbes Global 2000 list of the largest public companies in
the world[6] and 252nd on the Forbes list of
America's Best Employers.
Eli Lilly is a full
member of the Pharmaceutical
Research and Manufacturers of America and the European
Federation of Pharmaceutical Industries and Associations (EFPIA).
As of 1997, it was
the largest corporation and the largest charitable benefactor in Indiana
The major manufacturing implications for companies
like Eli Lilly and the global pharmaceutical industry. Based on the case of
information several quantitative estimates of costs that enables the comparison
between various options for manufacturing facilities. There are also
substantial amounts of information that is qualitative, which suggests that
Flexible facility is the best option for pharmaceutical companies such as Eli
Lilly in the long run. For example, looking at the associated costs only, the
total budget of building and operating a specialized pharmaceutical
manufacturing plant for 15 years and more is approximately $140 million.
However, in the case of a flexible manufacturing plant, given rig and
construction, the approximate cost of operation is $295 million(Pisano & Rossi, 1994). Additionally, a
manufacturing facility specifically optimized and designed for a certain group
of products would result in the production of higher output yields, for
example, 24 tons per year against 14.6 tons per annum for a flexible plant.
Further, such a plant will enjoy economies of scale and produce products at a
utilization rate of about 80% compared to a rate of 65% for flexible plants.
With regards to this information only, companies in
the pharmaceutical industry would consider the dedicated facility option to be
best, at least in the short run. However, the flexible installation choice,
despite having lower short-term utilization and yields, it offers significant
advantages in the long term. For example, less associated risk, possibly as a
result of clinical trials and process redesign, help prove the merits of the
drug, and ultimately get the drug to the market. This can be explicated by the
fact that a flexible plant is more pliable. Further, the process of
manufacturing drugs must does not need to be concluded until later on in the
construction process(Gad, 2008). One crucial
implication for companies like Eli Lilly, particularly in terms of sales, is
the fact that they do not have to deal with the possibility of requiring a
retro profit – an amount equal to the initial cost of developing a specialized
plant, approximately $38 million. In fact, they also do not have to deal with
the cost issues related to the possibility of releasing a product to the market
a little sooner.
Further, for manufacturing companies in the
pharmaceutical industry, investments in R&D, research and development are
necessary for their prosperity and survival. Usually, developing a new drug
takes between 10 and 15 years; there is a myriad of uncertainties as to whether
or not such R&D projects eventually succeed.
The pros and cons of each decision of the two options
considered by Eli Lilly’s management for the new facility design
Eli and Lilly Company has to decide which type of
manufacturing plant to build; the available options are either to have a
flexible or a specialized manufacturing plant. This is essential because it
helps determine the operational costs, time –to-market for new products,
flexibility in process control, and the capital investments required. In order
to explain the pro and cons of these scenarios, each of these options are
appraised in terms of their effect on their deduction in the cost of
manufacturing, reduction in development lead-time, and their impact on
production volumes, revenue, and profits. For both options, an approximate
discount rate of 10% results in an assumed profit of $11,000 per kilogram for
the flexible factory option and $10,000 per kilogram for the specialized
scenario(Pisano & Rossi, 1994). However, each of
the options has their advantages and disadvantages, which influence the
decision of the management with regards to the option to take. In the case of
the specialized plant option, there is an average delay of approximately six
months. There is also a 90% reduction in the production volumes as a result of
combined chance of drug blockbuster and drug failure. Assuming that Eli Lilly
plans to roll out one new specialized facility, and three new drugs on a
simultaneous schedule. This is the case of the flexible plant; except that all
the facilities are delayed one year behind the flexible facilities in order to
account for the slower finalization time of the processes.
If the company chooses to build a specialized facility
for its products, there will be no decrease in the product development lead
time. This is because, for each new product developed, there will be a new
plant developed. In fact, the new facility will be built just for the
particular type of product. A specialized factory has no flexibility in
operations. However, in terms of the overall costs, specialized plants are
advantageous. The cost of building specialized plants for three new products
per annum is approximately $9.3 million for a total of 15 years(Pisano & Rossi, 1994). The available
capacity of specialized plants is also fixed. In the initial years, the
utilized capacity is not high, thus resulting in a lot of resource wastage.
Compared to a flexible facility, dedicated facilities usually have higher
output per rig. In addition, the utilization rate or capacity of specialized
plants is higher. Deciding to build a specialized facility will not have a
direct effect on revenue.
The option of a flexible facility for the three
products on the pipeline will not result in a reduction in the development
lead-time. However, for future products, there will be a substantial reduction
in the development lead-time. Flexible factories suffer from under capacity
once they reach the maximum capacity; in fact, they cannot handle any more
production at that point. This results in a decrease in sales because the
company cannot fulfil the demand due to insufficiency in production capacity
and capability(Agalloco & Carleton, 2008). It is vital to
indicate that, compared to specialized facilities, there is no loss related to
wastage of the resources available. The fact that future products will come to
the market at least one year earlier, there will be an increase in revenue.
The pros and cons of each decision of the two options
considered by Eli Lilly’s management for the new facility design, Eli and Lilly
Company has to decide which type of manufacturing plant to build; the available
options are either to have a flexible or a specialized manufacturing plant.
This is essential because it helps determine the
operational costs, time –to-market for new products, flexibility in process
control, and the capital investments required. In order to explain the pro and
cons of these scenarios, each of these options are appraised in terms of their
effect on their deduction in the cost of manufacturing, reduction in
development lead-time, and their impact on production volumes, revenue, and
profits. For both options, an approximate discount rate of 10% results in an
assumed profit of $11,000 per kilogram for the flexible factory option and
$10,000 per kilogram for the specialized scenario(Pisano & Rossi, 1994). However, each of
the options has their advantages and disadvantages, which influence the
decision of the management with regards to the option to take. In the case of
the specialized plant option, there is an average delay of approximately six
months. There is also a 90% reduction in the production volumes as a result of
combined chance of drug blockbuster and drug failure. Assuming that Eli Lilly
plans to roll out one new specialized facility, and three new drugs on a
simultaneous schedule. This is the case of the flexible plant; except that all
the facilities are delayed one year behind the flexible facilities in order to
account for the slower finalization time of the processes.
If the company chooses to build a specialized facility
for its products, there will be no decrease in the product development lead
time. This is because, for each new product developed, there will be a new
plant developed. In fact, the new facility will be built just for the
particular type of product. A specialized factory has no flexibility in
operations. However, in terms of the overall costs, specialized plants are
advantageous. The cost of building specialized plants for three new products
per annum is approximately $9.3 million for a total of 15 years(Pisano & Rossi, 1994). The available
capacity of specialized plants is also fixed. In the initial years, the
utilized capacity is not high, thus resulting in a lot of resource wastage.
Compared to a flexible facility, dedicated facilities usually have higher
output per rig. In addition, the utilization rate or capacity of specialized
plants is higher. Deciding to build a specialized facility will not have a
direct effect on revenue.
Recommended facility design option for Eli Lilly. The
option of a flexible facility for the three products on the pipeline will not
result in a reduction in the development lead-time. However, for future
products, there will be a substantial reduction in the development lead-time.
Flexible factories suffer from under capacity once they reach the maximum
capacity; in fact, they cannot handle any more production at that point. This
results in a decrease in sales because the company cannot fulfil the demand due
to insufficiency in production capacity and capability(Agalloco & Carleton, 2008). It is vital to
indicate that, compared to specialized facilities, there is no loss related to
wastage of the resources available. The fact that future products will come to
the market at least one year earlier, there will be an increase in revenue.
Eli Lilly pharmaceutical company continues to be one
of the top pharmaceutical companies in the world reinvesting the hugest
percentage of its sales for R&D, research and development. Through this
investment, Eli Lilly is reaping rewards with a pipeline of substantial drug
offerings. For example, in 2001 alone, the company launched one new product and
submitted four more to the FDA for approvals – this was a record for any
company in the pharmaceutical industry at the time. Compared to other firms in
the industry, Eli Lilly is not keen on the consolidation phenomena because of
its core competency in managing strategic partnerships and alliances(Allen, 2012). Through active
and meaningful associations, Eli Lilly has managed to expand its R&D
efforts, which have allowed it to capitalize on the current advances in
biotechnology. For the past five years, Eli Lilly’s financial performance,
revenue and profitability have been stable compared to that of its major
competitors.
References
Agalloco, J. P., & Carleton, F.
J. (2008). Validation of Pharmaceutical Processes, Third Edition. (J. P.
Agalloco & F. J. Carleton, Eds.) (3rd ed.). New York, NY: Informa
Healthcare USA, Inc.
Allen, J. (2012). Eli Lilly: A Long-Term Growth Stock.
Retrieved September 16, 2014, from
http://seekingalpha.com/article/696451-eli-lilly-a-long-term-growth-stock
Gad, S. C. (2008). Pharmaceutical Manufacturing
Handbook: Production and Processes. Hoboken, New Jersey: John Wiley &
Sons, Inc.
Pisano, G., & Rossi, S. (1994). Eli Lilly and Company: The Flexible Facility Decision (1993). Harvard Business School, (April), 1–18.
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