ISYE Case study 2

ISYE Case study 2 - ISYE # 1 09/16/2009 Case Study 2 Eli...

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ISYE # 1 09/16/2009 Case Study 2 Eli Lilly and Company: The Flexible Facility Decision Question 1: How has the competitive environment in pharmaceuticals been changing over the past few years? What are the implications for the role of manufacturing within Eli Lilly? The pharmaceutical industry has changed a lot over the past few years. Pricing flexibility has diminished thanks to caps on price increases, caps on reimbursements for Medicare and Medicaid, and the rapid growth of managed care providers (HMOs) with all buying in bulk demanding price discounts of up to 60%. Increasing competition within drug classes from the development of similar compounds and from generic drugs has also led to lower prices. The rate of innovation has slowed leading to increased investments in Research and Design from $1.1B in 1975 to $12.6B in 1992 unfortunately having little or no effect on the number of new drugs introduced. Rising manufacturing costs due to under utilization, more FDA and EPA regulations, and more expensive production technology to produce the newer more complex compounds. The costs associated with developing drugs have also risen due to increased regulations, the complexity of the newer compounds, and the higher costs associated with storing high potency finished goods in inventory. Manufacturing costs represented about 20% of sales in 1990, up from 10% in the early 1980s and could possibly rise to 60% by the year 2000. These changes in the world of pharmaceuticals leading to competition in “a new marketplace” have led to some changes for the role of manufacturing within Eli Lilly. The company needs to find ways to bring new products to market faster at lower costs since average costs to develop drugs rose $120M from 5 years early to $359M. Manufacturing was a likely area for reducing costs. If manufacturing facilities could be ready earlier, a product could enter the market earlier increasing the time the drug is exclusively on the market. The value of getting a drug to market one year sooner or one year later was equal to around $175M for a large market drug. Also, the production process could be refined and made more efficient if facilities are ready sooner. Companies also utilized less outsourcing in order to protect proprietary knowledge and design more complex compounds in the drugs. A 25% cost reduction goal was proposed in the company resulting a debate over the fundamental way drugs are manufactured. The company also wanted to see a large jump in utilization. The only way to do this is by either figuring out how to make manufacturing capacity more productive or reducing your asset base. Also with prediction that the company would be producing up to 37 active chemical ingredients, there would be a need for
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ISYE Case study 2 - ISYE # 1 09/16/2009 Case Study 2 Eli...

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