MANUFACTURING LOCATION DECISIONS IN THE PHARMACEUTICAL INDUSTRY: AN EXPLORATORY STUDY FROM A NETWORK PERSPECTIVE MATHIEU PELLERIN A THESIS SUBMITTED FOR THE DEGREE OF MASTER OF ENGINEERING DEPARTMENT OF INDUSTRIAL AND SYSTEMS ENGINEERING NATIONAL UNIVERSITY OF SINGAPORE 2003 MANUFACTURING LOCATION DECISIONS IN THE PHARMACEUTICAL INDUSTRY MATHIEU PELLERIN 2003 Acknowledgement This research would not have been possible without help and support from many people and organizations I wish particularly to express my greatest gratitude to the following: • My supervisors, Dr Yap Chee Meng and Dr Chai Kah Hin, for their invaluable advice and support throughout the whole research project • The managers of the pharmaceutical company, which was at the centre of my case study, particularly for their good will and interest in this project • The Industrial and Systems Engineering department for its financial support; its staff and my lab-mates of the National University of Singapore, who welcomed me • Finally, my family, who let me go away for a hard year, and my friends, both in France and in Singapore, for their patience, encouragement, understanding and continuous support throughout my research I MANUFACTURING LOCATION DECISIONS IN THE PHARMACEUTICAL INDUSTRY MATHIEU PELLERIN 2003 ACKNOWLEDGEMENT - I SUMMARY -IV LIST OF TABLES VI LIST OF FIGURES VIII INTRODUCTION 1.1 RESEARCH BACKGROUND -1 1.2 RESEARCH PRESENTATION 2 LITERATURE REVIEW -6 2.1 INTRODUCTION -6 2.2 MANUFACTURING LOCATION DECISIONS 2.3 INTERNATIONAL MANUFACTURING NETWORKS 17 2.4 OUTSOURCING 27 2.5 RESEARCH GAPS AND FORMULATION OF RESEARCH QUESTION 38 2.6 CONCLUSION - 40 RESEARCH METHODOLOGY 42 3.1 INTRODUCTION - 42 3.2 RESEARCH APPROACH AND METHOD SELECTION 42 3.3 DATA COLLECTION TECHNIQUES - 46 3.4 ORGANIZATION OF THE DATA COLLECTION FOR THE CASE STUDIES - 46 3.5 DATA ANALYSIS PROCEDURE - 48 3.6 VALIDATION OF THE MEANS OF DATA MEASURING - 49 3.7 SUMMARY OF THE RESEARCH PROCESS 50 3.8 RESEARCH SCOPE 50 3.9 RESEARCH IMPLEMENTATION - 51 3.10 CONCLUSION - 54 EXPLORATORY CASE 55 4.1 INTRODUCTION - 55 4.2 UNFOCUSED FIELD STUDY - 55 4.3 PRELIMINARY CASE (CASE 1) - 64 4.4 CONCLUSION - 66 PILOT CASES: MAPPING ANALYSIS 67 5.1 INTRODUCTION - 67 5.2 RETROSPECTIVE CASE (CASE 2) 67 5.3 RETROSPECTIVE CASE (CASE 3) 69 5.4 RETROSPECTIVE CASE (CASE 4) 75 5.5 FIRST ANALYSIS: OPEN CODING METHOD AND RESULTS - 77 5.6 CONCLUSION - 86 II MANUFACTURING LOCATION DECISIONS IN THE PHARMACEUTICAL INDUSTRY MATHIEU PELLERIN 2003 MAIN CASES: RELATIONSHIP ANALYSIS - 87 6.1 INTRODUCTION - 87 6.2 LONGITUDINAL CASE (CASE 5) - 87 6.3 RETROSPECTIVE CASE (CASE 6) 90 6.4 LONGITUDINAL CASE (CASE 7) - 92 6.5 LONGITUDINAL CASE (CASE 8) - 94 6.6 RETROSPECTIVE CASE (CASE 9) 96 6.7 LONGITUDINAL CASE (CASE 10) 97 6.8 CASES ANALYSIS: MAPPING RESULTS 99 6.9 CASES ANALYSIS: RELATIONSHIPS RESULTS 100 6.10 STAGE FINDINGS AND FRAMEWORK -109 6.11 REVISITING THE CASES -116 6.12 CONCLUSION 120 METHODOLOGY DEVELOPMENT AND THEORY VALIDATION -122 7.1 INTRODUCTION 122 7.2 METHODOLOGY DEVELOPMENT -122 7.3 THEORY VALIDATION -125 7.4 CONCLUSION 132 CONCLUSION 133 8.1 INTRODUCTION 133 8.2 DISCUSSION -133 8.3 LIMITATIONS AND FUTURE RESEARCH 136 8.4 SUMMARY OF THE RESEARCH CONTRIBUTIONS -137 REFERENCES -139 APPENDICES 143 A THE PHARMACEUTICAL MANUFACTURING PROCESS -144 B SEMI-STRUCTURED INTERVIEW PROTOCOLS FOR RETROSPECTIVE CASES 145 C GRAPHIC REPRESENTATION OF THE 10 CASES 150 D QUESTIONNAIRE TO EVALUATE EXPERT JUDGEMENT 160 E WORKBOOK FOR PRODUCT MANUFACTURING LOCATION DECISION 161 III MANUFACTURING LOCATION DECISIONS IN THE PHARMACEUTICAL INDUSTRY MATHIEU PELLERIN 2003 Summary Access to new markets and lower production costs are some of the reasons why companies have established manufacturing operations all around the world These manufacturing operations may constitute wholly owned factories, joint ventures, as well as external contractors, forming an international manufacturing network with unique capabilities Effective integration and coordination among these operations could become more and more a pre-requisite in order to survive in an increasing competitive market Preliminary contacts with an international pharmaceutical company with significant activities in Asia-Pacific revealed the company had difficulties in solving manufacturing location issues efficiently, for new product launches or responding to environment changes, even though these present a good opportunity for the company to optimise their chain of locations of the manufacturing operations In the pharmaceutical case, manufacturing location decision consists of locating the incorporation into dosage form step (bulk standard product) and the packaging step (customized finished product) An extensive literature review reveals two main research gaps: • The manufacturing location decision literature does not include a network perspective • Manufacturing network literature does not consider extended networks including wholly owned in-house plants, joint ventures, and external contractors This study examines location decisions from a manufacturing network perspective in order to understand the impact of these decisions for the entire manufacturing network IV MANUFACTURING LOCATION DECISIONS IN THE PHARMACEUTICAL INDUSTRY MATHIEU PELLERIN 2003 Six retrospective and four longitudinal case studies were conducted over an eight-month period in the pharmaceutical company, detailing ten product manufacturing location decisions in Asia-Pacific markets The cases confirmed and detailed the importance of the manufacturing capabilities in product manufacturing location decision-making They revealed that a manufacturing location decision is largely driven by the potential benefits drawn from the exploitation and from the development of the company manufacturing capabilities at both the plant level and the network level The drivers, such as plant knowledge or economies of scale are grouped into four categories: Use of / Development of single site capabilities, Use of / Development of network configuration capabilities, Use of / Development of network coordination capabilities, Use of / Development of financial capabilities More particularly, it also permitted to identify and detail the influence of the decision specific context and environment, specified by legislation requirements, markets specifications, and product specifications, on the role of the previously identified drivers These drivers can be classified into qualifying criteria and ranking criteria categories However, the relative importance of the drivers is dynamic, varying from one case to another according to the decision specific factors The findings suggest that managers, when making manufacturing location decisions, should seek to maximize the use and the development of the manufacturing capabilities, taking into account the influence of the decision context and environment A simple stepby-step guide has been developed to assist managers in making the right location decision V MANUFACTURING LOCATION DECISIONS IN THE PHARMACEUTICAL INDUSTRY MATHIEU PELLERIN 2003 List of Tables Table 2-1: Location factors Table 2-2: Categories of factors for manufacturing location decision Table 2-3: Definitions of firm’s resource and capability, and capability-building process16 Table 2-4: Synthesis of the role of foreign factories 20 Table 2-5: Plant capabilities 22 Table 2-6: Pros and cons to outsource drug manufacturing 37 Table 2-7: Perceived pros and cons to use CROs 37 Table 3-1: Dual methodology for case study 44 Table 3-2: Research methodologies from 45 Table 3-3: Summary of research process 50 Table 3-4: Cases table 53 Table 4-1: Countries' sourcing configuration in company X 57 Table 4-2: Type of facility for the network studied and its relative markets 59 Table 4-3: Product flows from the manufacturing facilities (rows) to market (columns) 60 Table 4-4: Case raw data 64 Table 5-1: Case raw data 67 Table 5-2: Case raw data 69 Table 5-3: Possible chains for case 71 Table 5-4: Summary of pros/cons for remaining solutions in case 74 Table 5-5: Case raw data 75 Table 5-6: Creation of categories and their properties 81 Table 5-7: Origin of the properties' names 84 VI MANUFACTURING LOCATION DECISIONS IN THE PHARMACEUTICAL INDUSTRY MATHIEU PELLERIN 2003 Table 5-8: Open coding results for the 4th first cases 85 Table 6-1: Case raw data 87 Table 6-2: Case raw data 90 Table 6-3: Possible chains for case 91 Table 6-4: Case raw data 93 Table 6-5: Case raw data 95 Table 6-6: Case raw data 96 Table 6-7: Case 10 raw data 98 Table 6-8: Refined categories 100 Table 6-9: Table of the categorization results 103 Table 6-10: Role of the drivers for the decision in the 10 cases 105 Table 6-11: Context/environment’s impacts on drivers 106 Table 6-12: Details from the cases of the links context/environment to drivers 107 Table 6-13: Details of the links from drivers to financial capabilities 108 Table 6-14: Relationships identified between the groups 109 Table 6-15: Inputs of Use of / development of single site capabilities 111 Table 6-16: Inputs of Use of / development of the network configuration capabilities 112 Table 6-17: Inputs of Use of / development of network coordination capabilities 113 Table 6-18: Inputs for Use of / development of ability to provide financial advantages 114 Table 6-19: Inputs for the case context and environment category 114 Table 7-1: Questionnaire respondents 126 VII MANUFACTURING LOCATION DECISIONS IN THE PHARMACEUTICAL INDUSTRY MATHIEU PELLERIN 2003 List of figures Figure 1-1: Structure of the thesis Figure 2-1: Relative importance of key factors affecting international location decisions Figure 2-2: Common network types 19 Figure 2-3: Manufacturing network and supply-chain 26 Figure 2-4: Transaction cost analysis 28 Figure 2-5: Methodology for strategic outsourcing 29 Figure 2-6: Different external possibilities for outsourcing 30 Figure 2-7: A practical framework for evaluating the outsourcing decision 33 Figure 2-8: Drug manufacturing process and outsourcing 36 Figure 2-9: Research question location among existing literature 39 Figure 3-1: Repartition of cases among the stages 52 Figure 4-1: 1st elements proposed for the sourcing decision 58 Figure 4-2: The scope of a product manufacturing location decision 62 Figure 5-1: Financial issue in case 70 Figure 5-2: Conceptual frame for labelling during the coding process 78 Figure 6-1: Groups issued from the categorization process 101 Figure 6-2: Proposed framework for product manufacturing location decision 116 Figure 6-3: Simplified representation of case 117 Figure 6-4: Simplified representation of case 117 Figure 7-1: 5-steps tool for the decision-making process 123 Figure 7-2: Expert judgement for question 127 Figure 7-3: Expert judgement for question 127 VIII MANUFACTURING LOCATION DECISIONS IN THE PHARMACEUTICAL INDUSTRY MATHIEU PELLERIN 2003 Figure 7-4: Expert judgement for question 128 Figure 7-5: Expert judgement for question 128 Figure 7-6: Expert judgement for question 129 Figure 7-7: Expert judgement for question 129 Figure 7-8: Expert judgement for question 130 Figure 7-9: Expert judgement for question 130 Figure 0-1: Overview of the pharmaceutical manufacturing process 144 IX 171 List of manufacturing sites and packaging sites and contacts to start the data collection, including fully owned plants, joint ventures and external contractors List of potential chains of manufacturing operations: Preparing a map geographically presenting the different possibilities can help for the data collection Worksheet 1, proposed in Appendix B, can help to The list could be restrained to sites presently manufacturing or packaging the product, or able to it Market Packaging site Manufacturing site Active principle site A chain is the sequence of manufacturing operations: - - This step is a preparation stage; it consists in exploring and listing the potential solutions and the contacts to be used to ask for detailed information: Step 1: Preparing the data collection Ranked qualified chains Step Which chains meet the ranking criteria, in order of best -fit? List of qualified chains Step Which chains meet the qualifying criteria? List of chains Step Identify possible chains of location based on geographical locations and types of operation (i.e wholly owned, joint venture or contractors) carry out this step List of ranking criteria List of qualifying criteria Case identification Product for defined markets Step text text EVALUATION OUTCOME text (provided in appendixes) List of criteria to evaluate the manufacturing capabilities ACTION Sort criteria to qualifying and ranking categories based on decision context and environment List of requirements Step Identify the requirements based on decision context and environment - Legislation - Market - Product Location Decision workbook (draft) 172 Ranked qualified chains Step Which chains meet the ranking criteria, in order of best -fit? List of qualified chains Step Which chains meet the qualifying criteria? List of chains Step Identify possible chains of location based on geographical locations and types of operation (i.e wholly owned, joint venture or contractors) List of ranking criteria List of qualifying criteria Case identification Product for defined markets Step text text text EVALUATION OUTCOME (provided in appendixes) List of criteria to evaluate the manufacturing capabilities ACTION Sort criteria to qualifying and ranking categories based on decision context and environment List of requirements Step Identify the requirements based on decision context and environment - Legislation - Market - Product - Label specifications: Specific requirements for the secondary packaging may force to have a specific artwork for the market or proceed to a “re-sticking” for the market In Thailand, import duties on active principle are only 1%, against 10% for the bulk and 20% for the FG - Import duties: higher import duties on bulk and finished goods than on the active principle In Pakistan and Bangladesh it is not possible to import bulk and FG when generics products are available on the local market In Indonesia the imports of bulk and FG are only allowed when there is a technical impossibility to manufacture locally and when the volumes are large enough to justify a local manufacturing - Impossibility to import bulk and finished goods: • Import legislation on API, bulk, finished goods (FG) in the marketed country n Legislation requirements This step consists in collecting the specific data describing the context and environment of the decision The data required is split into three categories: - legislation requirements, - markets specifications, - product specifications Step 2: Decision context and environment Location Decision workbook (draft) 173 - Lead time needed for registration of drug - Requirements for stability data Long-term / accelerated stabilities (length), climatic conditions for the stabilities (temperature and humidity), stability linked to the batch size, acceptance of trial batch are some of the factors that forces to have specific stabilities for a market - Free sale certificate needed In more and more countries the importing country requires a free sale certificate, which states that the exporting country is also selling the drug on its own market and constitutes a guarantee of quality control by the local drug authorities • Required specifications for product registration: The regulatory aspect has a strong influence on the importance of the criteria Imported drugs in Korea have difficulty to be listed in hospitals (which is a condition to sell in this market) Products manufactured in Indonesia have temporally difficulties to be registered in Malaysia, etc - Informal barriers: Some markets have informal barriers, which makes difficult to reach to full potential of sales Philippines needs a specific artwork due to the “Generic law’; Malaysia requires the registration number on the pack; Australian legislation is also very specific in terms of packaging, etc The lead-time needed to register in a market may vary significantly from one country to another (roughly between months and year) Location Decision workbook (draft) 174 • Requested date of supply The requested date (date of launch, date of end of current contract / registration, or no specified date line) may impose to choose a solution that is ready to supply the market For Instance, in Korea there is a remaining reluctance to buy imported products and people prefer to buy locally manufactured drugs Some markets may prefer products from Europe or USA rather than another region (e.g Thailand) Some markets may even refuse some products manufactured in a specific country • Market acceptance In Thailand, the cash flow criterion is very sensitive due to current low local margins • Current local margin, and consolidated margin A low local margin in a country may raise issue of cash flows For product with small volumes, the proposed batch size may be too large, leading to high inventories and creating obsolete products A plant able to aggregate the volumes across different markets or with flexible production (lower batch size, MOQ) may be more appropriate to serve the markets with small volumes Sales forecasts and product life cycle are determinant as a product may have a strong sales potential after several years • Volume forecasts years and trend n Market specifications Location Decision workbook (draft) 175 This step permitted to describe the decision context and environment, which is important information in the decisionmaking process In Thailand, the obsolete products in hospitals are exchanged for free, increasing significantly the costs of sales Besides, markets in climatic zone often request a specific packaging or a least zone stabilities to support storage conditions • Requested expiration date and storage conditions (Climatic zone 4?) and the sensitivity to the expiration date In the Philippines, the market often uses large boxes and cuts the blisters manually in the outlets • Packaging requirements: For instance, the market may request smaller or larger packs depending on the usages Handling active principles can raise safety issues, which impose to have a specific equipment and process • Specific safety issue linked with the product • Specific strengths and/or formulation A change of formulation could be necessary or imposed by corporate guidelines n Product specifications • Strategic / non-strategic product Use a worksheet (see worksheet in appendix C for an example) to list all the factors and arguments that make the case specific Location Decision workbook (draft) 176 Ranked qualified chains Step Which chains meet the ranking criteria, in order of best -fit? List of qualified chains Step Which chains meet the qualifying criteria? List of chains Step Identify possible chains of location based on geographical locations and types of operation (i.e wholly owned, joint venture or contractors) List of ranking criteria List of qualifying criteria Case identification Product for defined markets Step text text EVALUATION OUTCOME text (provided in appendixes) List of criteria to evaluate the manufacturing capabilities ACTION Sort criteria to qualifying and ranking categories based on decision context and environment List of requirements Step Identify the requirements based on decision context and environment - Legislation - Market - Product The list of these qualifying criteria largely depends on the decision context and environment Indeed the case specificity will give a high importance to some criteria that may not be relevant in other cases Thus, at this stage, we have to list the criteria that are or become essential due to the case specificity, it will constitute the qualifying criteria list and the remaining criteria will constitutes the ranking criteria list This step consists in grouping the criteria listed in appendixes into qualifying criteria and ranking criteria By default all the criteria are ranking criteria, but for specific reasons some criteria become qualifying criteria and constitute the minimal requirements a possible solution has to fill to be further studied Step 3: Grouping the criteria Location Decision workbook (draft) 177 Product specifications Strategic / non-strategic Formulation & strength Packaging requirements Safety issues Requested expiration date Market specifications Volume forecasts Current local margin Market acceptance Requested supply date L5, P2 L7, P5 P1 L3, M1, P3, L6, L7, M4 Products manufactured Stabilities available Export experience Specific artwork possible Implementation lead-time P5 L7, M3, P4 M1, M2 Cash flows management Financial capabilities (4) Elements May caused by L2, L3, M2 P1 M1 NPV Cost / unit Supply-chain complexity P4 P3 M1, P2, P4 Overhead absorption M3 “Made in country X” effect Amortization of investments M1, P3 Transport lead-times and cost P2 M1 Manpower costs P1 M1 Local taxation Network coordination capabilities (3) Elements May caused by Economies of scale M1 The decision context impacts the relative importance of the manufacturing capabilities M1, Batch size & MOQ Network configuration capabilities (2) Elements May caused by Access to markets L1, L4, M3 P1, Quality & delivery Facility capabilities (1) Elements May caused by Equipment and capacity P2, P3, M1, P4 Manufacturing capabilities: M4 M3 M2 M1 Legislation requirements L1 Impossibility to import L2 Import duties L3 Label specifications L4 Informal barriers L5 Free sale certificate Lead-time for registration L6 L7 Requested stability Decision context and environment: To help to identify qualifying criteria, some of the encountered links are given on this page to illustrate the specific importance of some criteria The worksheet proposed in appendixes (worksheet 3) can help to realize this step Location Decision workbook (draft) 178 List of ranking criteria List of qualifying criteria Step text text text EVALUATION OUTCOME (provided in appendixes) List of criteria to evaluate the manufacturing capabilities ACTION Sort criteria to qualifying and ranking categories based on decision context and environment List of requirements Step Identify the requirements based on decision context and environment - Legislation - Market - Product Worksheets and proposed in appendixes are a way to carry out these two steps Ranked qualified chains Step Which chains meet the ranking criteria, in order of best -fit? List of qualified chains Step Which chains meet the qualifying criteria? List of chains Step Identify possible chains of location based on geographical locations and types of operation (i.e wholly owned, joint venture or contractors) Case identification Product for defined markets The values of the ranking criteria for all the qualified chains of operations have to be collected However by identifying the qualified chain in the previous step, it permits to reduce the amount of data collected in the manufacturing entities In this step all the components that intervene in the decision are now taken into account, the decision makers are now able to select the chain which represents the best opportunity At the end of step 4, only few chains are likely to remain Only one remaining chain is common The ranking criteria are used to choose the best chain of operations among the qualified chains Step 5: Final selection If no chain is remaining after the first selection, it is probably that the product should be pruned for this market The possible chains satisfying the minimal requirements imposed by the list of qualifying criteria are qualified chains that would be studied in higher details The other possibilities are eliminated By this way, only the relevant chains would be studied in details in the next step, saving time and resources After having identified the qualifying criteria, we now have to determine the value of these criteria for each potential chain of operation It consists in collecting the data in the manufacturing entities This step could require much time and resource Step 4: First selection Location Decision workbook (draft) 179 • FG Stability data available: - Current expiration date - Conditions: Long-term / accelerated stabilities, Climatic conditions, Batch size dependency, trial batch acceptance n Plant knowledge • Plant already manufacturing the product: - Formulation available (sugar coated, film coated, formula, etc)? - Strengths range: Is the required range already available? - Primary packaging, pack size and secondary packaging available? • Adapted batch size: - Comparison of the batch size with the volumes and taking into account the trend n Plant facilities and capacity • Facilities for manufacturing and packaging: - Do the facilities already exist? - Are investments needed? - Product requirements flexibility to minimize investments? - Is there capacity available? - What are the impacts on capacity level for a plant receiving additional volumes or loosing current volumes? To identify the potential manufacturing & packaging sites according to their capabilities Facility capabilities Appendix A: Criteria to evaluate the drivers • Sustainable source perspective - Will there be a need to re-register in few years or the option is sustainable? • Production lead-time - Lead-time between order received and shipment • Service rate and delivery concern • Quality concern - Especially the risk to use external contractors n Plant delivery and quality • Implementation lead-time - What is the time line to be ready to register and to produce? • Possibility of plant expansion • Urgency responsiveness • Volume flexibility: - MOQ (minimum order quantity), and value of additional inventories due to MOQ n Plant flexibility • Product specification flexibility: - Ability to provide a specific artwork, etc • Export experience and structure Has the plant the organization, the structure and experience to export or such organization has to be developed? At what cost? Location Decision workbook (draft) 180 n Proximity to the customers and suppliers • Transports lead-time and costs: - API site to manufacturing site - Manufacturing site to packaging site - Packaging site to market • Logistic support - Ease of access, proximity to logistic hub • Manpower costs • Taxation in the countries - Location permits to overcome imports duties and benefits from lower taxes and other government incentives • Political instability risk n Access to favorable production, economic, political factors • Country of provenance effect - Positive / Negative effect of the “Made in country X” label n Access to strategic targets • Need to have a certain level of local operation to access - To the market (formal barriers: legislation restrictions) - To foster sales (informal barriers: market acceptance to buy imported products) To precise the suitable geographic chain of locations for the manufacturing and packaging Capabilities of the network configuration • New supplier for the market - Avoid to have a new site supplying a market or consider transport costs, plant registration in the marketed country • Number of entities in the Supply-Chain - Minimize the number of node in the supply-chain, to minimize hidden management costs and reduce complexity: prefer manufacturing and packaging at the same site • Overhead absorption implication - Calculate the fix costs to be absorbed (PRC) and evaluate the implications for the plants • Amortization of in-house investments - Use existing specific in-house facilities to amortize the investments • Level of standardization - Use standard formulation, “shared” packs, preferred pack size, etc n Economies of scale and scope • Aggregation of identical volumes - Concentrate the volumes with identical activities to avoid duplication To evaluate the impact of identified solutions for the whole manufacturing network Capabilities of the network coordination • Additional inventories along the chain due to transport lead-time - Sum the values of inventories of API, bulk and FG along the chain, due to transport lead-time Location Decision workbook (draft) 181 n Project Net Present Value for the Company • Annual Incremental cost: The annual incremental cost (IC) for the company is the delta of the variable costs n Management costs per unit • The management costs (SCOG) (standard costs of goods) are given by the supply configuration: - API transfer price without margins + transport costs - Import duties and taxes - Manufacturing variable costs (labor, machine, components, fees) and fix costs (PRC: product related costs) - Transport costs - Import duties and taxes - Packaging variable costs (labor, machine, components, fees) and fix costs (PRC) - Transport costs - Import duties and taxes To calculate the financial benefits of a sourcing option Ability to provide financial advantages • New source of supply - Evaluate the advantages and the necessity to have a new supply source for the market n Development of the network flexibility • Double source of supply - Use the double source registration when legally possible It is an efficient means to solve supply issue • The ability to adjust transfer prices and manage cash flows is limited by: - Import duties on the transfer price - Minimal legal local margins in manufacturing countries and marketed country - Local shareholders requirements n Local cash flow and ability to manage cash flows • The local cash flow is given by: - Local cash flow: Selling price – Transfer price of the imported item - local costs • NPV: Net Present Value The NPV is a method among others, to evaluate the financial interest of the project taking into account the Implementation cost and the expected annual incremental cost • Implementation cost: The implementation cost, is the cost of the project implementation, i.e registration fees, capital expenditures (investments), transfer costs, etc However in some cases, the volume of sales will be impacted by the change of sourcing, thus the additional cash earned by the company would have to be taken into account IC = D variable costs = Variable costs – Variable costs = (SCOG ex-2 – fix costs ex-2) – (SCOG ex-1 – fix costs ex-1) = D SCOG + fix costs – fix cost Where is future configuration; is current Location Decision workbook (draft) 182 Pack site Manuf site Site (others ) Site Site Site … Site Site Site Site name Country City Type: owned plant, JV, external contractor Contacts List of possible sites for manufacturing and packaging: Appendix B: Worksheet (others) Chain Chain Chain Active principle site Manufactur ing site Packagin g site Market List of possible chain of operations derived from the previous table Location Decision workbook (draft) 183 (others) Requested stability Lead-time for registration Free sale certificate Informal barriers Product specifications (others) Requested expiration date Safety issues Packaging requirements Formulation & strength Strategic / non-strategic (others) Requested supply date Import duties Label specifications Market acceptance Current local margin Volume forecasts Market specifications Impossibility to import Legislation requirements Description of the decision specificity due to its context and environment Appendix C: Worksheet Location Decision workbook (draft) 184 Cost / unit NPV Cash flows management Financial capabilities (4) Amortization of investments Overhead absorption Supply-chain complexity Economies of scale Network coordination capabilities (3) Access to markets Local taxation Manpower costs Transport lead-times and cost “Made in country X” effect Network configuration capabilities (2) Specific artwork possible Implementation lead-time Equipment and capacity Quality & delivery Batch size & MOQ Products manufactured Stabilities available Export experience Facility capabilities (1) Influence of decision context (column) on manufacturing capabilties (rows) Requested requirements Packaging Formulation & strength Requested supply date Market acceptance Current local margin Volume forecasts Lead-time for registration certificate Free sale Informal barriers specifications Label Import duties import Impossibility to Product specifications Safety issues Market specifications expiration date Legislation requirements … Strategic / nonstrategic … Grouping the criteria of the manufacturing capabilities into qualifying criteria and ranking criteria Non case specific importance Qualifying (Q) / Appendix D: Worksheet … Requested stability Location Decision workbook (draft) ranking (R) factor 185 Crite ria A Criteri aB Criteri aC Criteri aD Qualifying criteria (others ) (others) Qualified chain Qualified chain Chain name Criteri aE Criteri aF Criteri aG Criteri aH Ranking criteria (others ) Best chain ? Qualifie d chain ? Presenting the values along the ranking criteria for each qualified chain Appendix F: Worksheet (others) Chain Chain Chain Chain name Presenting the values along the qualifying criteria for each chain Appendix E: Worksheet Location Decision workbook (draft) [...]... identifies the research gaps The main areas reviewed in this chapter are manufacturing location decision factors and tools, international manufacturing network literature and the outsourcing field, particularly for the pharmaceutical industry 2.2 Manufacturing location decisions Manufacturing location decisions are decisions concerning the location of manufacturing activities for a company It can consist in. .. is a capability-building process within the plant that leads to build a hard-to-imitate plant 22 MANUFACTURING LOCATION DECISIONS IN THE PHARMACEUTICAL INDUSTRY MATHIEU PELLERIN 2003 manufacturing capability Schroeder et al (2002) state that internal and external learning processes are important to build capability at the plant level and contribute to the manufacturing performance Product manufacturing. .. opinion 16 MANUFACTURING LOCATION DECISIONS IN THE PHARMACEUTICAL INDUSTRY MATHIEU PELLERIN 2003 This section has presented the list of factors and their relative importance that are given by the literature, for manufacturing location decisions The literature suggests that the interdependence of manufacturing entities, part of a manufacturing network, is overlooked in the existing manufacturing location. .. of coordination when dealing with manufacturing location decisions and gave preliminary ideas for future integration of configuration and coordination Manufacturing location decision and Supply-chain Management As shown in the previous paragraph, co-ordination between entities seems to be an important consideration in manufacturing location decisions The supply-chain management field, reviewed in this... holistically the sourcing decision in international manufacturing, considering internal and external sources (Karlsson, 2003) by examining its influence on long-term manufacturing capabilities This question is 1 MANUFACTURING LOCATION DECISIONS IN THE PHARMACEUTICAL INDUSTRY MATHIEU PELLERIN 2003 particularly important in the pharmaceutical industry, where local health regulations often mean production... factors influencing companies in the choice of a specific state within the United States for setting up a manufacturing plant The main factors identified are access 6 MANUFACTURING LOCATION DECISIONS IN THE PHARMACEUTICAL INDUSTRY MATHIEU PELLERIN 2003 to markets, labour market conditions, state promotional efforts to attract investments, and state taxes Jungthirapanich and Benjamin (1995) conducted a review... How to stay efficient and practical in the decision-making process? 2 MANUFACTURING LOCATION DECISIONS IN THE PHARMACEUTICAL INDUSTRY MATHIEU PELLERIN 2003 Research output The research consists in developing a product manufacturing location decision framework for a manufacturing company with geographically dispersed facilities, taking into account not only the financial consideration but also the long-term... thousand manufacturing companies in the Asian countries, regardless of the industry sector, to establish the impact of location factors on the supply-chain They revealed the existing trade-offs between plant locations and supply-chain uncertainty for managers trying to reach the optimal supply-chain competitiveness For instance in order to enter a new market, a company may hesitate between • developing... optimisation models They are therefore concentrating on quantitative factors such as production costs, 13 MANUFACTURING LOCATION DECISIONS IN THE PHARMACEUTICAL INDUSTRY MATHIEU PELLERIN 2003 capacity, demand quantity, currency exchange rates, material costs, and transportation costs and are seeking to minimise costs or maximise profits (See Hanna and Newman, 2001, Roberta and Bernard, 1995 for a review... longitudinal cases The analysis of all the ten cases permits to validate and refine the previous mapping analysis The relationships between the categories are identified and presented in this chapter Finally, the findings are presented in a framework for product manufacturing location decision Chapter 7, entitled theory validation, presents the research findings in a more useful presentation for the managers ... period in the pharmaceutical company, detailing ten product manufacturing location decisions in Asia-Pacific markets The cases confirmed and detailed the importance of the manufacturing capabilities... literature and the outsourcing field, particularly for the pharmaceutical industry 2.2 Manufacturing location decisions Manufacturing location decisions are decisions concerning the location of manufacturing. .. strategic manufacturing decisions and more particularly product manufacturing location decisions are concerned with the network 26 MANUFACTURING LOCATION DECISIONS IN THE PHARMACEUTICAL INDUSTRY MATHIEU