1) How would you characterise Eli Lilly’s approach to manufacturing before 1987?

How much
progress have they made since then?

Characteristics of Eli Lilly’s approach to manufacturing before 1987:

➢ High stress on R&D and capital expenditure compared to manufacturing (process

improvement).
➢ Manufacturing was given a relatively lower weight in the overall corporate strategy.
➢ Location decisions heavily influenced by availability of technical staff, infrastructure and
tax incentives.
➢ Critical manufacturing technologies were spread across numerous smaller scale plants
rather than concentrated at key world scale plants.
➢ Manufacturing had not been able to coordinate fully its activities with other functions,
which was attributed to lost of significant opportunities both in manufacturing processes
for new drugs and improving existing processes.
➢ In the early half of 1980 the company had a significant amount of idle capacity, this
however changed in the later half with rising sales for several products (Humulin, Prozac,
Ceclor and others) to growth phase (better utilization of plants/ capacity).
➢ The focus was more on short term planning and results than long term planning and
results.

Progress made since 1987:-

➢ Manufacturing was given higher weight in overall corporate strategy.

➢ In late 1988 a Manufacturing Strategy Committee was set up to establish global
manufacturing policies.
➢ The committee included top executives from manufacturing, engineering, R&D,
marketing, finance, personnel and international.
➢ A central theme of “Process development and improvement” was chosen for guiding the
manufacturing strategy.
➢ The Cooke’s team developed three plans (proposals) for the consideration of committee
for the decision on process improvement efforts.
➢ An outside consulting firm was hired to gather estimated data and assess the impact of
each of the plans on the company’s bottom-line (through cost savings and capacity
building).

1) What recommendations would you make to Joe Cook regarding the three alternatives for process
development? Why?

Recommendations: Adopt plan2 (Commit to process improvement for a product(s) that is not yet on
the market, but which appears overwhelmingly likely to succeed) for Eli Lilly Pharmaceutical
 company which would lead to Investment savings on the rig upto $26188 million for the period of
1979 to 2000.

Reasoning: We first deduce the decision of which plan to adopt?

Step1: From exhibit 7A we calculate no. of rigs required for the current yield, plan1, plan2 and
plan3. Then we calculate the total investment per year for rigs (1 rig = $40million)

Volumes Current Plan1 Plan2 Plan3

of Drug Annual Annual Annual Annual
Year
required Yield Yield Yield Yield
(kg) (kg/rig) (kg/rig) (kg/rig) (kg/rig)

1979 5000 1500 1500 1500 1725

1980 1000 1500 1500 1500 1725
1981 1000 1750 1750 1750 2013
1982 1000 1750 1750 2000 2295
1983 1000 1750 1750 2500 2869
1984 1000 2000 2000 3250 3730
1985 10000 2500 2550 4000 4591
1986 10000 2750 2850 4750 5452
1987 10000 3000 3060 5500 6312
1988 10000 3500 3570 6000 6886
1989 25000 4000 4080 6000 6886
1990 25000 4500 4590 6250 7173
1991 30000 5000 5100 6500 7460
1992 33000 5250 5355 6750 7747
1993 36000 5750 5865 6750 7747
1994 40000 6000 6120 7000 8034
1995 44000 6250 6375 7250 8321
1996 47000 6500 6630 7250 8321
1997 49000 6500 6630 7250 8321
1998 50000 6750 6885 7500 8608
1999 51000 6750 6885 7500 8608
2000 52000 7000 7140 7500 8608

Capacity Cumulati Total Increment Capaci Cumulati Total Increment

Require ve no. of Investme al ty ve no. of Investme al
d rigs nt on rigs Investme Requir rigs nt on Investmen
current required for nt per ed required rigs for t per year
Yield no. for current year for Plan1 for Plan1 Plan1 for Plan1
of rigs current Yield (m$) current Yield (m$) (m$)
Yield Yield (m$) no. of
 rigs

3.33 3.33 133.33 3.33 3.33 133.33

0.67 4.00 160.00 26.67 0.67 4.00 160.00 26.67
0.57 4.57 182.86 22.86 0.57 4.57 182.86 22.86
0.57 5.14 205.71 22.86 0.57 5.14 205.71 22.86
0.57 5.71 228.57 22.86 0.57 5.71 228.57 22.86
0.50 6.21 248.57 20.00 0.50 6.21 248.57 20.00
4.00 10.21 408.57 160.00 3.92 10.14 405.43 156.86
3.64 13.85 554.03 145.45 3.51 13.64 545.79 140.35
3.33 17.18 687.36 133.33 3.27 16.91 676.50 130.72
2.86 20.04 801.65 114.29 2.80 19.71 788.55 112.04
6.25 26.29 1051.65 250.00 6.13 25.84 1033.65 245.10
5.56 31.85 1273.87 222.22 5.45 31.29 1251.51 217.86
6.00 37.85 1513.87 240.00 5.88 37.17 1486.81 235.29
6.29 44.13 1765.30 251.43 6.16 43.33 1733.30 246.50
6.26 50.39 2015.73 250.43 6.14 49.47 1978.83 245.52
6.67 57.06 2282.40 266.67 6.54 56.01 2240.27 261.44
7.04 64.10 2564.00 281.60 6.90 62.91 2516.35 276.08
7.23 71.33 2853.23 289.23 7.09 70.00 2799.90 283.56
7.54 78.87 3154.77 301.54 7.39 77.39 3095.53 295.63
7.41 86.28 3451.06 296.30 7.26 84.65 3386.02 290.49
7.56 93.83 3753.29 302.22 7.41 92.06 3682.31 296.30
7.43 101.26 4050.43 297.14 7.28 99.34 3973.63 291.32
Savings from 1977 to 2000
(m$) 76.80
Capacit
Incremen Capacit
y Total Increment
Cumulati Total tal y Cumulati
Requir Investme al
ve no. of Investme Investme Require ve no. of
ed nt on Investmen
rigs nt on rigs nt per d Plan3 rigs
Plan2 rigs for t per year
required for Plan2 year for Yield required
Yield Plan3 for Plan3
for Plan2 (m$) Plan2 no. of for Plan3
no. of (m$) (m$)
(m$) rigs
rigs
 3.33 3.33 133.33 2.90 2.90 115.94
0.67 4.00 160.00 26.67 0.58 3.48 139.13 23.19
0.57 4.57 182.86 22.86 0.50 3.98 159.00 19.87
0.50 5.07 202.86 20.00 0.44 4.41 176.43 17.43
0.40 5.47 218.86 16.00 0.35 4.76 190.37 13.94
0.31 5.78 231.16 12.31 0.27 5.03 201.10 10.72
2.50 8.28 331.16 100.00 2.18 7.21 288.22 87.13
2.11 10.38 415.38 84.21 1.83 9.04 361.59 73.37
1.82 12.20 488.10 72.73 1.58 10.62 424.96 63.37
1.67 13.87 554.77 66.67 1.45 12.08 483.05 58.09
4.17 18.04 721.44 166.67 3.63 15.71 628.27 145.22
4.00 22.04 881.44 160.00 3.49 19.19 767.69 139.41
4.62 26.65 1066.05 184.62 4.02 23.21 928.54 160.86
4.89 31.54 1261.61 195.56 4.26 27.47 1098.93 170.39
5.33 36.87 1474.94 213.33 4.65 32.12 1284.81 185.88
5.71 42.59 1703.51 228.57 4.98 37.10 1483.96 199.15
6.07 48.66 1946.27 242.76 5.29 42.39 1695.48 211.51
6.48 55.14 2205.58 259.31 5.65 48.04 1921.41 225.93
6.76 61.90 2475.93 270.34 5.89 53.92 2156.96 235.55
6.67 68.56 2742.59 266.67 5.81 59.73 2389.30 232.34
6.80 75.36 3014.59 272.00 5.92 65.66 2626.29 236.99
6.93 82.30 3291.93 277.33 6.04 71.70 2867.93 241.64
Savings from 1977 to Savings from 1977 to 2000
2000 (m$) 758.50 (m$) 1182.50

Now from Exhibit 5 we calculate the Manufacturing cost (Rig cost) = Annual volume X Rig unit
cost.

We then add this Manufacturing cost with the annual process development cost and incremental
investment per year for rig to arrive at the total cost.

Current Yield
 Manufacturi Incremen
Total Cost
Annual ng tal
Annu (m$)
Rig process Manufacturi Cost+Proce Investme
al =Mfg.cost+Pro
Yea unit developm ng Cost ss nt per
Volu cess
r cost ent (Rig Cost) Developme year for
me Development
($/kg) expenses (m$) nt current
(Kg) cost+Investme
(1990 $m) Expenses Yield
nt
(m$) (m$)
197
7 0 0
197
8 0 0
197
9 5000 15000 0.58 75 75.58 133.33 208.91
198
0 1000 14000 0.58 14 14.58 26.67 41.25
198
1 1000 13000 0.58 13 13.58 22.86 36.44
198
2 1000 12000 0.58 12 12.58 22.86 35.44
198
3 1000 11000 0.58 11 11.58 22.86 34.44
198 1000
4 0 9000 0.58 90 90.58 20.00 110.58
198 1000
5 0 7000 0.58 70 70.58 160.00 230.58
198 1000
6 0 6000 0.58 60 60.58 145.45 206.03
198 1000
7 0 5000 0.58 50 50.58 133.33 183.91
198 1000
8 0 4000 0.58 40 40.58 114.29 154.87
198 2500
9 0 3000 0.58 75 75.58 250.00 325.58
199
0 5000 2000 0.58 10 10.58 222.22 232.80
 Plan1
Annua
l Incremen
Manufacturi Total Cost
proces Manufac tal
Annu ng (m$) Savin
Rig s turing Investme
al Cost+Proces =Mfg.cost+Pro gs in
Yea unit develo Cost nt per
Volu s cess total
r cost pment (Rig year for
me Developmen Development cost
($/kg) expen Cost) current
(Kg) t Expenses cost+Investme (m$)
ses (m$) Yield
(m$) nt
(1990 (m$)
$m)
197
7 0 0
197
8 0 0
197
9 5000 15000 0.58 75 75.58 133.33 208.91 0.00
198
0 1000 14000 0.58 14 14.58 26.67 41.25 0.00
198
1 1000 13000 0.58 13 13.58 22.86 36.44 0.00
198
2 1000 12000 0.58 12 12.58 22.86 35.44 0.00
198
3 1000 11000 0.58 11 11.58 22.86 34.44 0.00
198 1000
4 0 9000 0.58 90 90.58 20.00 110.58 0.00
198 1000
5 0 6790 1.16 67.9 69.06 156.86 225.92 4.66
198 1000
6 0 5820 1.16 58.2 59.36 140.35 199.71 6.32
198 1000
7 0 4850 1.16 48.5 49.66 130.72 180.38 3.53
198 1000
8 0 3880 1.16 38.8 39.96 112.04 152.00 2.86
198 2500
9 0 2910 1.16 72.75 73.91 245.10 319.01 6.57
199
0 5000 1940 1.16 9.7 10.86 217.86 228.72 4.08
Total Savings 28.03
 Plan2
Annual
Manufacturi Incremen
proces Total Cost
Manufac ng tal
Annu s (m$)
Rig turing Cost+Proce Investme Savings
al develo =Mfg.cost+Pro
Yea unit Cost ss nt per in total
Volu pment cess
r cost (Rig Developme year for cost
me expen Development
($/kg) Cost) nt current (m$)
(Kg) ses cost+Investme
(m$) Expenses Yield
(1990 nt
(m$) (m$)
$m)
197
7 0 0
197
8 0 0
197
9 5000 12000 1.16 60.00 61.16 133.33 194.49 14.42
198
0 1000 10320 1.16 10.32 11.48 26.67 38.15 3.10
198
1 1000 8731 1.16 8.73 9.89 22.86 32.75 3.69
198
2 1000 7334 1.16 7.33 8.49 20.00 28.49 6.94
198
3 1000 6014 1.16 6.01 7.17 16.00 23.17 11.26
198 1000
4 0 4691 1.16 46.91 48.07 12.31 60.38 50.20
198 1000
5 0 3283 0.58 32.83 33.41 100.00 133.41 97.17
198 1000 2725 0.58 27.25 27.83 84.21 112.04 93.99
 6 0
198 1000
7 0 2180 0.58 21.80 22.38 72.73 95.11 88.81
198 1000
8 0 1635 0.58 16.35 16.93 66.67 83.60 71.27
198 2500
9 0 1096 0.58 27.40 27.98 166.67 194.65 130.93
199
0 5000 548 0.58 2.74 3.32 160.00 163.32 69.48
Total Savings 641.27

Plan3
Annual
Manufacturi
proces Total Cost
Manufac ng Incrementa
Annu s (m$) Savin
Rig turing Cost+Proce l
al develo =Mfg.cost+Pro gs in
Yea unit Cost ss Investment
Volu pment cess total
r cost (Rig Developme per year
me expens Development cost
($/kg) Cost) nt for current
(Kg) es cost+Investme (m$)
(m$) Expenses Yield (m$)
(1990 nt
(m$)
$m)
197
7 0 1.6 1.6 1.6 -1.6
197
8 0 1.6 1.6 1.6 -1.6
197
9 5000 7800 1.16 39 40.16 115.94 156.10 52.81
198 1000 7150 1.16 7.15 8.31 23.19 31.50 9.75
 0
198
1 1000 6500 1.16 6.5 7.66 19.87 27.53 8.91
198
2 1000 5850 1.16 5.85 7.01 17.43 24.44 11.00
198
3 1000 4550 1.16 4.55 5.71 13.94 19.65 14.79
198 1000
4 0 3250 1.16 32.5 33.66 10.72 44.38 66.20
198 1000 116.8
5 0 2600 0.58 26 26.58 87.13 113.71 7
198 1000 112.5
6 0 1950 0.58 19.5 20.08 73.37 93.45 9
198 1000 106.9
7 0 1300 0.58 13 13.58 63.37 76.95 6
198 1000
8 0 650 0.58 6.5 7.08 58.09 65.17 89.70
198 2500 166.7
9 0 520 0.58 13 13.58 145.22 158.80 8
199
0 5000 390 0.58 1.95 2.53 139.41 141.94 90.86
844.0
Total Savings 0

Now we have total savings from the three plans. We now do the decision
analysis

Strategy adopted
Plan1 Plan2 Plan3
Savings
28.03 641.27 844.00
(m$)
Probabilit
y of 1 0.8 0.2
success
Payoff
28.03 513.02 168.80
(m$)

We observe that the payoff from the plan 2 is the highest which is $513.02 million among the three
plans, hence we adopt the plan2

Step2: We calculate the implications of adopting plan2 for all Eli Lilly pharmaceutical co.

From Exhibit 7B we calculate the incremental investment per year for current yield and plan2 for all
Eli Lilly pharmaceutical co. and then calculate the overall savings for plan2.
 Projected Incremental
New Tank Cumulative Total
Current Capacity Investment
Volume no. of rigs Investment on
Year Yield Rqd Current per year for
Required required for rigs for current
(kg) Yield no of current Yield
(kg) current Yield Yield (m$)
rigs (m$)
197
9 1500
198
0 1500
198
1 50000 1750 29 29 1142.86 1142.86
198
2 70000 1750 40 69 2742.86 1600.00
198
3 80000 1750 46 114 4571.43 1828.57
198
4 100000 2000 50 164 6571.43 2000.00
198
5 130000 2500 52 216 8651.43 2080.00
198
6 170000 2750 62 278 11124.16 2472.73
198
7 210000 3000 70 348 13924.16 2800.00
198
8 240000 3500 69 417 16667.01 2742.86
198
9 270000 4000 68 484 19367.01 2700.00
199
0 300000 4500 67 551 22033.68 2666.67
199
1 310000 5000 62 613 24513.68 2480.00
199
2 290000 5250 55 668 26723.20 2209.52
199
3 250000 5750 43 712 28462.33 1739.13
199
4 240000 6000 40 752 30062.33 1600.00
199
5 220000 6250 35 787 31470.33 1408.00
199
6 200000 6500 31 818 32701.10 1230.77
199
7 180000 6500 28 845 33808.80 1107.69
199
8 150000 6750 22 867 34697.68 888.89
199
9 110000 6750 16 884 35349.54 651.85
200
0 90000 7000 13 897 35863.82 514.29
 Total Investment on rigs for 35863.82
current Yield (m$)

Projected
New Tank Cumulative no. Total Incremental
Plan 2 Capacity
Volume of rigs Investment on Investment
Year Yield Required
Required required for rigs for Plan2 per year for
(kg) Plan2 Yield
(kg) Plan2 (m$) Plan2 (m$)
no of rigs
197
9 1500
198
0 1500
198
1 50000 1750 29 29 1142.86 1142.86
198
2 70000 2000 35 64 2542.86 1400.00
198
3 80000 2500 32 96 3822.86 1280.00
198
4 100000 3250 31 126 5053.63 1230.77
198
5 130000 4000 33 159 6353.63 1300.00
198
6 170000 4750 36 195 7785.21 1431.58
198
7 210000 5500 38 233 9312.48 1527.27
198
8 240000 6000 40 273 10912.48 1600.00
198
9 270000 6000 45 318 12712.48 1800.00
199
0 300000 6250 48 366 14632.48 1920.00
199
1 310000 6500 48 414 16540.17 1907.69
199
2 290000 6750 43 456 18258.69 1718.52
199
3 250000 7000 36 492 19687.26 1428.57
199
4 240000 7250 33 525 21011.40 1324.14
199
5 220000 7250 30 556 22225.19 1213.79
199
6 200000 7250 28 583 23328.64 1103.45
199
7 180000 7250 25 608 24321.74 993.10
199
8 150000 7500 20 628 25121.74 800.00
199
9 110000 7500 15 643 25708.41 586.67
200
0 90000 7500 12 655 26188.41 480.00
Total Investment on rigs for 26188.41
current Yield (m$)

Savings generated for all Eliy Lilly Pharmaceutical co. from 1979 to 2000 = $ 9675.41 million

2) What steps must be taken to implement your recommendation?

Steps needed to be taken for implementing recommendations:

➢ List down the product(s) which are in Phase III clinical, these are the product(s) for which
resources (capital and manpower) should be committed for process improvement.
➢ Since these product(s) have 2 more years for testing, the process development for these
products is already started hence the process improvement must start from year7 instead of
year8 (refer exhibit 2).
➢ Decision on which plant location the product would be produced in mass scale should be
decided, the plant employees from that plant should be actively involved in the process
development and process improvement activities.
➢ Since there is 20% probability of the product not making to the market, a continuous review
of the product’s progress in clinical trials should be done meticulously in order to get the
early signs of the product’s viability.
➢ All other activities such as Marketing, ramp-up mechanism etc. need to be accelerated due to
increased pace of the product introduction in the marketplace (if not done these activities
could become constraints).