A custom manufacturer of active pharmaceutical ingredients (APIs) and intermediates was faced with a challenge regarding their capacity investment strategy and a general increase in demand for the use of its facilities. In fact, the company had recently won a new contract for production of a potentially large product currently in Phase III development. This contract would put further pressure on existing capacity, and might even result in the displacement of other products.
In order to accommodate the new contract, company management was considering making a significant capacity expansion to avoid the risk of forgoing new business opportunities in the future. Investment alternatives included: modifying existing facilities, building new facilities, or acquiring capacity. However, the investment decisions were complicated by:
- Uncertainty about future demand, both for the existing portfolio, as well as for potential new products;
- Varying growth expectation depending on both single-customer exclusive synthesis as well as multi-customer products; and
- Capacity utilization needed to be considered at three different scales of production.
The COO of the company was under pressure to find a solution—which path forward would make the most sense to enable rapid scaling of production, when necessary, but also manage uncertainty about future demand?
Discovery & Solutions:
To determine the best path forward, Strategic Decisions Group was brought in to provide a structured approach to decision making.
First, SDG worked to level set the playing field by defining a capacity unit for the company that would help to characterize current production, as well as inform long-term production planning. Through the definition of this capacity unit, we were able to bring clear thinking to the company’s strategic capacity planning by accurately characterizing their current production. As a result, the company was able to identify their main sources of profitability by assessing the contribution of each product per unit of utilized capacity.
Second, SDG looked in detail at the sources of uncertainty around the level of demand in future years—both analyzing the level of uncertainty for existing portfolio products, as well as additional uncertainties that would arise from the level of demand for capacity from new products.
Using the agreed upon characterization of current production, incorporating current, and future potential demand and the capacity of work centers, SDG created a probabilistic model to forecast the future capacity demand, taking into account all sources of uncertainty. Then, the team looked at the risk profile of the expected capacity demand over the next few years, in order to assess whether or not new capacity should be added.
Results & Impact:
Ultimately, SDG concluded that there was not enough demand for an immediate capacity expansion—the proposed new work center had an expected utilization of only 20 percent and only an eight percent probability of full capacity.
To equip the manufacturer to make informed decisions moving forward, we developed a framework and dashboard to signal potential triggers of expansion decisions, depending on the anticipated environment. Using these tools, the company instituted a regular process to review the decision to increase capacity in the future based on a much better understanding of uncertainties.
Also, in order to enhance flexibility to respond quickly to changing customer needs and new opportunities, we helped the manufacturer identify small investments to decrease the lead time for adding capacity. Further, the company adopted a staged approach to capacity expansion, with low-cost process improvement investments being pursued first when additional capacity would be needed.
Overall, through this structured approach, we provided the company with a forum for working through differing opinions, placing the company in a more sound position to tackle changes and challenges moving forward.