A manufacturer of active pharmaceutical ingredients creates a probabilistic model to forecast future demand, allowing it to adopt a flexible, staged approach to increasing its manufacturing capacity.
Situation Analysis
The chief operating officer of a custom manufacturer of active pharmaceutical ingredients (APIs) and intermediates was faced with a challenge regarding the company’s capacity investment strategy. The company had seen a general increase in demand for the use of its facilities and recently had in fact 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 displace other products.
To accommodate the new contract, company management considered investing in significant capacity expansion to its multiproduct, multipurpose facilities to avoid the risk of forgoing this and new opportunities in the future. Investment alternatives included modifying existing facilities, building new facilities, or acquiring capacity. These decisions were complicated by:
- Uncertainty about future demand, both for the existing portfolio and for potential new products;
- Varying growth expectation depending on both single-customer exclusive synthesis as well as multicustomer products; and
- Capacity utilization needed to be considered at three different scales of production.
The COO was under pressure to find a solution—a path forward that would not only enable rapid scaling of production when necessary, but also manage uncertainty about future demand.
Discovery & Solutions
To determine the best path forward, SDG was engaged 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’s multipurpose facilities that would characterize current utilization with varying products and inform long-term production planning. By defining this capacity unit and accurately characterizing current production, SDG was able to bring clear thinking to the company’s strategic capacity planning. As a result, the company was able to identify the 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 demand in future years—both analyzing the level of uncertainty for the existing portfolio of products as well as additional uncertainties that could arise from new demand for manufacturing capacity.
Using the agreed-upon characterization of current production, and incorporating current and future potential demand and capacity of work centers, SDG created a probabilistic model to forecast future capacity demand, taking into account all sources of uncertainty. The team the 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, the engagement team concluded that there was not enough demand for an immediate capacity expansion—the proposed new work center had a probability-weighted utilization of just 20% percent and an 8% chance of full utilization.
To equip the manufacturer to make informed decisions moving forward, SDG 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 choice to increase capacity in the future based on a much better understanding of uncertainties.
To enhance the flexibility to respond quickly to changing customer needs and new opportunities, SDG helped the manufacturer identify small investments to decrease the lead time necessary for adding capacity. In addition, the company adopted a staged approach to expansion, with low-cost process-improvement investments being pursued first when additional capacity would be needed.
Through this structured approach, SDG provided the manufacturer with a forum for working through differing opinions, placing the company in a sounder position to tackle change and challenges in the future.
