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Genentech: Capacity Planning CASE SOLUTIONS- GROUP MEMEBERS- Achal Goel (199278088), Piyush Raj (199278001), Rishab Gupta (199278006), Rohit Dawra Gul (199278027)

Q1. What is your evaluation of Genentech’s production capacity requirements given expected demand in 2010 and 2015 for Avastin and Genentech’s other products as per Exhibit 3? Does your evaluation change if Genentec wants to cover the 85th percentile of demand (see spreadsheet)

Table encapsulates different production scenarios of Genentech in 2010 and 2015, and the gap between the supply and demand for these years. Parameter

Demand / Supply (in kg) 2010

Shortage / Surplus (in kg) 2010

Demand / Supply (in kg) 2015

Shortage / Surplus (in kg) 2015

Demand (85th percentile)

3434

-

4274

-

Base demand forecast

2748

-

3420

-

Supply Supply if contract manufacturing is extended Supply if CCP3 is commissioned by 2010 Supply if both contract is extended and CCP3 is commissioned

2808

-626

2808

-1466

3042

-392

3042

-1232

3978

544

3978

-296

4212

778

4212

-62

1. From the table it can be inferred that unless the CCP3 plant starts production by the year 2010, we are going to face a shortage in supply. 2. If CCP3 plant becomes operational, then the supply would exceed demand by 544 kgs. 3. In 2015, Genentech would not be able to meet the demands even with CCP3 operational. 4. Hence for 2015, both contract manufacturing and an operational CCP3 plant would be needed to meet the demand. 5. As contract manufacturing is not needed in 2010 (with an operational CCP3 plant), hence it can be terminated post 2009 as per the original plan, but revived back in 2014 when the demand finally overshoots the supply. 6. However, if the rules of demand variability are relaxed from 1 standard deviation to about 0.5 standard deviation (12.5% additional capacity over forecast), then contract manufacturing may be able to keep up with the planned demand for 2010. 7. With respect to 2015, with the relaxed demand variability rules, CCP3 would be able to meet the entire demand without the contract manufacturing augmentation.

Ques 2: Assuming Genentech decides to proceed with CCP3, what size production lines (tan k sizes) would you recommend? Why? What criteria should Ebersman use in selecting a location? Should Ebersman move forward with CCP3 now? If not, when? Answer: Genesis is planning to grow its production capacity and for that they are planning a new production unit all together but we have 2 options while deciding the size of the production lines i.e. the currently deployed 12,000 liters and 25,000 liter tanks. Both the options have pros and cons linked to them: 12,000 Liter S.No

PROS

CONS

1.

Least Risk: It is already deployed and hence proceeding ahead with the installation of same sized tanks in the new production capacity involves least amount of risk in terms of increase in infestation or failure of the technique

Huge Investment, Less Return: Though the company has been successfully expanding with the help of installing 12,000-liter capacity tanks but when we see them in comparison to the 25,000 liter tanks installation there is significant difference in the initial investments

2.

Production of small scale products: These Difficult to Scale up: Simply because of its tanks gives us the flexibility of producing size restriction, it will be difficult to meet the multiple range of products having different growing demands in future with these tanks demands at different points of time, so effectively we can even produce small scale products as well with ease

3.

Already passed by the regulating bodies: The tank design and specification had already been passed by the regulating bodies and any sort of tweaking in the design or size required to again apply for the license and validation which requires huge amount of resources and time

4.

Easy to expand: As the company already has all its tank of the same capacity and they have installed the same sized tanks in their last production facility expansion, It will be quite easier for them to expand their production using same sized tanks as they’ll have insights and experience from their recent expansion of the Vacaville line

25,000 Liter S.No

PROS

CONS

Growing Demand: The company will be very efficient and prepared to meet the growing demands in the market as it will have huge production capacities which will be capable of producing massive volumes at any point of time.

Risky Alternative: Going ahead with the installation of 25,000 liter tanks will certainly entail a lot of risk as it might have unseen repercussion & problems in the production process causing troubles for the company

2.

Better Margins and Profitability: Since it has been stated quite clearly that the investments to install these 25,000 liter tanks is not significantly higher than installing the 12,000 liter variants and will give us better production ability thus increasing our margins without incurring huge investments

Chances of increase in wastes: As per the analysts only 65% of the proteins produces by the cells could be recovered. Moreover, 20% of the batch was usually not usable so in these tanks it would lead to generation of huge stocks because of the huge size that will fail the quality check

3.

No need for 24x7 production: Owing to their huge production capacities, the company does not need to run the production units across the year and produce only with the demand arising from the markets

Production of small scale products: These tanks simply don’t give the flexibility of producing multiple range of products having different demands at different points of time, so we cannot produce small scale products at all times. 2 runs would take care of the annual supply and a large time would be spent on doing changeovers

1.

After doing the analysis we can clearly see that the 25,000 liter tanks will certainly help the company increase their production ability to cater the growing needs of the market which is estimated to grow by at least 25% by 2010 and further by 25% in the next 5-year period. Even if all the results of the trials and tests do not turn out to be pleasing, some definitely would which will lead to high demands in the market. Also, with the growth in population and more and more people seeking a solution to grave medical problems like cancer, the company must be committed well in advance to service the demand of the market in this noble profession. Not able to suffice the market demand in future poses a greater threat to both the financial and perceptual health of the company, hence they should definitely go for expansion and 25,000 liter tanks will ensure good margins and better scalability prospect. What criteria should Ebersman use in selecting a location? 





Sense of Ownership: Genentech has a small family of 550 employees in Vacaville, and their level of commitment is impressive. If company adds more employees at the same location, the existing one may feel a loss in their criticality in their respective teams as members. A great leader can overcome this challenge, but the worry will be if the size gets too big. Specialized training: Right knowledge and experience are critical in running a plant and opening a plant in a location where people have the above-said things like Vacaville. This would help the company with better management and better products. The motivation for moving to a new location: Employees in Genentech work not because of the monetary benefits, but the work company does for their patients. And thus, finding a creative way to encourage employees to relocate is tough.





Cost savings vs Operating Efficiency: Adding new technology in their existing production plan can help in increasing the yield of protein at the same operating cost. But at the same time, maintaining operational efficiency will be a challenge. Management distraction: CCP2 is already in construction and starting construction of another plant CCP3 may increase the distraction of the higher authorities in the company as they would have to devote their precious time in whereabouts of the 2 plants and can lead to decrease in their efficiency, which can further increase if the plant is being constructed at a location far away from Vacaville.

 Should Ebersman move forward with CCP3 now? If not, when? Yes, Ebersman should move forward with CCP3 construction. 1) The future market looks good as per calculation by the company and Investment bank research analyst. The time a plant takes for operation is about 4-5 years, and further delaying of getting the product into the market would result in much higher losses of revenue and can have impact on the share price of the company. 2) The company is in testing phase of other medicines, and this plant can help in meeting the future demand of these medicines. 3) Delay in getting new products in the market because of production constraint could definitely result in losses of much larger scale, hence capacity expansion in the need of the hour keeping in mind the future market potential. 4) Even if the results of the tests in future do not match with the calculation of the company and Investment bank research analyst by a small margin, the company can still go on with production as they can store these medicines at lower temperatures for up to 4 years. 5) Even if company has thought of improving manufacturing process in current plant for higher yields the demand data available with us is not concreate and getting approval for this newer technology from FDA will be a problem as they are less familiar with newer technology.