Lorex Pharmaceuticals Case Study Analysis
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LOREX PHARMACEUTICALS CASE STUDY ANALYSIS
Problem:
Carter Blakely, quality assurance manager for the manufacturing department at Lorex Pharmaceuticals, is charged with determining the ideal volume level for a medicine the company is about to produce.
Lorex has estimated the profit margin of $158,347.00 for producing and selling one batch of Linatol. The profit margin was estimated based on the target fill line for each bottle which was arbitrarily set at 10.2 oz; this target was set to make sure that most bottles are filled with a minimum level of 10 oz. To accomplish this, Lorex utilizes a semiautomatic filling production line and an automatic filling mechanism to fill each bottle of Linatol at the target amount. In addition, the liquid volume of each bottle is measured by an electric sensor.
Before Lorex proceeds with the production of Linatol, the manufacturing division performed a filling-line test on 144 bottles to ensure that each bottle is filled with at least 10 oz. The test revealed that 12 out of 144 bottles contained less than 10 oz. The manufacturing division discovers that the under filled bottles have a potential to clog the storage area which causes interruption to the filling line. Furthermore, under filled bottles are being sold to a secondary market at a reduced price rather than the full price of $186.00/case, thus lowering the profit margin.
Solution:
Carter Blakely should determine the optimal target fill amount that reduces or eliminates the number of under filled bottles, and ensures Lorex maintains or exceeds a favorable gross margin of $158,347.00 per batch or $15,119,828 annually. To accomplish this, Blakely should compare different target fill amounts to determine the best combination of over and under filled bottles while reducing production cost.
After careful consideration, the optimal amount should be set at 10.4 oz. This amount provides the right balance between under filling bottles and over filling bottles. The set target amount of 10.4 oz yields a gross margin of $161,339.00, an improvement of $2,992.00 over the original estimated gross margin.
Evidence:
To arrive at the optimal target amount of 10.4 oz, comparisons of target fill amounts ranging from 10.2 to 10.5 oz are calculated using the results from the filling-line test sample population of 144 bottles. Then a gross margin comparison is conducted to confirm or reject the target fill amount findings.
Method for establishing the optimal target amount
The first step is to determine the minimum and maximum filling ranges by using the 1st, 2nd and 3rd standard deviations (Std Dev) of 0.16, which was calculated from the 10.2 oz fill average from the filling-line test sample results. This baseline filling range allows for a comparison of different target fill amounts. By specifically focusing on the 3rd Std Dev one can be 99.7% certain that the filled bottles will end up in the calculated range.
Next, Blakely applied the same method for the averages of 10.3, 10.4, and 10.5 oz (see exhibit 1). The Std Dev calculation shows the optimal target amount to be 10.5 oz, creating a range in which there will be no under filled bottles. But without the gross margin comparison, one cannot be so sure that its a sound business decision. Gross margin must also be considered to set the ideal target amount.
Gross margin comparison
Blakely also needs to verify that this new set target of 10.5 will be most profitable. A cost breakdown of each set target is presented (see exhibit 2). If more bottles are filled to an optimal level of 10 oz, then overhead, labor and packaging costs will be reduced. Look closely at the annual profit margins of 10.2, 10.3, 10.4, and 10.5 oz target amounts. The 10.4 target filling amount reduces the number of under filled bottles and increases the number of commercial cases that can be produced per year thus allowing the company to sell more bottles at the normal price of $186 per case. And in fact, the 10.4 target has an increased