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Homework answers / question archive / Comprehension Check 1) Make-Money Therapeutics (20 Points) You pulled of a corporate coup and have recently been appointed the youngest ever CEO of Make-Money Therapeutics

Comprehension Check 1) Make-Money Therapeutics (20 Points) You pulled of a corporate coup and have recently been appointed the youngest ever CEO of Make-Money Therapeutics

Operations Management

Comprehension Check

1) Make-Money Therapeutics (20 Points)

You pulled of a corporate coup and have recently been appointed the youngest ever CEO of Make-Money Therapeutics. Make-Money therapeutics is a research based pharmaceutical company that brings novel therapies to the market. Recent advances, in bioinformatics, and the deciphering of the human genome have provided pharmaceutical companies with a limitless library of potential compounds to be tested and brought to the market as drugs. However, before a drug can be sold it must undergo a series of development trials, mandated and monitored by the Food and Drug Administration (FDA). The drug development process at Make-Money has four stages:

Pre-clinical Research: In this stage, compounds are tested for desired therapeutic activity and safety in animals. Typically, only 10% of compounds that enter this stage survive and make it to the next stage.

Phase l Clinical Trials: Compounds which successfully pass pre-clinical trials can be tested in humans. This stage involves testing compounds for safety in small samples of healthy humans. Typically, 2 out of 3 compounds that undergo phase l clinical trials proceed to the next stage.

Phase II Clinical Trials: In this stage, compounds are tested for safety and efficacy in a small sample of patients. Typically, 3 out of 5 compounds that undergo this stage proceed to the next and final stage.

Phase III Clinical Trials: This is the final stage of clinical trials. The main objective in this stage is to verify the safety and efficacy of drugs in a large sample of patients. Typically, 5 out of 6 compounds that undergo this stage proceed successfully to the next stage.

Each of these stages requires a group of stage-specific scientists, biostatisticians, clinical sites, etc. Based on the current staff levels and resources at Make-Money Therapeutics, the Vice President of R&D estimates the available annual input capacity at each of the stages. These Capacities and the drug development process are illustrated in

Figure 1. Finally, the Vice President of Marketing estimates that each drug that is successfully brought to the market leads to average sales of $1.5 Billion per year.

                        Preclinical   1/10                Phase l    2/3     Phase ll  3/5     Phase lll

Capacity    300 Compounds/Year 9/10    35    1/3            15    2/5                12  1/6

FIGURE 1: THE DRUG DEVELOPMENT PROCESS

a) You need to provide the stock markets with a sales estimate for the next few years. What is your best assessment of the average annual sales? ** [8 points]

b) As is typical in a recessionary environment, drug sales at Make-Money continue to hold up strong despite all-round economic downturns. Thus, you have a generous cash-flow from your existing drugs. However, limited credit availability restricts your ability to acquire or merge with other companies. You are thus exploring the option of expanding in-house drug development capabilities. You would like to focus on increasing capacity at one stage. At what stage and by how much would you increase the capacity? ** [6 points]

c) As you were pondering and thinking about the long-road to building in-house capabilities, you run into your old MBA class mate at the money-bags private airfield. He is now managing a large private equity fund. He mentions that he would love to provide funding for acquisitions in recession-proof industries such as pharmaceuticals. The empire-builder in you is excited by this opportunity and you abandon all ideas of organic growth and start considering potential compounds, currently in-development, that you could acquire from other smaller pharmaceutical companies. You and your team develop a list of criterion. From the capacity of the drug development process standpoint, at what stage of development would your dream compound for acquisition be? Ignore any differences in the cost of acquisition. [6 points] **

2) Shouldice goes Global (20 Points)

Shouldice is considering opening a small clinic in Paris with 5 beds. The inter-arrival time between patient arrivals is 24 hours, on average, with a standard deviation of 24 hours. There is no indication of a systematic arrival pattern over the course of the day. Assume that, an incoming patient is admitted right away if there is a bed available. If there is no bed available, the patients are willing to wait until there is one. An admitted patient stays in the clinic, on average, for 2.5 days with a standard deviation of 1 day.

a) What is the average number of empty beds? (8 pts) *

b) How would the total time spent change if the branch decides to have all patients stay in the hospital for exactly 4 days? Assume that, if such a restriction is imposed, the average inter-arrival time will increase to 36 hours with a standard deviation of 36 hours. (12 pts) **

l. SHAKING UP THE DANCE WORLD [50 POINTS|]

Costume Gallery is a New-Jersey based catalogue retailer of dance costumes. These dance costumes are typically purchased by dance schools who further sell them to dance students. Dance performances are held in April, and demand for dance costumes is fully known in February. The value chain of the dance costume business is illustrated below:

Overseas                         Costume

Garment                           Gallery                              Dance Schools                                   Students

Manufacturers $7                          $30                                                  $35

A typical costume is purchased by Costume Gallery for $7 from overseas manufacturers (all costs inclusive), sold to dance schools for $30, who then sell it to students at $35. The timeline of activities in this industry is illustrated below:

Nov                     Dec                   Jan                            Feb                                    Mar                             April

Students                                  Overseas             Demand is realized                                                 Deliveries

Enroll in                                   Orders Must       Dance Schools Place

Classes                                     be Placed            final orders

Costume Gallery employs a team of fashion forecasters who continuously scan fashion and cultural trends. In January every year, this team gets together and develops a demand forecast. For a particular costume in the current catalogue, they estimate demand to be distributed normally with mean 5,000 units and standard deviation of 2,000 units. The costs and prices of this costume are in line with a typical costume described above. Further, we will assume that all units of this costume are sold through one particular dance school.

Conventional Business Model

1 Problems are rated for difficulty: * = Relatively easy, for first review of concepts; ** = Challenging, assumes good understanding of the concepts; *** = Advanced, assumes full understanding of the concepts and creativity in application.

A. Based on the forecasts provided by the team of fashion forecasters, how many units of this costume should costume gallery order from its overseas suppliers? [4 Points] *

B. What are Costume Gallery’s expected sales, expected leftover inventory and profits? [4 Points] *

C. What are the Dance school’s expected sales, expected leftover inventory and profits? [2 Points] *

Shakeup 1: Local Production

The management at Costume Gallery is pained by all their left-over inventory and by the additional costumes the dance school wants to buy but they can’t supply because of insufficient stock. They hire a consultant who advises them to contract some local production capacity for the month of March, in addition to continuing their overseas production. Local production costs $20 per costume (all inclusive). The timeline of the activities after this suggestion is implemented is illustrated below:

Nov                     Dec                   Jan                            Feb                                    Mar                             April

Students                                  Overseas             Demand is realized               Local                       Deliveries

Enroll in                                   Orders Must       Dance Schools Place            Production

Classes                                     be Placed            final orders

D. Based on the forecasts provided by the team of fashion forecasters, how many units of this costume should costume gallery order from its overseas suppliers? [4 Points] **

E. What are Costume Gallery’s expected sales, expected leftover inventory and profits? [4 Points] **

F. What are the Dance school’s expected sales, expected leftover inventory and profits? [2 Points] *

Shakeup 2: Advance Purchase Discounts

Costume Gallery is considering a new way of interacting with the dance schools. It is considering offering a novel scheme for the dance school, an advance purchase discount. Dance schools get a 10% discount for all orders placed by December 31°. The management at Costume Gallery thinks that as a result of the discount the dance school will place some of its orders by Dec 31°. In the past, dance schools placed orders only in February. They also speculate that dance schools will have a better idea of the demand for dance costume than costume gallery. In particular, they expect that the dance school’s forecast of demand at the end of December will be distributed normally with mean 5000 units but a standard deviation of only 500 units.

Finally, the forecast team feels its task for coming up with the forecast in January will be much easier if they had access to the early demand information, that is the number of orders placed in December. In particular, they estimate that if the dance school orders X units in the first order (December order), the final order (February order) from the dance school will be distributed normally with mean 5000 — X units and a standard deviation of just 100 units.

Nov

Dec

Jan

Feb

Mar

April

Students Enroll in Classes

Advance

Purchases by

Dance

Schools

Overseas

Orders Must

Be Placed

Demand is realized Dance Schools Place final orders

Local Production

Deliveries

 

G. On average, how many units should the dance school order at the end of December and how many units will it order in February? [8 points] ***

2This demand distribution is a forecast for the size of the full price orders from the dance school in February. It is an estimate of the demand from the dance school that will not be satisfied from the discounted order, taking into account the additional information that the forecasters gather from the first order and their subjective judgment on the expected evolution of the market in the intervening months.

H. How many units should Costume Gallery order from the overseas manufacturer and how many units does it expect to produce using the local source? [8 Points] ***

I. What are the Dance school’s expected profits under this new scheme? [4 Points] ***

J. What are Costume Gallery’s expected profits under this new scheme? [4 Points] ***

K. Reflection: Answer each of the following statements with a True or False. Correct answers earn two points. Incorrect answers make you lose one point. No answer earns zero points. No explanations are required. [max score 6 points, min score -3 points] **

l. The profits of Costume Gallery will decrease with local production in shakeup 1 (compared to the conventional business model) because it is producing some of the demand locally at high cost.

II. With shakeup 2, profits of Costume Gallery will decrease but the profits of the dance school will increase (both compared to the model with local production) because the dance school now gets a discount and costume gallery has reduced its average sales price.

III. With shakeup 2, profits of both Costume Gallery and Dance Schools will increase.

ll. BUSINESS MODEL INTUITION (20 POINTS)

A. Which of the following are good reasons to enter into long-term relationships to source components? [4 points]

i. You are unable to come up with detailed specifications for the components and must work closely with the suppliers to develop the components.

ii. The difference in costs of sourcing this component from different suppliers is large and it varies widely and unpredictably.

iii. It is impossible to verify the quality of the delivered components.

a. I only

b. ii only

c. iii only

d. I and ii only

e. ii and iii only

f. i and iii only

g. i, ii and iii.

B. You find yourself employed in an industry where the obsolescence rate is high and customers desire high levels of variety. Which of the following would be features of good business model? [4 points]

i. Building to Forecast and Global Sourcing i.e., sourcing from long-lead time locations.

ii. Product designs that allow for last minute customization and Building to Order.

iii. An additional second product line with flexible delivery times.

a. I only

b. ii only

c. iii only

d. I and ii only

e. ii and iii only

f. I and iii only

g. i, ii and iii.

C. A company has 10 resources (plants, employees, [T-hardware resources, etc.) and produces 10 products or services using these resources.

Compare the performance of the following alternate configurations. Explain your comparison [<100 words]. For bonus points, describe the business conditions where the performance differences will be most significant? [12 points]

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