The use of flexible manufacturing capacity in pharmaceutical product introductions

Chester G. Chambers, Eli M. Snir, Asad Ata

Research output: Contribution to journalArticlepeer-review

Abstract

This work considers the value of the flexibility offered by production facilities that can easily be configured to produce new products. We focus on technical uncertainty as the driver of this value, while prior works focused only on demand uncertainty. Specifically, we evaluate the use of process flexibility in the context of risky new product development in the pharmaceutical industry. Flexibility has value in this setting due to the time required to build dedicated capacity, the finite duration of patent protection, and the probability that the new product will not reach the market due to technical or regulatory reasons. Having flexible capacity generates real options, which enables firms to delay the decision about constructing product-specific capacity until the technical uncertainty is resolved. In addition, initiating production in a flexible facility can enable the firm to optimize production processes in dedicated facilities. The stochastic dynamic optimization problem is formulated to analyze the optimal capacity and allocation decisions for a flexible facility, using data from existing literature. A solution to this problem is obtained using linear programming. The result of this analysis shows both the value of flexible capacity and the optimal capacity allocation. Due to the substantial costs involved with flexibility in this context, the optimal level of flexible capacity is relatively small, suggesting products be produced for only short periods before initiating construction of dedicated facilities.

Original languageEnglish (US)
Pages (from-to)243-268
Number of pages26
JournalDecision Sciences
Volume40
Issue number2
DOIs
StatePublished - May 1 2009

Keywords

  • And Real Options
  • Flexible Capacity
  • Markov Decision Processes
  • Operations Strategy
  • Optimization
  • Pharmaceutical Manufacturing

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Strategy and Management
  • Information Systems and Management
  • Management of Technology and Innovation

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