LOREX PHARMACEUTICALS

Carter Blakely, manager of quality assurance for the manufacturing division of Lorex
Pharmaceuticals, was pleased with the progress made so far toward the production of
the companys newest product, Linatol. Developed for the treatment of high blood
pressure developed and patented by Lorex several years ago, Linatol was a highly
promising medicine.
After eight years of thorough product testing, including clinical studies of the drugs
effectiveness on humans, the U.S. Food and Drug Administration (FDA) had approved
Linatol only a week ago. The manufacturing division had been able to prepare a
production line during the past week and now one-shift production was scheduled to
begin on Monday. The marketing division at Lorex had decided that the initial offering
of Linatol would be in sealed 10-ounce
bottles, packaged in cases of 12 bottles each. The wholesale price had been set at $186
per case.
The one task remaining for Blakely on this Friday afternoon was the selection of a
target amount to which each of the 10-ounce bottles of Linatol would be filled.

The Manufacturing of Linatol
Linatol was blended in 5,000-liter batches using a process and formula that were kept
confidential by the company. The product was then bottled on one of the companys
semiautomatic filling lines. Those lines consisted of an automatic filling mechanism for
liquids, a capping and sealing component, and an electronic sensor capable of
measuring the volume of liquid in each bottle. The bottles, when filled properly, were
conveyed to a packaging machine that would load and seal cartons of 12 bottles each.
At top speed, the line chosen for Linatol could fill and package 1,000 bottles per hour.
Because of unavoidable delays and setup requirements, the production rate was
expected to average 500 cases over an eight-hour shift.
Those rates were slower than most of the other filling lines in use, but the relatively low
production volumes of Linatol dictated that it be filled on one of the older, slower lines,
which was not needed for any other product.
The entire line was operated by two employees who earned $12.80 per hour, including
fringe benefits. Every product was charged an overhead burden to cover the huge
expense of maintaining an antiseptic filling room. For the line on which Linatol would
be bottled, the overhead was charged at a rate of $89.50 per hour. The cost of the
materials used by the filling line (bottles, caps, cap seals, labels, and packaging) was
estimated to be $1.10 per bottle.
Those bottles that were not filled to the 10-ounce requirement were identified by the
electronic eye and automatically directed for special handling. A team of filling-room
attendants periodically labeled the under filled bottles as seconds and hand-packaged
them for sale to secondary markets (such as government hospitals) at 80% of the normal
price of $186 per case.
Although those attendants spent most of their time hand-packaging under filled
products, a variety of other activities also kept them busy. Each attendant was capable
of labeling and packaging about 12 cases per hour. Attendants made $8.50 per hour,
including fringe benefits.
The initial production of Linatol had been scheduled for one 40-hour-per-week shift on
the filling line for the foreseeable future. The actual batch blending of Linatol would be
scheduled accordingly. An approximate operating profit statement for Linatol (prepared
prior to the filling-line test) is given in Exhibit 1.

The Filling-Line Test
Prior to the startup of production of a new product, the process capability of the filling
line was testedfirst with an inexpensive liquid with physical properties similar to the
product and finally with the product itself. Once the filling process was perfected,
samples of the filled bottles were individually measured. The results of 144 bottles of
Linatol filled during the test are given in Exhibit 2. This exhibit also shows which of
the 144 bottles were selected by the electronic sensor as under filled. For that test, the
filling mechanism was adjusted to fill to a target of 10.2 fluid ounces. The consistency
of amounts in the 144 test bottles left little doubt that the fill mechanism could be set to
any desired target.

Setting the Fill Target
It now remained for Carter Blakely to determine the fill target. The 10.2-ounce target
chosen for the test was arbitrary, and certainly no economic justification existed for
keeping that target. A rule often used for setting fill targets was to pick a target that was
one standard deviation above the required amount. The relevant standard deviation was,
of course, the standard deviation of the amounts placed in individual bottles. However,
a one standard deviation rule, although cloaked with a certain amount of statistical
justification, also seemed to ignore the peculiar economics associated with each filling
situation. In fact, a one standard deviation rule in the past had led to several occasions
when the buffer storage area for under filled bottles had become clogged with rejected
bottles, which caused a temporary stoppage of the entire filling line.


















FARMACUTICOS Lorex

Carter Blakely, director de aseguramiento de la calidad para la divisin de fabricacin
de Lorex Pharmaceuticals, se mostr satisfecho con los progresos realizados hasta ahora
hacia la produccin del nuevo producto de la compaa, Linatol. Desarrollado para el
tratamiento de la presin arterial alta desarrollada y patentada por Lorex hace varios
aos, Linatol era un medicamento muy prometedor. Despus de ocho aos de pruebas
de productos completa, incluyendo estudios clnicos de la droga eficacia en los seres
humanos, la Food and Drug Administration (FDA ) haba aprobado Linatol hace slo
una semana. La divisin de fabricacin haba sido capaz de preparar una lnea de
produccin durante la ltima semana y ahora la produccin de un turno fue programada
para comenzar el lunes. El marketing dela divisin en Lorex haba decidido que la
oferta inicial de Linatol estara en 10 onzas sellados botellas, envasado en los casos de
12 botellas cada una. La venta al por mayor precio tena ha establecido a $ 186 por caso.
La tarea que queda por Blakely en este viernes por la tarde fue la seleccin de un
importe objetivo a la que cada una de las botellas de 10 onzas de Linatol seran
llenados.

La fabricacin de Linatol
Linatol se mezcl en lotes de 5.000 litros utilizando un proceso y la frmula que se
mantiene confidencial por la empresa. El producto se envasa en una de la empresa
lneas de llenado semiautomticas. Esas lneas consistieron de un mecanismo de llenado
automtico para lquidos, un componente de taponado y sellado, y un sensor electrnico
capaz de medir el volumen de lquido en cada botella. Las botellas, cuando se llena
correctamente, fueron transmitidas a una mquina de envasado que cargar y sellar cajas
de cartn de 12 botellas cada una. A toda velocidad, la lnea elegida para Linatol podra
llenar y envasar 1.000 botellas por hora. Debido a los retrasos inevitables y
configuracin requisitos, se espera que la tasa de produccin a un promedio de 500
casos ms de un turno de ocho horas. Esas tasas fueron ms lentos que la mayora de las
otras lneas de llenado en uso, pero la relativamente
baja produccinvolmenes de Linatol dictada que que ser lleno en uno de la ms
viejo, ms lento lneas, which no era necesaria para cualquier otro producto.



LOREX PHARMACEUTICALS
Carter Blakely, Gerente de aseguramiento de calidad de la divisin de fabricacin de
Lorex Pharmaceuticals, estaba satisfecho con los progresos realizados hasta ahora que
hacia la produccin de Linatol, el producto ms nuevo de la empresa. Desarrollado para
el tratamiento de la hipertensin arterial desarrollada y patentada por Lorex hace varios
aos, Linatol fue una medicina altamente prometedora. Tras ocho aos de pruebas de
productos completa, incluyendo los estudios clnicos de eficacia del medicamento en
seres humanos, el U.S. Food y Drug Administration (FDA) ha aprobado Linatol hace
slo una semana. La divisin de fabricacin haba sido capaz de preparar una lnea de
produccin durante la semana pasada y ahora uno-turno de produccin estaba
programado para comenzar el lunes. La divisin de marketing de Lorex haba decidido
que la oferta inicial de Linatol sera en sellado de botellas de 10 onzas, envasadas en
cajas de 12 botellas cada uno. El precio haba sido fijado en $186 por caja. La uno tarea
restante para Blakely este viernes por la tarde fue la seleccin de una cantidad de blanco
para que cada una de las botellas de 10 onzas de Linatol se llenara.

La fabricacin de Linatol
Linatol fue mezclado en lotes de 5.000 litros usando un proceso y una frmula que
mantuvieron confidenciales por la empresa. El producto fue entonces embotellado en
uno de semiautomtica de la empresa lneas de llenado. Esas lneas consistieron en un
mecanismo de llenado automtico de lquidos, un componente de tapado y sellado y un
sensor electrnico capaz de medir el volumen de lquido en cada botella. Las botellas,
cuando llen correctamente, fueron transportadas a una mquina de envasado que carga
y sellar cajas de 12 botellas cada uno. A toda velocidad, la lnea elegida para Linatol
podra llenar y paquete de 1.000 botellas por hora. Debido a demoras inevitables y los
requisitos de configuracin, la tasa de produccin se esperaba en un promedio de 500
casos durante un turno de ocho horas. Esas tasas eran ms lentas que la mayora de las
otras lneas de llenado en uso, pero los volmenes de produccin relativamente bajos de
Linatol dictaron que se llena en una de las lneas ms viejas, ms lentas, que no era
necesario para cualquier otro producto. Toda la lnea era operada por dos empleados que
ganaron $12,80 por hora, incluyendo beneficios adicionales. Cada producto fue acusado
una carga area para cubrir el enorme gasto de mantener una sala de llenado antisptico.
Para la lnea en que Linatol podra ser embotellada, la sobrecarga fue acusada en una
tasa de $89,50 por hora. El costo de los materiales utilizados por la lnea de llenado
(botellas, tapas, tapa juntas, etiquetas y embalajes) se estimaba en $1,10 por botella.
Esas botellas que no llenaron el requisito de 10 onzas fueron identificadas por el ojo
electrnico y automticamente dirigidas para un manejo especial. Un equipo de
asistentes de sala de llenado etiquetado peridicamente el bajo llenaban botellas como
segundos y mano en envases para la venta a mercados secundarios (por ejemplo,
hospitales pblicos) en el 80% del precio normal de $186 por caja. Aunque los
asistentes pasaron la mayor parte de su tiempo mano-embalaje bajo productos rellenos,
una variedad de otras actividades tambin los mantuvo ocupados. Cada asistente era
capaz de etiquetado y envasado de 12 casos por hora. Los asistentes hicieron $8,50 por
hora, incluyendo beneficios adicionales. La produccin inicial de Linatol haba sido
programada para un turno de 40 horas por semana en la lnea de llenado en el futuro
previsible. El lote actual mezcla de Linatol se programar en consecuencia. Una
declaracin de beneficio operativo aproximado para Linatol (preparado antes de la
prueba de la lnea de llenado) se da en exposicin 1.

Lnea de llenado y Prueba
Previa a la puesta en marcha de la produccin de un nuevo producto, se evalu la
capacidad de proceso de la lnea de llenado, primero con un lquido con propiedades
fsicas similares al producto barato y finalmente con el mismo producto. Una vez que se
perfeccion el proceso de llenado, muestras de las botellas llenas individualmente
fueron medidas. Los resultados de 144 botellas de Linatol llenado durante la prueba se
dan en exhibicin 2. Esta exposicin muestra tambin que de las 144 botellas fueron
seleccionados por el sensor electrnico lleno como debajo. Para esa prueba, el
mecanismo de llenado se ajust para llenar con un objetivo de 10,2 onzas fluidas. La
consistencia de las cantidades en las botellas a prueba de 144 dej pocas dudas de que el
mecanismo de llenado puede establecerse en cualquier destino deseado.

Fijar el objetivo de llenar
Ahora permaneca para que Carter Blakely determinar el destino de relleno. El objetivo
de 10,2 onzas elegido para la prueba era arbitrario, y sin duda no existi ninguna
justificacin econmica para mantener ese objetivo. Una regla de uso frecuente para
objetivos de relleno de ajuste fue a buscar un objetivo que fue una desviacin estndar
por encima de la cantidad requerida. La desviacin estndar relevante fue, por supuesto,
la desviacin estndar de los montos colocados en botellas individuales. Sin embargo,
una desviacin estndar de una regla, aunque camuflados con cierta justificacin
estadstica, tambin pareca ignorar la peculiar economa asociada con cada situacin de
relleno. De hecho, una desviacin estndar de una regla en el pasado haba conducido a
varias ocasiones cuando el rea de almacenamiento de memoria intermedia para bajo las
botellas llenas haba obstruirse con botellas rechazadas, que provoc un paro temporal
de la lnea de llenado todo.



El caso:
Lorex Pharmaceuticals ha llegado con un nuevo producto, Litanol. Este medicamento
parece tener un gran potencial que se desarrolla para el tratamiento de la hipertensin
arterial. La compaa ha creado una lnea de fabricacin y produccin se supone que
comenzar el prximo lunes. Los siguientes puntos son considerados al analizar el
caso:

1.El equipo de marketing ha decidido vender Litanol en botellas de 10 onzas sellados,
envasados en cajas de 12 botellas cada una con un precio al por mayor de US $ 186
por caso.
2. La capacidad de produccin es de 1.000 botellas por caja, pero debido a ciertas
razones inevitables, Lorex est produciendo Litanol a un promedio de 500 casos ms
de un turno de ocho horas.
3. Toda la lnea fue operado por dos empleados que se les paga $ 12.80 por hora.
4. Otros cargos incluyen $ 89.50 por hora para los gastos generales y el llenado $ 1.10
por botella.
5. Botellas llenas de menos de 10 oz se rechazan y se venden el 80% del precio
normal.
6. Asistentes para embalaje secundario se les paga $ 8.50 por hora.
7. Una muestra de llenado de proceso y de resultados de la prueba se da en el anexo
2, con la meta de 10,2 fl oz.
8. Los detalles de los costos de exhibicin 1 se utilizan para conjeturar por el costo de
otras muestras previstas (10.3, 10.4, 10.5 y 10.6 onzas) de muestras.

El tema:
Recientemente, hubo un caso de obstruccin de rea de almacenamiento para
botellas no rellenos debido a la inesperada bajo de llenado. Esto fue al parecer debido
a una desviacin estndar permitida por encima de la cantidad necesaria de 10 oz.

Alternativas:

1.Podemos revisar el objetivo de llenado de 10,2 a reducir el no de bajo botellas llenas
sin comprometer los mrgenes brutos. Varios objetivos de llenado se han resuelto en
la prxima pgina
2. Podemos especular bajo el no de botellas llenas mediante el estudio de la
probabilidad de ocurrencia de llenado bajo durante un perodo. En consecuencia, el
rea de almacenamiento de evacuacin puede ser programado para evitar la
obstruccin Anlisis: Vamos a suponer la desviacin estndar a ser el mismo (0,16)
para todos los objetivos de llenado. Esto se justifica porque Volatilidad


Case 34: Lorex Pharmaceuticals
Executive Summary:
Lorex Pharmaceuticals had come up with a new product, Linatol. Carter Blakely,
manager of quality assurance for the manufacturing division, was pleased with the
progress made thus far. Linatol was a highly promising medicine for the treatment of
high blood pressure developed and patented by Lorex several years ago (Bodily,
Carraway, Frey, & Pfeifer, 1998). After 8 years of thorough testing and clinical trials,
the FDA had finally approved Linatol. Manufacturing had been scheduled to begin the
following Monday. The marketing division had decided to sell Linatol in sealed 10-
ounce bottles, packaged in cases of 12 bottles each with a wholesale price of $186 per
case.
The production capacity was 1000 bottles per case but because of unavoidable
circumstances, Lorex began producing Linatol at an average of 500 cases over an eight-
hour shift. The entire line was operated by two employees who earned $12.80 per hour.
Other charges included $89.50 per hour for overheads and filling line of $1.10 per
bottle. Those bottles filled with less than 10 ounces were rejected and sold for 80% of
the normal price. Attendants for this secondary packaging were only paid $8.50 per
hour. A sample of filling process and test results is given in exhibit 2, with target of
10.2 fluid ounces. The cost details from exhibit 1 are used to guesstimate for cost of
other predicted samples (10.3, 10.4, 10.5 and 10.6 ounce samples).

Decision Problem:
On occasion, Lorex has experienced a case of clogged storage due to underfilled bottles.
This had taken place because of the one standard deviation allowed above the required
amount of 10 ounces. The current challenge presented in this case pertains to finding a
balance between maximizing revenue and controlling costs. To date, the only fill rate
that had been examined was 10.2 ounces. This target fill rate was chosen randomly
during the filling line test and no data existed for keeping this target. Basically, Mr.
Blakely needs to determine the fill target.
Decision Alternatives & Evaluation:
If we work with the varying target fill rates by calculating the quantity of bottles that
would be filled correctly, then subtracting the costs from the revenue, the performance
measure of contribution per case can be found. Please see the contribution per case
calculations shown in Exhibit 1 for further details.
Based on the data from the filling line test, calculations were performed on target fill
rates from 10.0 ounces up to 10.5 ounces. These calculations can be seen below in
Exhibit 2. If Blakely is to accurately measure performance, he must first step determine
which variables or costs would be relevant. Such as packaging cost per case, active
ingredient cost per case, and rework cost per case. These variables were estimated based
on the effect they would have on the decision variable, which in this particular case
happens to be the target fill rate. Packaging cost per case was the only cost that was not
calculated because the same amount of packaging was used regardless of the amount of
medication dispensed in each bottle. The active ingredient cost per case increased as the
target fill rate increased. In addition, the rework cost per case decreased as the target fill
rate increased.
For each target fill rate, the amount of bottles filled correctly had to be determined. This
calculation provided a breakdown between cases that could be sold for the full amount
of $186 and cases that sold as seconds. These cases were sold for 80% of the full price
which when calculated was $148.80. Revenue per case continued to grow as the target
fill rate increased. The blending which included $67,662 of active ingredients per 5000
liters, and the blending labor of $432 per 5000 liter batch, the cost per ounce of
medication came to be approximately $0.40. Based on the secondary labor cost of $8.50
per hour at 12 cases per hour, the input for rework cost per case was approximately
$0.70 per case. Contribution per case was derived by subtracting revenue from the
costs. The contribution per case was the performance criteria that our decision was
based on.
A balance between revenue and cost can be seen at a target fill rate of 10.4 ounces per
bottle. The revenue per case is the greatest when the bottles are filled to 10.5 ounces;
but the resulting increase in the active ingredient cost produces a lower contribution per
case. The recommendation is to use a target fill rate of 10.4 ounces per bottle. At the
outset there will be an increased cost of active ingredients but in the long run the
savings found in the small cost to rework each case will prove to be beneficial and
produce the maximum contribution per case.
Exhibit 1


Exhibit 2
Probability of Correct Fill
Z = 10.0 10.0/0.16 = 0 Z = 0.50
Z = 10.0 10.1/0.16 = -0.625 Z = 0.735
Z = 10.0 10.16/0.16 = -1.0 Z = 0.85
Z = 10.0 10.2/0.16 = -1.25 Z = 0.894
Z = 10.0 10.3/0.16 = -1.88 Z = 0.969
Z = 10.0 10.4/0.16 = -2.5 Z = 0.994
Z = 10.0 10.5/0.16 = -3.125 Z = 0.999
Revenue/Case
0.5($186/case) + 0.5(148.80/case) = $167.40
0.74($186/case) + 0.26(148.80/case) = $176.33
0.85($186/case) + 0.15(148.80/case) = $180.42
0.89($186/case) + 0.11(148.80/case) = $181.91
0.97($186/case) + 0.03(148.80/case) = $184.88
0.99($186/case) + 0.01(148.80/case) = $185.63
0.999($186/case) + 0.001(148.80/case) = $185.96
Active Ingredient Cost
(Cost/5000L batch = $67,662) + (Cost Blending Labor/5000L batch = $432)/(5000L or
169,088 oz) = $0.4027/ounce
12 bottles @ 10oz = 120.00oz/case 120.00oz ($0.4027/oz) = $48.32
12 bottles @ 10.1oz = 121.20oz/case 121.20oz ($0.4027/oz) = $48.81
12 bottles @ 10.16oz = 121.92oz/case 121.92oz ($0.4027/oz) = $49.10
12 bottles @ 10.2oz = 122.40oz/case 122.40oz ($0.4027/oz) = $49.29
12 bottles @ 10.3oz = 123.60oz/case 123.60oz ($0.4027/oz) = $49.77
12 bottles @ 10.4oz = 124.80oz/case 124.80oz ($0.4027/oz) = $50.26
12 bottles @ 10.5oz = 126.00oz/case 126.00oz ($0.4027/oz) = $50.74
Rework Cost/Case
Each worker can repackage 12 cases per hour @ $8.50 per hour
$8.50/12 cases = $0.708/case
At 10.0oz fill rate 50% of cases require rework: 0.5($0.708/case) =$0.354/case
At 10.1oz fill rate 26% of cases require rework: 0.26($0.708/case) =$0.18/case
At 10.16oz fill rate 15% of cases require rework: 0.15($0.708/case) =$0.11/case
At 10.2oz fill rate 11% of cases require rework: 0.11($0.708/case) =$0.08/case
At 10.3oz fill rate 3% of cases require rework: 0.03($0.708/case) =$0.02/case
At 10.4oz fill rate 1% of cases require rework: 0.01($0.708/case) =$0.01/case
At 10.5oz fill rate < 1% of cases require rework: 0.001($0.708/case) =$0.00/case
Contribution/Case
10oz fill rate = $167.40 ($48.32 + $0.35) = $118.72
10.1oz fill rate = $176.33 ($48.81 + $0.18) = $127.34
10.16oz fill rate = $180.42 ($49.10 + $0.11) = $131.21
10.2oz fill rate = $181.91 ($49.29 + $0.08) = $132.54
10.3oz fill rate = $184.88 ($49.77 + $0.02) = $135.09
10.4oz fill rate = $185.63 ($50.26 + $0.01) = $135.36
10.5oz fill rate = $185.96 ($50.74 + $0.00) = $135.22

References
Bodily, S. E., Carraway, R. L., Frey, J. S., & Pfeifer, P. E. (1998). Quantitative Business
Analysis: Text and Cases. New York: McGraw Hill Companies.

Honor Statement
Dallas Baptist University
With this case study I hereby adhere to both the academic and ethical standards
implemented by the University Honor Code, and further, by the professor, and fellow
classmates.
Keisha Williamson