Page 10 - CIMA SCS Workbook November 2018 - Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

Deciding which factories to close

There are a number of issues to consider in deciding which 2 of the 3 current Cronland factories
should be closed.

Firstly, the purpose of closing 2 factories is to produce cost savings; how much will be saved by
Novak each year in closing each of the 3 current factories? It makes sense that the company
should save as much money as possible if it is to pursue this strategy.

Secondly, we should consider the age of each factory, together with the state of the plant in each.
Not only should we look to maximise saving of current costs, but also have an eye on what future
costs might need to be incurred. For example, if a production line is due to be replaced soon in
one location, this may make it more appropriate to choose that particular factory for closure.

Thirdly, we need to consider the specific pharmaceutical products made in each factory, and how
easy it would be to relocate production to somewhere abroad. Do any drugs have particular
manufacturing requirements? For example, if one of the Cronland factories specialises in drugs
that are administered via an intravenous drip, and there is no spare capacity or even similar
production methods elsewhere in the Novak network, this would strengthen the case for this
factory being kept.

Another factor is the length of patent protection left on the drugs produced at each location. As a
drug gets closer to being off-patent, so we might expect demand to fall as competitors launch
their own generic version. Lower demand will naturally lead to lower quantities of the Novak drug
being forecast for the near future, and so make a stronger case for that factory to be chosen.

In addition, the actual location of each factory should be considered. If, for example, one of our
factories is in an area that suffers higher than average levels of unemployment, the resistance
shown by Novak staff and the Cronland government is likely to be higher. This is because the
prospects for those employees in finding alternative employment are likely to be much lower than
elsewhere in the country, which naturally has political effects. Novak may find that its reputation
and ability to gain regulatory approval suffers as a result.

Any ongoing costs should also be factored in. For example, if a location has commitments under
lease agreements in respect of property or other assets, these will still need to be met even if
such assets are vacated or returned to the lessor.

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