Page 9 - CIMA SCS Workbook November 2018 - Day 2 Suggested Solutions

CIMA NOVEMBER 2018 – STRATEGIC CASE STUDY

Risks

There are, however, a number of risks that must be assessed before a final decision can be taken.

Firstly, how confident are we that the necessary surplus capacity to take on the production levels
currently seen in 2 of our factories exists elsewhere in the Novak network, in the necessary
locations? The aim is to produce cost savings by making more of our drugs in cheaper parts of the
world; do our current facilities in such locations actually have the plant and personnel needed to
increase their production levels to the extent required? Much of the benefit of relocating
production would be lost if we then have to invest further sums in extending factories, buying
new production equipment and recruiting new staff.

Secondly, how will the Cronland government react when it finds out that we are making perhaps
two thirds of our staff here redundant? Novak will still have 1 factory and a research centre in this
country, as well as any administrative/management presence, but there are still going to be a lot
of Cronland residents being made redundant due to the factory closures. This could lead to a loss
of privileged status in our resident country.

Thirdly, there could be a significant backlash from staff. Transferring production overseas cannot
happen overnight; it will require careful planning and management. Once the announcement has
been made about factory closures, there is a risk that morale will drop severely amongst those
who will lose their jobs, with a consequential risk that efficiency levels and quality standards will
fall. It is imperative that no lapses in quality occur in the pharmaceuticals industry, and so
minimising possible resistance to the news will be vital. There may also be a negative reaction
from the factory that will not be closed, as workers show sympathy for their colleagues.

Whilst there may well be a one-off injection of cash from closing the 2 factories, there will also be
closure costs to take into account. Redundancy costs, legal fees, agents’ costs in respect of asset
disposals, and the costs of transferring production to new locations will be expensive one-off
costs. It may also be argued that the value of the assets we look to sell will be limited because of
their specialised nature; by definition, the pharmaceuticals industry uses plant that has no fit
purpose for most other areas of manufacturing, and Novak may have difficulty finding a buyer at a
reasonable price.

Finally, the actual transfer of production will need to be managed very carefully. If the 2 factories
that are ear-marked for closure are the only locations where certain drugs are currently made,
there will be no “safety net” in terms of alternative supplies should there be a delay in these
drugs being made to satisfactory standards elsewhere. This would then run the risk of delays in
our supply to customers, with the consequential impact on patient welfare and sales.

Preliminary conclusion

A full evaluation of all the above benefits and risks should be carried out before a firm decision is
made. The financial benefits of closing 2 Cronland factories should not be the sole issues taken
into account; there are many non-financial factors to consider as well.

70 KAPLAN PUBLISHING