A model based on total cost and manufacturer performance to evaluate a product as well as possible cost reductions

University essay from Linköpings universitet/Logistik- och kvalitetsutveckling; Linköpings universitet/Logistik- och kvalitetsutveckling


Omega Pharma is a distributer of over the counter products, selling thousands of products produced at more than 200 manufacturers and sold in most European countries. The company was founded in Belgium in 1987 and has since then had a high market focus and expanded through acquisitions of brands and products. The company has in recent years started working towards centralization and supplier base management. A project team has been set up to work strategically by choosing key manufacturers and by reducing the supplier base. A first step in this is to look more closely at products with a low turnover and that are not strategically important in order to evaluate if the product is profitable and which products that could be moved to other manufacturers or cancelled from the portfolio. Therefore the purpose of the study is to:

Create an evaluation model based on revenue, total cost and manufacturer performance to evaluate a product and if cost reductions can be achieved by ending the production of the product or moving the product to a different manufacturer.

A four step approach for analyzing total cost was followed in order to, in a structured way, create the model and identify the relevant elements related to revenue, total cost and manufacturer performance that were to be present in the model. The four steps were:

  1. In a first step elements and costs were identified that might be relevant for the model. This was done based on previous research, holding interviews at the company and reviewing documents.
  2. The second step was to adapt the elements to the model.
  3. In the third step, it was decided how the elements and costs that were to be in the model would be calculated and presented as well as looking into how the model would be built.
  4. The fourth step consisted of doing test runs and a sensitivity analysis to test the robustness of the model.

The result handed over to the company is in the form of the evaluation model created based on the above stated purpose. Within the model, there are 4 manufacturer performance parameters and 1 for revenue. When it comes to costs, the amount varies depending on the case analyzed. To evaluate product profitability there are 7 cost elements containing 20 identified costs. When evaluating moving a product to another manufacturer there are the same costs, however an additional element for transfer is added containing 5 costs. For the situation ending a production, there are 2 costs. In order to facilitate the use of the model, estimations were done to the costs to the extent possible. From test runs the model was further adapted to the company as it was identified what values connected to a product where possible for the user to find in the system and in what units of measure. The sensitivity analyses showed that none of the estimated values would, if the estimation was not accurate, affect the evaluation of the product. They could however affect the cost element of that cost.

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