Cost Control at Olive Pharmaceuticals - Assignment Example

? [Cost Control at Olive Pharmaceuticals] BSB115 - Management IN LISBON Word count: [1537] Cost Control at Olive Pharmaceuticals Introduction The objective of this report is to analyse the problem of controlling operational costs to maintain the profitability of the organization. The Lisbon branch is responsible for serving the markets of Western Europe and northern Africa, including the countries of Portugal, Morocco, Algeria, Tunisia and Spain. The Lisbon branch contributes 15% of the total revenues for the Olive Pharmaceuticals Company and hence is a critical part of the global strategy. Problem Definition Since the Eurozone debt crisis that affected Portugal since 2010, the pharmaceutical industry in general and Olive Pharmaceuticals have been experiencing reduced profitability. As a result, it has become difficult to stay within the annual operating budgets. As part of the 2011 IMF bailout package, the Portuguese government has instituted heavy reductions in public expenditure which includes the public health care system. Olive Pharmaceuticals has been affected because of the growing public debt of hospitals and the cuts in pharmaceutical expenditure by the government. In 2012, public hospitals owed €1.5 billion to international pharmaceutical companies. In 2013, the public pharmaceutical expenditure was further reduced by €333 million, which makes pharmaceutical expenditure just 1 percent of GDP (Feria, 2012). As a result, sales to state hospital pharmacies have declined by 10% over the past two years (Feria, 2012). At the same time, operational costs have not reduced proportionally because of increase in energy costs and imported raw materials. The business mission of Olive Pharmaceuticals is to provide high quality oncology pharmaceutical products at affordable prices to consumers through efficient operations and continuous research. This is achieved through goals of keeping operating costs low and maintaining supply chain efficiency. The situation has implications for planning and organizing decisions for Olive Pharmaceuticals as it influences the decision about investing in research or selling generic products. Secondly, the supply chain may have to be reorganized for greater operational efficiency. Situation Analysis Impact of the Situation on Planning Planning is defined as the management function related to the determination of organizational goals and objectives and identifying tasks and resources to achieve those goals (Hill and McShane, 2006). The goal of Olive Pharmaceuticals is to grow its market share and profitability by investing in research and efficient operations. Planning is conducted at different levels such as strategic planning, tactical planning and operational planning. The present situation has implications for planning at all levels. Strategic planning is concerned with decisions about which products to produce and which markets to serve (Carpenter, Bauer, & Erdogan, 2009). In the current situation, where the government is reducing expenditure on pharmaceutical products, the sales of oncology products will become expensive due to high costs. Rationing will further reduce profits while keeping costs the same. On the other hand, sales of generic drugs will increase due to lower prices to the consumer. The planning decisions to be made in this situation include the selection of whether to continue investment in researching new products or market generic drugs to reduce costs and increase sales. This would require careful analysis of the organizational mission and goals. Tactical planning is concerned with decisions made at the divisional level. These goals and plans are developed with a view to help the achievement of strategic level goals and plans (Daft, 2013). The challenge of reducing operational costs can be achieved through effective planning at the tactical level with the divisional managers assuming responsibility for staying within the operating budgets for their divisions. Finally, operational level planning is also relevant in the current situation because it can help the divisions and individual departments to meet performance and efficiency targets (Daft, 2013). Operating and marketing costs can be controlled by making appropriate decisions at the operational or departmental level. Goals and plans for achieving sales quotas and visits per sale can be developed to help the achievement of tactical and strategic level plans. Impact of the Situation on Organizing Organizing is the management function associated with arranging tasks and allocating material, financial, human and informational resources to each task (Kreitner & Cassidy, 2012). The current situation has implications for organizing at Olive pharmaceuticals because the required cost reductions and increase in efficiency can be achieved through better organization of tasks and resources. In other words, the implications for supply chain management at the company are quite significant as the pressure on reducing operating costs increases (Heizer & Render, 2010). In order to avoid salary pay cuts for all employees at the branch, the most important alternative is to make cost reductions by improvements in the supply chain. Organizational structure and culture are also important elements of the organizing function (Kreitner & Cassidy, 2012). The organizational structure for the branch is developed in line with the global structure for the company and its various branches. However, changes can be made where such changes can increase operating efficiency. Another important aspect of organizing is human resource management. Organizing efficiency can also be improved by redesigning jobs and compensation plans (Kinicki & Williams, 2010). All of these aspects of organizing can contribute to helping the organization deal with the current situation effectively. The current situation of reduced public expenditure on pharmaceutical products has implications for the organizing function at Olive Pharmaceuticals. The public sector is an important customer. However, recent reductions would mean necessitate reorganizing to maintain profitability of operations. The threat of pay cuts means that job design and supply chain improvements should be made to meet reduce costs and stay within the operational budgets. There is also the likelihood of job losses where costs cannot be reduced by other means. Impact of Contextual Factors The political environment in Portugal has a deep impact on the pharmaceutical industry. In recent years, the government has made some important legislation to facilitate e-commerce and reduce bureaucratic hassles for business. Competition has increased through liberalization and reduction in the size of the public sector (Feria, 2012). In terms of economic context, the debt crisis and the 2011 IMF package has brought about an increase in taxation and reduction in public expenditure. This is detrimental to the pharmaceutical industry as it makes the products expensive for the consumer. In 2013, the reduction in pharmaceutical expenditure by the government has been €333 million (Feria, 2012). The policy of favouring generic drugs also negatively affects the interests of Olive Pharmaceuticals. The distribution factor in the task environment is in a critical state for Olive Pharmaceuticals. Pharmacies in the public as well as private sector remain the biggest retailers for our products. The risk of shortages in the supply chain has been a persistent risk in recent years owing to the recession and heavy borrowing by pharmacies (Feria, 2012). The risk of more pharmacies closing down coupled with panic buying places greater risks on the operations of Olive Pharmaceuticals. In addition to these challenges, there is growing competition from the generic drugs segment which has been favoured by the regulatory changes. In 2012, prices of generic drugs fell by 20% (Research and Markets, 2012). Other similar changes include the greater streamlining in the public sector through the creation of central purchasing centres and electronic prescribing systems (Costa, 2012). Another risk factor in the task environment is the growing market for fake drugs (Feria, 2012). There is a risk that the market will grow faster with the difficulties for non-generic drugs and the supply chain challenges. There is a need to invest in awareness programs at the industry and government level to raise awareness about the risks of fake drugs and their harmful effects on the health of consumers. Conclusion To control costs in the current situation, changes are required in the planning and organizing functions. As the market for generic drugs is likely to grow in the forthcoming years as the country complies with the terms of the IMF, changes need to be made in the product development strategy. Similarly, the challenges for the supply chain of the company make it necessary to make changes in the organizing function and selection of distributors. New marketing and distribution channels may need to be developed as the trend of closure of pharmacies and centralized purchasing in hospitals continues in the short and long-term. Recommendations As the investment in research and provision of high-quality drugs is part of the organizational mission, it is not recommended to alter the strategy entirely. Dede (2012) states that pharmaceutical R&D in Portugal is extremely cost-effective. However, the product range should be expanded by including more generic drugs that can cater to the new regulations of the Ministry of Health. The product portfolio should be expanded during the short and long term by adding three generic drugs every year. This would require curtailing the research expenditure so that resources can be directed towards the manufacture of generic drugs for the contracted market. For greater operational efficiency, it is recommended that costs be reduced in order to comply with the pricing criteria of hospitals. This can be done by manufacturing generic drugs and reducing costs of packaging and distribution. Only key private pharmacies should be retained while relationships with public sector hospitals should be strengthened to benefit from the centralized purchasing practices. In addition, collaboration with other companies can help to benchmark best practices and reduce operational costs at Olive Pharmaceuticals. References Carpenter, M., Bauer, T., & Erdogan, B. (2009). Principles of management. Flat World Knowledge, Inc. Costa, H. (2012). The current state of the pharmaceutical industry in Portugal. European Industrial Pharmacists Group. [Online]. Retrieved from http://eipg.eu/wp-content/uploads/2013/07/Pharma-in-Portugal.pdf Daft, R. L. (2013). Management (11th ed.). Mason, OH: South-Western, Cengage Learning. Dede, A. (2012). Crisis threatens pharma. Chemistry & Industry, 76(8), 27. Feria, C. (2012). Tough times for pharma in Portugal. PM Live. Retrieved from http://www.pmlive.com/pharma_intelligence/tough_times_for_pharma_in_portugal_452813 Heizer, J., & Render, B. (2010). Principles of operations management (8th ed.). Upper Saddle River, NJ: Prentice Hall. Hill, C., & McShane, S. (2006). Principles of management. New York, NY: McGraw-Hill. Kinicki, A., & Williams, B. (2010). Management: A practical introduction (5th ed.). Burr Ridge, IL: McGraw-Hill. Kreitner, R., & Cassidy, C. M. (2012). Management. Mason, OH: South-Western, Cengage Learning. Research and Markets. (2012). Portugal Pharmaceuticals and Healthcare Report Q3 2012. Pharma Business Week. Read More