OVERVIEW
- Jorge, the general manager of Liderm had requested a management meeting to discuss the prospects of Micoderm, The product, which at the time was barely profitable, was losing money in 2010.
- In general, medications could only be purchased in pharmacies with a medical prescription (written by a licensed doctor, whether public or private) or consumed in hospitals and health centers. However, in a few cases, well known, low-risk medications could be obtained without prescription. Micoderm was among these products: although a medication, it could be purchased in pharmacies without a prescription.
- In December 2004, LIDERM requested a selling price increase on the basis of an increase in costs. The request was rejected. LIDERM executives feared that if it were requested again, the Ministry of Health might review the status of Micoderm as part of the SSRS and decide that its modest treatment properties did not justify inclusion in the SSRS.
- Fifty per cent of Micoderm revenue came from the SSRS and 40% from purchases with prescriptions from private doctors and OTC sales. The remaining 10% was directly sold to and dispensed by hospitals and health centers.
- It was expected that manufacturing costs would increase in the following years at an annual rate of 3% and that the manufacturer would pass on these increases to LIDERM.
DECISION PROBLEM
The management of Liderm has to decide what to do about Micoderm, the product is making a loss due to a 3% annual increase in manufacturing cost and they are unable to increase the price due to its inclusion in the SSRS
OBJECTIVE
The Objective is to ensure that Liderm no longer loses money from the sales of Micoderm.
ALTERNATIVES
- Request a price increase from SSRS
- Leave SSRS and increase price
- Maintain status quo of absorbing the losses
CRITERIA
| Criteria | Leave SSRS | Request price | Maintain Status quo |
| Impact on the sales of other products | There should be a negative impact but difficult to quantify | No impact | No impact |
| Impact on the sales of Micoderm | Sales reduction | Absorb loses | |
| Impact on the company’s reputation | Negative impact: perceived as greed | No impact | No impact |
| Impact on users of Micoderm | Reduced product loyalty | No impact | No impact |
A TABLE SHOWING THE PROJECTED MANUFACTURING COST AT 3% ANNUAL INCREASE
| Yrs | PROJECTED INCREASE IN COST OF PRODUCTION | |
| Annual Cost of Production | Percentage increase | |
| 1 | 1.69 | 1.03 |
| 2 | 1.74 | 1.03 |
| 3 | 1.79 | 1.03 |
| 4 | 1.85 | 1.03 |
| 5 | 1.90 | 1.03 |
| 6 | 1.96 | 1.03 |
| 7 | 2.02 | 1.03 |
| 8 | 2.08 | 1.03 |
| 9 | 2.14 | 1.03 |
| 10 | 2.21 | 1.03 |
| 11 | 2.27 | 1.03 |
| 12 | 2.34 | 1.03 |
| 13 | 2.41 | 1.03 |
| 14 | 2.48 | 1.03 |
| 15 | 2.56 | 1.03 |
| NEW LSP IMPACT ON SALES ANALYSIS TABLE | |||
| Optimistic | Normal | Pessimistic | |
| % Decrease in Sales | 20% | 40% | 58% |
| New Price € | 2.5 | 2.5 | 2.5 |
| Volume | 1,756,800 | 1,317,600 | 922,320 |
| Sales | 4,392,000 | 3,294,000 | 2,305,800 |
| Manufacturing cost | 2,968,992 | 2,226,744 | 1,558,721 |
| Profit | 1,423,008 | 1,067,256 | 747,079 |
RECOMMENDATIONS
- Liderm should present its manufacturing cost to the ministry of health. They have a chance because the committee works with evidence.
- Liderm should propose a selling price of €2.5 because this covers future years manufacturing costs.
- Liderm’s sales team needs to intensify the marketing of Micoderm toward younger doctors.
DECISION
Liderm should re-submit a proposal for a new lab selling price of €2.5 with financial statement showing losses as a result of cost of production higher than lab selling price, if request is not granted, Lidrem should take Microdem out of SSRS and still sell at the new proposed price.
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