Client Name

Herbion Pharma

Faculty Advisor

Dr. Fawad Ahmed

SBS Thought Leadership Areas

Investment Decision Making

SBS Thought Leadership Area Justification

The ELP is categorized as part of the Investment Decision Making area of IBA Suleman Dawood School of Business (IBA SBS, 2024). In manufacturing, cost flow and overhead allocation frameworks are essential in driving both investment and operational decisions. Understanding how to accurately compute product costs on a per unit basis informs decisions on the direction and financing of investments, management of product lines, and the pricing of such product lines, all of which are investment decisions.

Aligned SDGs

GOAL 9: Industry, Innovation and Infrastructure

Aligned SDGs Justification

Industry, Innovation and Infrastructure, the cost flow framework emphasizes the Korangi Plant`s operational efficiency and cost management. Management's proficiency in cost control reflects the foundations of sustainable industry, as it allows management to recognize inefficiencies and waste to reallocate and utilize resources optimally. This increases the overall resilience of an industry and its capacity for innovation.

NDA

No

Abstract

This report incorporates a detailed Cost Flow Analysis for the Korangi Plant of Herbion Naturals, and is the first of its kind as part of the Experiential Learning Project (ELP) at the Institute of Business Administration (IBA) Karachi, and is done under the guidance of Dr. Fawad. The Korangi Plant, comprising of three major dosage forms – Capsules, Granules, and Syrup, involves a similar Phase I Extraction for all three, and subsequent operations become separate for all the forms.Thus, the outcome is a shared-cost complexity that is structurally intricate for all three forms.

The aim was to capture the whole transformation and migration of manufacturing costs, from procurement of raw materials, to various stages of manufacturing to the Finished Goods and ultimately, to the Cost of Goods Sold (COGS). This included visits to the plant, documenting process flows, and interviewing employees from the Finance, Production and Operations departments. The framework relied on the activity-based costing (ABC) techniques for the construction of a detailed cost flow, alongside the Traditional Overhead Rate for the integration of plant-specific overheads.

Interviews and site inspections revealed five major gaps in cost management. The first was the fact that the first 7-stage shared extraction process had no formal method for apportioning the various product lines, resulting in product cross-subsidization. The second was that the Granules line, which had three separate drying operations in 11 stages, absorbed a lot of the overheads for electricity and machine time which went unallocated at the plant level, due to cost pooling. The third was that the dedicated chiller for the Syrup line also absorbed overhead costs which should have remained within that line, due to a lack of cost center. The fourth was that the overheads for QA, which were absorbed at each of the stages, also remained unallocated. Finally, the various packaging components of the product, which included labeling, packing inserts, and outer cartons, were also undeservedly classified as indirect materials.

Five practical suggestions are offered. These include formal cost apportionment, with volume extracted as the cost base; establishment of a separate chiller overhead pool; QA time tracking by stage; the addition of energy sub metering to granulation dryers; and a change to traceable packaging materials, to treat them as Direct Materials. Application of the suggested system will allow management at Herbion to develop per unit costs of products, enhance the assessment of profitability by product line, and provide a basis for operational and pricing decisions, backed by the appropriate level of data.

Document Type

Restricted Access

Document Name for Citation

Experiential Learning Project

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