Optimal contract selection for contract manufacturing organizations in the secondary pharmaceutical industry

Abstract

During the last two decades, an increasing number of large pharmaceutical companies have decided to outsource part of their operations to reduce costs and mitigate their risk exposure. Contract Manufacturing Organizations (CMOs) utilize their facilities to manufacture products for multinational pharmaceutical companies on a contract basis. These organizations must define which contracts to accept to maximize their profit while considering their risk tolerance. This work presents an integrated tactical planning and medium-term scheduling framework for the optimal contract appraisal problem of Contract Manufacturing Organizations in the secondary pharmaceutical industry under demand uncertainty. An aggregated MILP-based planning model is proposed, along with a general precedence MILP model for the scheduling of multi-stage, multiproduct, batch industries. Production targets are defined in the planning decision level using a rolling horizon framework, while the scheduling model takes batch-sizing, sequencing and timing decisions in detail. A three-phase, scenario-based solution algorithm is introduced to model demand uncertainty considering Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR) measures, while both systematic and unsystematic risk are considered. Results illustrate that the proposed modelling framework provides a systematic approach for the contract appraisal problem of Contract Manufacturing Organizations as it can select the optimal contract mixture depending on the corresponding risk tolerance.