NORDIC CASE HOUSE

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CBS023

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BUDGETING AT PHARMABREW (A)
Catherine E. Batt

“This is a nightmare!”

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After years of hard work focused on reorganizing production and the factory, Peter Rasmussen, the
production manager for Pharmabrew, felt frustrated. Much of the necessary raw materials were delayed,
leaving him unable to produce Pedericin, a newly developed drug for the treatment of high blood
pressure that was expected to generate substantial income for Pharmabrew in the coming years. As
he looked across the production site, he questioned what was going on and why Pharmabrew did not
have the raw materials he needed on hand. Peter knew this issue would need to be addressed at the

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meeting later that day.

PHARMABREW
Pharmabrew, a Danish pharmaceutical production company that specialized in developing, producing,
and selling generic pharmaceuticals to third-party pharmaceutical companies, had its headquarters
and main production site just outside Copenhagen, Denmark.
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The company had two divisions: an R&D division, which was responsible for researching and developing
medicines that could be adapted to the generic market, and an Operations division, which oversaw the
production and sales of the pharmaceuticals. Each division had its own executive vice president, who
reported directly to the president, Nicolai Holm. Exhibit 1 shows the organization of the company’s top
management.
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The Operations division, headed by Pernille Jensen, was composed of the sales, production, and
purchasing units. Exhibit 2 presents the division’s organizational chart.

Exhibit 1: Exhibit 2:
Pharmabrew’s Top Management Operations Division – Top Management
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President Vice President

Operations
Nicolai Holm
Pernille Jensen

Legal CFO
Production Purchasing
Head of Sales Manager Manager
Sheila Clasen Anna Nielsen
John Christensen Peter Rasmussen Thomas Jørgensen

Human
Resources
Assistant Sales
Anita Larsen Manager

Martin Andersen
Vice President Vice President
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Operations R&D
Pernille Jensen Jack Hansen

© 2023 Copenhagen Business School. Catherine E. Batt wrote this case solely to provide material for class
discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective
or ineffective management. The material in this case may not be digitized, copied, or otherwise reproduced,
posted, or transmitted without the permission of Copenhagen Business School. The author would like to thank
Morten Holm and Jytte Grambo Larsen for their support.

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 THE INDUSTRY

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The pharmaceutical industry is heavily regulated. The regulatory system requires that raw materials,

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machines, and factory buildings meet safety, efficacy, and quality requirements throughout the supply chain.

However, the pharmaceutical industry is less volatile than other industries. It has high barriers to entry
due to the significant investments required for innovation. It is divided into brand developers and generic
competitors. Brand developers innovate and develops new medicines and treatments, which they sell

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under their brand names. These newly developed medicines are covered by patents, which protect
the return on the developers’ R&D investments. In practical terms, this means that only the company
holding a patent can manufacture, market, and eventually profit from that patent. As such, the patent
holder enjoys an oligopolistic or even monopolistic market position.

When a patent expires, other companies can manufacture and sell the brand developers’ medicines, which

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were then referred to as generic medicines. These medicines are the same as brand-name medicines
in terms of dosage, safety, strength, route of administration, quality, performance characteristics, and
intended use. The entry of generic medicines into the market encourages competition and significantly
lowers the cost of medicines for consumers, thereby ensuring that life-saving and other important
medicines reach the general population at comparatively low prices.

A shortage of medicines for patients is not an option. Therefore, the pharmaceutical industry is highly
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dependent on the reliability of its planning process. Moreover, due to the industry’s stringent regulatory
system, the production of medicines can become very challenging.

SEPTEMBER 2018
As it did every year, Pharmabrew’s management team spent approximately eight weeks in 2018 preparing
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the budget for the board of directors’ approval. The management team often complained about the
budgeting process, which was very time-consuming. In addition, the budget was often viewed as obsolete
as soon as it was completed and the management team was not sure it added value for anyone in the
organization. Some members of top management even claimed that the budget was typically built on
unsupported assumptions.
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Anna Nielsen, the company’s CFO, was worried that the management team might not put the required
effort into the budgeting process. Traditionally, the budgeting process at Pharmabrew had been
decentralized. Each business-unit manager prepared their unit’s own budget, which became part of the
organization’s master budget. These managers would meet weekly to work on the budget and come
to an agreement. Anna had long considering ways to improve the budgeting process and, thereby,
eliminate the management team’s complaints.

In 2018, Anna decided to give the management team more autonomy. She called a meeting and
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announced that instead of meeting regularly, the managers should coordinate with each other without
her involvement. She wanted the management team to be independent and autonomous in the budgeting
process. The team would meet with Anna four weeks later to finalize the master budget. She hoped that
giving them more independence and autonomy would empower them.
Two days after the meeting, Peter walked into Anna’s office.

CBS023 BUDGETING AT PHARMABREW (A) 2

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 Peter Rasmussen: How can I prepare a budget if I don’t know our sales expectations? I will produce

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only what is needed and when needed, but I need some idea of what is expected. Inventories are too

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expensive to keep on hand—I don’t have to tell you that. As we lost part of the warehouse during the
fire last Christmas, it is even more complicated.

Anna Nielsen: Have you tried to contact John in sales?

Peter Rasmussen: Why? You told us we had full autonomy this year and that we would discuss it again
in three weeks.

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Anna Nielsen: Autonomy, yes, which means I am not going to be watching over your shoulder. However,
you must communicate with each other. Contact John and see if he can sit down with you.

Peter Rasmussen: Ok, I’ll do that!

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Peter returned to his desk and sent John an e-mail asking for a meeting. A few seconds later, he heard
the ping indicating an incoming e-mail. Before opening it, he decided to grab a coffee. Coffee in hand,
he stood by the large window in his office and looked at the production room. He was proud of his
work over the past ten years. When he took over production, most of the machines were outdated and
production was always late due to machine breakdowns. Each breakdown created bottlenecks. Over
time, he managed to replace some machines and ensure others were brought back in line with the
maintenance plan.
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When Peter returned to his desk, he saw the e-mail that caused the earlier ping. It was from John:

I am on vacation from September 23 . I will not read my e-mails while on vacation.

I will return on Monday, October 1st.
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Kind regards,
John Christensen

“Nice for him but it does not help me,” mumbled Peter.

OCTOBER 3, 2018
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The week passed. By October 3, John still had not responded to Peter’s e-mail. Peter also had not had
time to send him a reminder.

Peter decided that the two of them needed to meet to make a production plan for the new product
being launched the next week and for three other products being launched in the first quarter of 2019.
Peter was working late for the third time that week, and it had happened several times over the last
two months. His wife, Johanna, was getting angry at him. She had been working hard on her Ph.D. and
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needed his help at home.

CBS023 BUDGETING AT PHARMABREW (A) 3

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 Peter sent John an e-mail just before leaving the office at 8 p.m.:

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Hi John,

Hope you enjoyed your vacation. This is Peter from production. Maybe my first e-mail got lost.
Can we meet soon to discuss your plans for next year?

Peter pushed the “send” button, turned off his computer, and headed home. With a little bit of luck, he

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would be home in time to watch the second half of the Liverpool game.

When Peter awoke the following day, he found John’s reply in his mailbox.

Hi Peter,

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The vacation was nice, but the kids and I caught a bug on our way home.
So I am stuck at home sick, but I will get back to you soon.

My plan for next year is growth. It is what the board wants from us with the new strategy.
My team and I will do whatever it takes to comply.

“Ok … growth. Whatever he means by that,” Peter thought to himself. He could deduce from the e-mail
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that John and his team would sell more than they had this year, so he decided to use this year’s budget
as a guide for his production plan. He then added 15% to that budget as a starting point.
Soon after he had finished his production plan for the following year, he contacted Thomas Jørgensen,
the purchasing manager.
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Peter Rasmussen: Hi! I have prepared a plan for next year’s production. I guess that you would like to
take a look at it?

Thomas Jørgensen: Yeah—send it over I will see what I can use. By the way, have you heard? John
returned from the islands with his wife and kids. They all caught a bug or something, and now they are
all quarantined. We won’t see him for two weeks! I hope he makes it to the budget meeting Anna has
planned for us.
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As it turned out, John would not return to work for quite some time, as his son became very ill and was
admitted to the hospital. His assistant, Martin Andersen, who was a new business-school graduate, was
tasked with preparing the sales team’s budget. Martin had never prepared a budget and had to rely heavily
on his business-school textbooks. He did not feel comfortable asking for help or communicating his
concerns with his colleagues, as he had already found it difficult to be the new kid on the block. Moreover,
he did not want to reveal his lack of knowledge and experience with regard to budget preparation. He
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believed it was just a question of plugging numbers into tables. He prepared an Excel document, and
sent it to Peter and Anna. It seemed very impressive with numerous tables and graphs, and the team was
pleased with his work. His plan was aligned with the board of directors’ growth strategy. The different
units then coordinated their plans for the following year based on what Martin had presented.

John Christensen: That was a fairly smooth process. We argued less than usual this year and the
meeting was quick. Let’s hope we can do it again next year.

CBS023 BUDGETING AT PHARMABREW (A) 4

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 MARCH 2019

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Three months into 2019, Peter discovered he could not produce Pedericin, as he did not have the

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necessary raw materials.

At a management meeting shortly thereafter, Thomas addressed the issue:

Thomas Jørgensen: Pedericin was not expected to go into production until June, so I did not order

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component HO946. The next delivery should arrive in May for June’s production. I called the producer
and they do not have it on hand. The best they can do is mid-April.

Peter Rasmussen: I had to change the production timeline. Martin didn’t inform me that sales were
going better than expected. This is not the first time this has happened this quarter. Production is late
and the raw materials we need are not available.

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Sheila Clasen from Legal joined the discussion and voiced her concerns.

Sheila Clasen: We have started receiving calls from clients because we are unable to fulfill our
agreements. Some clients are raising the possibility of fines.

Anna decided to call a new meeting to clear up the situation. John had recently returned to work and
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had a lot of catching up to do. As this would be his first meeting with the management team after his
return, he took Martin with him. At the meeting, John learned that Martin had shared another budget than
the one they had discussed. He was furious but tried not to show his anger in front of the management
team. The board had recently announced that it would pay a bonus of EUR 5,000 to each sales employee
who reached his or her target. Above the targets, the bonus payouts would be linear. Martin had shared
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an easy-to-achieve budget in which he had intentionally cut the sales numbers by 5% to ensure the
members of the sales team would receive their bonuses. He was fully aware of what he had done but
wanted to be certain everyone would get their bonuses.

When preparing the sales plan, the sales unit would typically ask clients to send them their expected
order plans for the next 12 months. Those plans would include the medicines their clients expected
to purchase as well as the quantities. Typically, John would then base Pharmabrew’s future sales plan
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on what the clients expected to purchase in the following year. John had expected Martin to adopt the
same methodology. However, Martin had taken the previous year’s plan and replaced the medicines
that Pharmabrew no longer produced with the names of the three new products. He then adjust the
sales plan based on the medicines clients requested. As a result, clients ordered medicines outside of
scheduled production times and in different quantities than expected.

The sales team, which was also aware of the bonus system, was doing a good job of reaching new
clients. However, it committed to actions over which it had no authority in order to attract new clients.
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For instance, sales representatives sometimes promised a new client that it would be first in line when
production started. Peter and Martin discussed the issue during the meeting:

Peter Rasmussen: Well, nice, but those promises put us all in trouble.

CBS023 BUDGETING AT PHARMABREW (A) 5

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 Martin Andersen: How are our actions in sales your problem? Are you resentful because we will receive

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bonuses and you won’t? This meeting is great and really needed, as clients are complaining, asking for

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discounts, and threatening to fine us for late deliveries. It would be nice if you could get things together
on your side.

Peter Rasmussen: In business, we all count on each other and back each other up. We work as a team
here. If you had different plans, we should have been informed so we could meet the demand.

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Martin Andersen: What?! Why?

Thomas Jørgensen: Let me explain. You find it hard to sell a product when it cannot be delivered on
time, but you need to let us know what you want. Peter cannot produce the right products if he does
not have the raw materials and I don’t order those raw materials if we don’t appear to need them.

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Peter Rasmussen: Also, why are we being asked to produce Pedericin now? The production plan states
that it will not be produced before June. You are aware of the production plan, right?

Martin Andersen: Our clients need it now! Do you know how much they are going to pay for this delivery?
Peter Rasmussen: It would have been useful to know beforehand that they wanted such a large quantity
for April. Now client orders have become our own bottleneck.
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John Christensen: Martin, did you use the client’s plans to prepare our own plan?

Martin Andersen: We are the sales team. I only planned for the units sold. How is the production plan
any of my business?
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Peter Rasmussen: Well, it is key to the budgeting process and we are a team. We must know what
everyone else is doing.

There was a great deal of tension at the meeting. Peter and Thomas were angry. How could Pharmabrew
be in such a difficult situation with late deliveries and crucial raw materials missing? They wondered
how this situation could be resolved but did not say a word to each other.
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CBS023 BUDGETING AT PHARMABREW (A) 6

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an infringement of copyright. [email protected] or 617.783.7860