Case 3-2

Capacity Concerns
Bentley Hamilton throws the business section of The New York Times onto the conference room
table and watches as his associates jolt upright in their overstuffed chairs.

Mr. Hamilton wants to make a point.

He throws the front page of the The Wall Street Journal on top of The New York Times and
watches as his associates widen their eyes once heavy with boredom.
Mr. Hamilton wants to make a big point.

He then throws the front page of the Financial Times on top of the newspaper pile and watches
as his associates dab the fine beads of sweat off their brows.
Mr. Hamilton wants his point indelibly etched into his associates’ minds.

“I have just presented you with three leading financial newspapers carrying today’s top business
story,” Mr. Hamilton declares in a tight, angry voice. “My dear associates, our company is going
to hell in a hand basket! Shall I read you the headlines? From The New York Times,
‘CommuniCorp stock drops to lowest in 52 weeks.’ From The Wall Street Journal,
‘CommuniCorp loses 25 percent of the wireless router market in only one year.’ Oh, and my
favorite, from the Financial Times, ‘CommuniCorp cannot CommuniCate: CommuniCorp stock
drops because of internal communications disarray.’ How did our company fall into such dire
straits?”

Mr. Hamilton next points at a line sloping slightly upward on the conference room display. “This
is a graph of our productivity over the last 12 months. As you can see from the graph,
productivity in our router production facility has increased steadily over the last year. Clearly,
productivity is not the cause of our problem.”

Mr. Hamilton next displays a second graph showing a line sloping steeply upward. “This is a
graph of our missed or late orders over the last 12 months.” Mr. Hamilton hears an audible gasp
from his associates. “As you can see from the graph, our missed or late orders have increased
steadily and significantly over the past 12 months. I think this trend explains why we have been
losing market share, causing our stock to drop to its lowest level in 52 weeks. We have angered
and lost the business of retailers, our customers who depend upon on-time deliveries to meet the
demand of consumers.”

“Why have we missed our delivery dates when our productivity level should have allowed us to
fill all orders?” Mr. Hamilton asks. “I called several departments to ask this question.”

“It turns out that we have been producing routers for the hell of it!” Mr. Hamilton says in
disbelief. “The marketing and sales departments do not communicate with the manufacturing
department, so manufacturing executives do not know what routers to produce to fill orders. The
manufacturing executives want to keep the plant running, so they produce routers regardless of
whether the routers have been ordered. Finished routers are sent to the warehouse, but marketing
and sales executives do not know the number and styles of routers in the warehouse. They try to
communicate with warehouse executives to determine if the routers in inventory can fill the
orders, but they rarely receive answers to their questions.”

Mr. Hamilton pauses and looks directly at his associates. “Ladies and gentlemen, it seems to me
that we have a serious internal communications problem. I intend to correct this problem
immediately. I want to begin by installing a companywide computer network to ensure that all
departments have access to critical documents and are able to communicate with each other more
easily. Because this intranet will represent a large change from the current communications
infrastructure, I expect some bugs in the system and some resistance from employees. I therefore
want to phase in the installation of the intranet.”

Mr. Hamilton passes the following time line and requirements chart to his associates (IN =
intranet).

Month 1 Month 2 Month 3 Month 4 Month 5

IN
education
Install IN in
sales
Install IN in
manufacturing
Install IN in
warehouse
Install IN in
marketing

Number of
Department Employees
Sales 60
Manufacturing 200
Warehouse 30
Marketing 75

Mr. Hamilton proceeds to explain the time line and requirements chart. “In the first month, I do
not want to bring any department onto the intranet; I simply want to disseminate information
about it and get buy-in from employees. In the second month, I want to bring the sales
department onto the intranet since the sales department receives all critical information from
customers. In the third month, I want to bring the manufacturing department onto the intranet. In
the fourth month, I want to install the intranet at the warehouse, and in the fifth and final month,
I want to bring the marketing department onto the intranet. The requirements chart above lists the
number of employees requiring access to the intranet in each department.”

Mr. Hamilton turns to Emily Jones, the head of Corporate Information Management. “I need
your help in planning for the installation of the intranet. Specifically, the company needs to
purchase servers for the internal network. Employees will connect to company servers and
download information to their own desktop computers.”

Mr. Hamilton passes Emily the following chart detailing the types of servers available, the
number of employees each server supports, and the cost of each server.

Type of Server Number of Employees Server Supports Cost of Server

Mini Desktop Server Up to 30 employees $ 2,500
Desktop Server Up to 80 employees 5,000
Workstation Server Up to 200 employees 10,000
Full Rack Server Up to 2,000 employees 25,000

“Emily, I need you to decide what servers to purchase and when to purchase them to minimize
cost and to ensure that the company possesses enough server capacity to follow the intranet
implementation timeline,” Mr. Hamilton says. “For example, you may decide to buy one large
server during the first month to support all employees, or buy several small servers during the
first month to support all employees, or buy one small server each month to support each new
group of employees gaining access to the intranet.”

“There are several factors that complicate your decision,” Mr. Hamilton continues. We can get a
discount of 10 percent off each workstation server purchased, but only if we purchase servers in
the first or second month. We can get a 25 percent discount off all full rack servers purchased in
the first two months. You are also limited in the amount of money you can spend during the first
month. CommuniCorp has already allocated much of the budget for the next two months, so you
only have a total of $9,500 available to purchase servers in months 1 and 2. Finally, the
manufacturing department requires at least one of the three more powerful servers. Have your
decision on my desk at the end of the week.”

a. Emily first decides to evaluate the number and type of servers to purchase on a
month-to-month basis. For each month, formulate a spreadsheet model to determine
which servers Emily should purchase in that month to minimize costs in that month
and support the new users given your results for the preceding months. How many
 and which types of servers should she purchase in each month? How much is the total
cost of the plan?
b. Emily realizes that she could perhaps achieve savings if she bought a larger server in
the initial months to support users in the final months. She therefore decides to
evaluate the number and type of servers to purchase over the entire planning period.
Formulate a spreadsheet model to determine which servers Emily should purchase in
which months to minimize total cost and support all new users. How many and which
types of servers should she purchase in each month? How much is the total cost of the
plan?
c. Why is the answer using the first method different from that using the second
method?
d. Are there other costs for which Emily is not accounting in her problem formulation?
If so, what are they?
e. What further concerns might the various departments of CommuniCorp have
regarding the intranet?

Case 4-1

Prudent Provisions for Pensions

Among its many financial products, the Prudent Financial Services Corporation (normally
referred to as PFS) manages a well-regarded pension fund that is used by a number of companies
to provide pensions for their employees. PFS’s management takes pride in the rigorous
professional standards used in operating the fund. Since the near-collapse of the financial
markets during the protracted Great Recession that began in late 2007, PFS has redoubled its
efforts to provide prudent management of the fund.

It is now December 2017. The total pension payments that will need to be made by the fund over
the next 10 years are shown in the following table.4

Year Pension Payments ($ millions)

2018     8
2019 12
2020 13
2021 14
2022 16
2023 17
2024 20
 Year Pension Payments ($ millions)
2025 21
2026 22
2027 24

By using interest as well, PFS currently has enough liquid assets to meet all these pension
payments. Therefore, to safeguard the pension fund, PFS would like to make a number of
investments whose payouts would match the pension payments over the next 10 years. The only
investments that PFS trusts for the pension fund are a money market fund and bonds. The money
market fund pays an annual interest rate of 2 percent. The characteristics of each unit of the four
bonds under consideration are shown in the table below.

Current Price Coupon Rate Maturity Date Face Value

Bond 1 $ 980 4% Jan. 1, 2019 $ 1,000
Bond 2 920 2     Jan. 1, 2021 1,000
Bond 3 750 0     Jan. 1, 2023 1,000
Bond 4 800 3     Jan. 1, 2026 1,000

All of these bonds will be available for purchase on January 1, 2018, in as many units as desired.
The coupon rate is the percentage of the face value that will be paid in interest on January 1 of
each year, starting one year after purchase and continuing until (and including) the maturity date.
Thus, these interest payments on January 1 of each year are in time to be used toward the
pension payments for that year. Any excess interest payments will be deposited into the money
market fund. To be conservative in its financial planning, PFS assumes that all the pension
payments for the year occur at the beginning of the year immediately after these interest
payments (including a year’s interest from the money market fund) are received. The entire face
value of a bond also will be received on its maturity date. Since the current price of each bond is
less than its face value, the actual yield of the bond exceeds its coupon rate. Bond 3 is a zero-
coupon bond, so it pays no interest but instead pays a face value on the maturity date that greatly
exceeds the purchase price.

PFS would like to make the smallest possible investment (including any deposit into the money
market fund) on January 1, 2018, to cover all its required pension payments through 2027. Some
spreadsheet modeling needs to be done to see how to do this.
 a. Visualize where you want to finish. What are the decisions that need to be made?
What should the objective be? What numbers are needed by PFS management?
b. Suppose that PFS were to invest $30 million in the money market fund and purchase
10,000 units each of bond 1 and bond 2 on January 1, 2018. Calculate by hand the
payments received from bonds 1 and 2 on January 1 of 2019 and 2020. Also calculate
the resulting balance in the money market fund on January 1 of 2018, 2019, and 2020
after receiving these payments, making the pension payments for the year, and
depositing any excess into the money market fund.
c. Make a rough sketch of a spreadsheet model, with blocks laid out for the data cells,
changing cells, output cells, and objective cell.
d. Build a spreadsheet model for years 2018 through 2020, and then thoroughly test the
model.
e. Expand the model to consider all years through 2027, and then solve it.

Case 5-1

Selling Soap
Reconsider the Profit & Gambit Co. advertising-mix problem presented in Section 2.7. Recall
that a major advertising campaign is being planned that will focus on three key products: a stain
remover, a liquid detergent, and a powder detergent. Management has made the following policy
decisions about what needs to be achieved by this campaign.

• Sales of the stain remover should increase by at least 3 percent.

• Sales of the liquid detergent should increase by at least 18 percent.
• Sales of the powder detergent should increase by at least 4 percent.

The spreadsheet in Figure 2.21 shows the linear programming model that was formulated for
this problem. The minimum required increases in the sales of the three products are given in the
data cells Minimum Increase (G8:G10). The changing cells Advertising Units (C14:D14)
indicate that an optimal solution for the model is to undertake four units of advertising on
television and three units of advertising in the print media. The objective cell TotalCost (G14)
shows that the total cost for this advertising campaign would be $10 million.
After receiving this information, Profit & Gambit management now wants to analyze the trade-
off between the total advertising cost and the resulting benefits achieved by increasing the sales
of the three products. Therefore, a management science team (you) has been given the
assignment of developing the information that management will need to analyze this trade-off
and decide whether it should change any of its policy decisions regarding the required minimum
increases in the sales of the three products. In particular, management needs some detailed
information about how the total advertising cost would change if it were to change any or all of
these policy decisions.

a. For each of the three products in turn, use graphical analysis to determine how much
the total advertising cost would change if the required minimum increase in the sales
of that product were to be increased by 1 percent (without changing the required
minimum increases for the other two products).
b. Use the spreadsheet shown in Figure 2.21 (available in www.mhhe.com/hillier6e) to
obtain the information requested in part a.
c. For each of the three products in turn, use a parameter analysis report to determine
how the optimal solution for the model and the resulting total advertising cost would
change if the required minimum increase in the sales of that product were to be
 systematically varied over a range of values (without changing the required minimum
increases for the other two products). In each case, start the range of values at 0
percent and increase by 1 percent increments up to double the original minimum
required increase.
d. Use Solver to generate the sensitivity report and indicate how the report is able to
provide the information requested in part a. Also use the report to obtain the
allowable range for the required minimum increase in the sales of each product.
Interpret how each of these allowable ranges relates to the results obtained in part c.
e. Suppose that all the original numbers in Minimum Increase (G8:G10) were to be
increased simultaneously by the same amount. How large can this amount be before
the shadow prices provided by the sensitivity report may no longer be valid?
f. Below is the beginning of a memorandum from the management science team to
Profit & Gambit management that is intended to provide management with the
information it needs to perform its trade-off analysis. Write the rest of this
memorandum based on a summary of the results obtained in the preceding parts.
Present your information in clear, simple terms that use the language of management.
Avoid technical terms such as shadow prices, allowable ranges, and so forth.

MEMORANDUM
To: Profit & Gambit management

From: The Management Science Team

Subject: The trade-off between advertising expenditures and increased sales

As instructed, we have been continuing our analysis of the plans for the major new advertising
campaign that will focus on our spray prewash stain remover, our liquid formulation laundry
detergent, and our powder laundry detergent.

Our recent report presented our preliminary conclusions on how much advertising to do in the
different media to meet the sales goals at a minimum total cost:

• Allocate $4 million to advertising on television.

• Allocate $6 million to advertising in the print media.
• Total advertising cost: $10 million.

We estimate that the resulting increases in sales will be

• Stain remover: 3 percent increase in sales

• Liquid detergent: 18 percent increase in sales
• Powder detergent: 8 percent increase in sales
You had specified that these increases should be at least 3 percent, 18 percent, and 4 percent,
respectively, so we have met the minimum levels for the first two products and substantially
exceeded it for the third.

However, you also indicated that your decisions on these minimum required increases in sales (3
percent, 18 percent, and 4 percent) had been tentative ones. Now that we have more specific
information on what the advertising costs and the resulting increases in sales will be, you plan to
reevaluate these decisions to see if small changes might improve the trade-off between
advertising cost and increased sales.

To assist you in reevaluating your decisions, we now have analyzed this trade-off for each of the
three products. Our best estimates are the following.

https://www.chegg.com/homework-help/questions-and-answers/reconsider-profit-gambit-co-
advertising-mix-problem-recall-major-advertising-campaign-plan-q70476504

3TV + 2PM ≥ 18

Feasible Region

TV + 2PM ≥ 10

PM ≥ 3
(4, 3)

-TV + 4PM ≥ 4
 Graphical Method
9
3TV + 2PM ≥ 18
8

7 Feasible Region
6
Print Media

TV + 2PM ≥ 11.33
5

PM ≥ 4 4
(3.33, 4)
3

1
-TV + 4PM ≥ 4
0
-4 -2 0 2 4 6 8 10
TV

Stain Remover Liquid Dertergent

Powder Detergent Optimal Solution

Graphical Method
9
3TV + 2PM ≥ 19
8

7 Feasible Region
6
Print Media

5
TV + 2PM ≥ 10.33
4

PM ≥ 3 3
(4.33, 3)
2

1
-TV + 4PM ≥ 4
0
-4 -2 0 2 4 6 8 10
TV

Stain Remover Liquid Dertergent

Powder Detergent Optimal Solution

 Graphical Method
9
3TV + 2PM ≥ 18
8

7 Feasible Region
6
Print Media

5
TV + 2PM ≥ 10
4

PM ≥ 3 3
(4, 3)
2

1
-TV + 4PM ≥ 5
0
-5 -3 -1 1 3 5 7 9
TV

Stain Remover Liquid Dertergent

Powder Detergent Optimal Solution