Pro 2023
Pro 2023
Pro 2023
Because it costs differing amounts to convert between various currencies, H&J determined
strategy. Instead, it might be less expensive to convert exis ng holdings to an intermediate
currency before conver ng the result back to US dollars. The following table summarizes the
current exchange rates for conver ng from one currency to another.
The exchange rate table indicates, for instance, that one Japanese yen can be converted into
0.00910 US dollars. So 100,000 yen would produce $910 US. However, the bank’s 0.40% fee
for this transac on would reduce the net amount received to $910 (1 − 0.004) =
$906.36. So, H&J wants your assistance in determining the best way to convert all its non-US
currency holdings back into US dollars.
Case 2
Solu'ons Plus
Solu ons Plus is an industrial chemicals company that produces specialized cleaning fluids
and solvents for a wide variety of applica ons. Solu ons Plus just received an invita on to
submit a bid to supply Great North American railroad with a cleaning fluid for locomo ves.
Great North American needs the cleaning fluid at 11 loca ons (railway sta ons); it provided
the following informa on to Solu ons Plus regarding the number of gallons of cleaning fluid
required at each loca on (see Table 6.8). Solu ons Plus can produce the cleaning fluid at its
Cincinna plant for $1.20 per gallon. Even though the Cincinna loca on is its only plant,
Solu ons Plus has nego ated with an industrial chemicals company located in Oakland,
California, to produce and ship up to 500,000 gallons of locomo ve cleaning fluid to selected
Solu ons Plus customer loca ons. The Oakland company will charge Solu ons Plus $1.65 per
gallon to produce the cleaning fluid, but Solu ons Plus thinks that the lower shipping costs
from Oakland to some customer loca ons may offset the added cost to produce the
product.
The president of Solu ons Plus, Charlie Weaver, contacted several trucking companies to
nego ate shipping rates between the two produc on facili es (Cincinna and Oakland) and
the loca ons where the railroad locomo ves are cleaned. Table 6.9 shows the quotes
received in terms of dollars per gallon. The “—” entries in Table 6.9 iden fy shipping routes
that will not be considered because of the large distances involved. These quotes for
shipping rates are guaranteed for one year.
To submit a bid to the railroad company, Solu ons Plus must determine the price per gallon
it will charge. Solu ons Plus usually sells its cleaning fluids for 15% more than its cost to
produce and deliver the product. For this big contract, however, Fred Roedel, the director of
marke ng, suggested that maybe the company should consider a smaller profit margin. In
addi on, to ensure that if Solu ons Plus wins the bid, it will have adequate capacity to
sa sfy exis ng orders as well as accept orders for other new business, the management
team decided to limit the number of gallons of the locomo ve cleaning fluid produced in the
Cincinna plant to 500,000 gallons at most.
Case 3
Old Dominion Energy
The United States is the biggest consumer of natural gas, and the second largest natural gas
producer in the world. According to the U.S. Energy Informa on Administra on (EIA), in
2001 the U.S. consumed 22.7 trillion cubic feet of natural gas. Stemming from phased
deregula on, the transporta on and delivery of natural gas from wellheads has grown since
the ‘80s and there are now more than 278,000 miles of gas pipeline na onwide (see:
hOp://www.plaOs.com/features/usgasguide/pipelines.shtml). With more electric power
companies turning to natural gas as a cleaner-burning fuel, natural gas is expected to grow
even more quickly over the next 20 years.
To ensure an adequate supply of natural gas, gas storage facili es have been built in
numerous places along the pipeline. Energy companies can buy gas when prices are low and
store it in these facili es for use or sale at a later date. Because energy consump on is
influenced greatly by the weather (which is not en rely predictable), imbalances oQen arise
in the supply and demand for gas in different parts of the country. Gas traders constantly
monitor these market condi ons and look for opportuni es to sell gas from storage facili es
when the price offered at a certain loca on is high enough. This decision is complicated
because it costs different amounts of money to transport gas through different segments of
the na onwide pipeline, and the capacity available in different parts of the pipeline is
changing constantly. Thus, when traders see an opportunity to sell at a favorable price, they
must quickly see how much capacity is available in the network and create deals with
individual pipeline operators for the necessary capacity to move gas from storage to the
buyer.
Bruce McDaniel is a gas trader for Old Dominion Energy (ODE), Inc. The network in Figure
5.43 represents a por on of the gas pipeline where ODE does business. The values next to
each arc in this network are of the form ( , ) where is the cost per thousand cubic feet
(cf) of transpor ng gas along the arc, and is the available transmission capacity of the arc
in thousands of cubic feet. Note that the arcs in this network are bidirec onal (i.e., gas can
flow in either direc on at the prices and capaci es listed). Bruce currently has 100,000 cf of
gas in storage at Katy. Industrial customers in Joliet are offering $4.35 per thousand cf for up
to 35,000 cf of gas. Buyers in Leidy are offering $4.63 per thousand cf for up to 60,000 cf of
gas. Help Bruce model the problem.
Case 4
Op'mizing a Timber Harvest
The state of Virginia is one of the largest producers of wood furniture in the United States,
with the furniture industry accoun ng for 50% of value added to wood materials. Over the
past 40 years the inventory volume of wood in Virginia’s forests has increased by 81 percent.
Today, 15.4 million acres, which is well over half of the state, are covered in forest. Private
owners hold 77% of this land. When making decisions about which trees to harvest, forestry
professionals consider many factors and must follow numerous laws and regula ons.
Figure 6.36 depicts a tract of forested land that has been sec oned off into 12 harvestable
areas, indicated by dashed lines. Area 2 provides the only access to the forest via a paved
road, so any mber cut ul mately must be transported out of the forest through area 2.
Currently, there are no roads through this forest. So to harvest the mber, forest roads must
be built. The allowable routes for these roads are also shown in Figure 6.36. They are
determined largely by the geography of the land and by the loca on of streams and wildlife
habitat.
Not all areas of the forest have to be harvested. However, to harvest any area, a forest road
must be built to that area. The cost of building each sec on of forest road (in $1000s) is
indicated in the figure. Finally, the net value of the harvestable mber in each area is
es mated as follows:
Which areas should be harvested and what roads should be built to make the most
profitable use of this forest?
Case 5
The MasterDebt Lockbox Problem
MasterDebt is a na onal credit card company with thousands of card holders located across
the United States. Every day throughout the month, MasterDebt sends out statements to
different customers summarizing their charges for the previous month. Customers then have
30 days to remit a payment for their bills. MasterDebt includes a preaddressed envelope
with each statement for customers to use in making their payments.
One of the cri cal problems facing MasterDebt involves determining what address to put on
the pre-addressed envelopes sent to various parts of the country. The amount of me that
elapses between when a customer writes his check and when MasterDebt receives the cash
for the check is referred to as float. Checks can spend several days floa ng in the mail and in
processing before being cashed. This float me represents lost revenue to MasterDebt
because if they could receive and cash these checks immediately, they could earn addi onal
interest on these funds.
To reduce the interest being lost from floa ng checks, MasterDebt would like to implement a
lockbox system to speed the processing of checks. Under such a system, MasterDebt might
have all their customers on the West Coast send their payments to a bank in Sacramento
which, for a fee, processes the checks and deposits the proceeds in a MasterDebt account.
Similarly, MasterDebt might arrange for a similar service with a bank on the East Coast for
their customers there. Such lockbox systems are a common method that companies use to
improve their cash flows.
MasterDebt has iden fied six different ci es as possible lockbox sites. The annual fixed cost
of opera ng a lockbox in each of the possible loca ons is given below.
An analysis was done to determine the average number of days that a check floats when
sent from seven different regions of the country to each of these six ci es. The results of this
analysis are summarized below. This table indicates, for instance, that a check sent from the
central region of the country to New York spends an average of three days in the mail and in
processing before MasterDebt actually receives the cash for the check.
Further analysis was done to determine the average amount of payments being sent from
each region of the country. These results are given below.
Thus, if payments from the Central Region are sent to New York, on any given day there is an
average of $135,000 in undeposited checks from the Central Region. Because MasterDebt
can earn 15% on cash deposits, it would be losing $20,250 per year in poten al interest on
these checks alone. Which of the six poten al lockbox loca ons should MasterDebt use and
to which lockbox loca on should each region be assigned?
Case 6
Interna'onal Tex'le Company
Interna onal Tex le Company, Ltd., is a Hong Kong–based firm that distributes tex les
worldwide. The company is owned by the Lao family. Present plans are to remain in Hong
Kong through the transi on in governments. Should the People’s Republic of China con nue
its economic renaissance, the company hopes to use its current base to expand opera ons
to the mainland. Interna onal Tex le has mills in the Bahamas, Hong Kong, Korea, Nigeria,
and Venezuela, each weaving fabrics out of two or more raw fibers: coOon, polyester, and/or
silk. The mills service eight company distribu on centers located near the customers’
geographical centers of ac vity.
Because transporta on costs historically have been less than 10% of total expenses,
management has paid liOle aOen on to extrac ng savings through judicious rou ng of
shipments. Ching Lao is returning from the United States, where he has just completed his
bachelor’s degree in marke ng. He believes that each year he can save Interna onal Tex le
hundreds of thousands of dollars—perhaps millions—just by beOer rou ng of fabrics from
mills to distribu on centers. One glaring example of poor rou ng is the current assignment
of fabric output to the Mexico City distribu on center from Nigeria instead of from
Venezuela, less than a third the distance. Similarly, the Manila center now gets most of its
tex les from Nigeria and Venezuela, although the mills in Hong Kong itself are much closer.
Of course, the cost of shipping a bolt of cloth does not depend on distance alone. Table 5.14
provides the actual costs supplied to Lao from company headquarters. Distribu on center
demands are seasonal, so a new shipment plan must be made each month. Table 5.15
provides the fabric requirements for the month of March. Interna onal Tex le’s mills have
varying capaci es for producing various types of cloth. Table 5.16 provides the quan es
that apply during March.
Lao wants to schedule produc on and shipments in such a way that the most costly
customers are shorted when there is insufficient capacity, and the least-efficient plants
operate at less than full capacity when demand falls below maximum produc on capacity.
You have been retained by Interna onal to assist Lao.
Case 7
The Giant Motor Company
The Giant Motor Company (GMC) produces three lines of cars for the domes c (U.S.)
market: Lyras, Libras, and Hydras. The Lyra is a rela vely inexpensive subcompact car that
appeals mainly to first- me car owners and to households using it as a second car for
commu ng. The Libra is a sporty compact car that is sleeker, faster, and roomier than the
Lyra.Without any op ons, the Libra costs slightly more than the Lyra; addi onal op ons
increase the price. The Hydra is the luxury car of the GMC line. It is significantly more
expensive than the Lyra and Libra, and it has the highest profit margin of the three cars.
Currently GMC has three manufacturing plants in the United States. Each plant is dedicated
to producing a single line of cars. In its planning for the coming year, GMC is considering the
retooling of its Lyra and/or Libra plants. Retooling either plant would represent a major
expense for the company. The retooled plants would have significantly increased produc on
capaci es. Although having greater fixed costs, the retooled plants would be more efficient
and have lower marginal produc on costs—that is, higher marginal profit contribu ons. In
addi on, the retooled plants would be flexible—they would have the capability of producing
more than one line of cars.
The characteris cs of the current plants and the retooled plants are given in Table 6.16. The
retooled Lyra and Libra plants are prefaced by the word new. The fixed costs and capaci es
in Table 6.16 are given on an annual basis. A dash in the profit margin sec on indicates that
the plant cannot manufacture that line of car. For example, the new Lyra plant would be
capable of producing both Lyras and Libras but not Hydras. The new Libra plant would be
capable of producing any of the three lines of cars. Note, however, that the new Libra plant
has a slightly lower profit margin for producing Hydras than the Hydra plant. The flexible
new Libra plant can produce the luxury Hydra model but is not as efficient as the current
Hydra plant that is dedicated to Hydra produc on.
The fixed costs are annual costs incurred by GMC, independent of the number of cars
produced by the plant. For the current plant configura ons, the fixed costs include property
taxes, insurance, payments on the loan that was taken out to construct the plant, and so on.
If a plant is retooled, the fixed costs will include the previous fixed costs plus the addi onal
cost of the renova on. The addi onal renova on cost will be an annual cost represen ng
the cost of the renova on amor zed over a long period.
Short-term demand forecasts have been very reliable in the past and are expected to be
reliable in the future. The demand for GMC cars for the coming year is given in Table 6.17.
A quick comparison of plant capaci es and demands in Table 6.16 and Table 6.17 indicates
that GMC is faced with insufficient capacity. Par ally offseWng the lack of capacity is the
phenomenon of demand diversion. If a poten al car buyer walks into a GMC dealer
showroom wan ng to buy a Lyra but the dealer is out of stock, frequently the salesperson
can convince the customer to purchase the beOer Libra car, which is in stock. Unsa sfied
demand for the Lyra is said to be diverted to Libra. Only rarely in this situa on can the
salesperson convince the customer to switch to the luxury Hydra model.
From past experience, GMC es mates that 30% of unsa sfied demand for Lyras is diverted
to demand for Libras and 5% to demand for Hydras. Similarly, 10% of unsa sfied demand for
Libras is diverted to demand for Hydras. For example, if the demand for Lyras is 1,400,000
cars, then the unsa sfied demand will be 400,000 if no capacity is added. Out of this
unsa sfied demand, 120,000 (= 400,000 × 0.3) will materialize as demand for Libras, and
20,000 (= 400,000 × 0.05) will materialize as demand for Hydras. Similarly, if the demand for
Libras is 1,220,000 cars (1,100,000 original demand plus 120,000 demand diverted from
Lyras), then the unsa sfied demand for Lyras would be 420,000 if no capacity is added. Out
of this unsa sfied demand, 42,000 (= 420,000 × 0.1) will materialize as demand for Hydras.
All other unsa sfied demand is lost to compe tors. The paOern of demand diversion is
summarized in Table 6.18.
GMC wants to decide whether to retool the Lyra and Libra plants. In addi on, GMC wants to
determine its produc on plan at each plant in the coming year.
Case 8
Easley Shopping Center
The town of Easley, South Carolina, has experienced tremendous growth over the past few
years. AQer a long and spirited discussion, the town council has unanimously decided to
build Easley’s first big shopping center. On the recommenda on of the town planner, Jimmy
Barnes, the council has decided to hire the Ray Development Company (RDC) to help in the
shopping center’s planning and construc on. RDC has a great deal of experience in building
malls and shopping centers in the southeastern U.S., and the town council is confident they
will help Easley iden fy the right stores for its new shopping center.
Jennifer Ray, president of RDC, has quickly iden fied and signed two major anchor stores as
well as several other aOrac ve tenants for the shopping center. AQer assigning suitable
spaces to these tenants, Jennifer has 32,000 square feet of space s ll available for alloca on.
She and Jimmy are now tasked with deciding which stores to locate in this available space.
Due to the significant market interest in Easley’s new shopping center, Jennifer and Jimmy
are confident that they will not have any trouble finding tenants to suit whatever alloca on
plan they decide to use.
AQer extensive study, Jennifer has drawn up a list of 20 different stores she thinks she and
Jimmy should consider for the available space. Table 9 on the previous page lists these stores
in alphabe cal order, along with the floor space required by each store, the annual rent the
store would pay for the space, the expected annual sales at the store, and the expected upfit
cost to renovate the alloOed space to make it suitable for the store.
As per the leasing agreement developed by RDC, each store would pay the town an annual
rent for its alloOed space. The town council has mandated that the total rent payments each
year must be sufficient to cover the annual fixed cost of maintaining the shopping center.
This cost, which includes items such as security, janitorial services, maintenance, and
u li es, is es mated to be $500,000 per year. In addi on, the town council has specified
that the total upfit amount spent on renova ng the space to suit these stores cannot exceed
60% of the actual total annual rent that would be collected.
To make the shopping center aOrac ve to a broad range of customers, Jennifer believes it
must adhere to certain condi ons in terms of the mix of stores. Considering the tenants that
have already been signed for the shopping center, she thinks the remaining space should
contain at least two stores each in the apparel, food, and specialty types, and at least one
store each in the housewares and service types. She also thinks that there should be no
more than three stores of any type, and that the number of food and service stores should
not exceed the total number of stores in the other three types.
RDC has proposed an arrangement under which the town would receive a fixed percentage
of the total annual sales generated by the stores. The town council therefore wants to
iden fy the solu on that would generate the maximum total sales from these stores. How
should the remaining space in Easley’s new shopping center be alloOed?
Case 9
Stateline Shipping and Transport Company
Rachel Sundusky is the manager of the South-Atlan c office of the Stateline Shipping and
Transport Company. She is in the process of nego a ng a new shipping contract with
Polychem, a company that manufactures chemicals for industrial use. Polychem wants
Stateline to pick up and transport waste products from its six plants to three waste disposal
sites. Rachel is very concerned about this proposed arrangement. The chemical wastes that
will be hauled can be hazardous to humans and the environment if they leak. In addi on, a
number of towns and communi es in the region where the plants are located prohibit
hazardous materials from being shipped through their municipal limits. Thus, not only will
the shipments have to be handled carefully and transported at reduced speeds, they will
also have to traverse circuitous routes in many cases.
Rachel has es mated the cost of shipping a barrel of waste from each of the six plants to
each of the three waste disposal sites as shown in the following table:
The plants generate the following amounts of waste products each week:
The three waste disposal sites at Whitewater, Los Canos, and Duras can accommodate a
maximum of 65, 80, and 105 barrels per week, respec vely. In addi on to shipping directly
from each of the six plants to one of the three waste disposal sites, Rachel is also
considering using each of the plants and waste disposal sites as intermediate shipping
points. Trucks would be able to drop a load at a plant or disposal site to be picked up and
carried on to the final des na on by another truck, and vice versa. Stateline would not incur
any handling costs because Polychem has agreed to take care of all local handling of the
waste materials at the plants and the waste disposal sites. In other words, the only cost
Stateline incurs is the actual transporta on cost. So Rachel wants to be able to consider the
possibility that it may be cheaper to drop and pick up loads at intermediate points rather
than ship them directly. Rachel es mates the shipping costs per barrel between each of the
six plants to be as follows:
The es mated shipping cost per barrel between each of the three waste disposal sites is as
follows:
Rachel wants to determine the shipping routes that will minimize Stateline’s total cost in
order to develop a contract proposal to submit to Polychem for waste disposal. She
par cularly wants to know if it would be cheaper to ship directly from the plants to the
waste sites or if she should drop and pick up some loads at the various plants and waste
sites. Develop a model to assist Rachel and solve the model to determine the op mal routes.
Case 10
Nuclear Waste Disposal at PAWV Power and Light
PAWV Power and Light has contracted with a waste disposal firm to have nuclear waste from
its nuclear power plants in Pennsylvania disposed of at a government-operated nuclear
waste disposal site in Nevada. The waste must be shipped in reinforced container trucks
across the country, and all travel must be confined to the interstate highway system. The
government insists that the waste transport must be completed within 42 hours and that
the trucks travel through the least populated areas possible. The following network shows
the various interstate segments the trucks might use from PiOsburgh to the Nevada waste
site and the travel me (in hours) es mated for each road segment. The approximate
popula on (in millions) for the metropolitan areas the trucks might travel through are as
follows:
Determine the op mal route the trucks should take from PiOsburgh to the Nevada site to
complete the trip within 42 hours and expose the trucks to the least number of people
possible.
Case 11
Assigning Students to Schools
The Springfield School Board has made the decision to close one of its middle schools (sixth,
seventh, and eighth grades) at the end of this school year and reassign all of next year’s
middle school students to the three remaining middle schools. The school district provides
busing for all middle school students who must travel more than approximately a mile, so
the school board wants a plan for reassigning the students that will minimize the total
busing cost. The annual cost per student for busing from each of the six residen al areas of
the city to each of the schools is shown in the following table (along with other basic data
for next year), where 0 indicates that busing is not needed and a dash indicates an infeasible
assignment.
The school board also has imposed the restric on that each grade must cons tute between
30 and 36 percent of each school’s popula on. The above table shows the percentage of
each area’s middle school popula on for next year that falls into each of the three grades.
The school aOendance zone boundaries can be drawn so as to split any given area among
more than one school but assume that the percentages shown in the table will con nue to
hold for any par al assignment of an area to a school.
You have been hired as a management science consultant to assist the school board in
determining how many students in each area should be assigned to each school.
The El Paso plant was expanded when the company began marke ng its meters in Arizona,
California, Nevada, and Utah. With the growth of the West Coast business, the Darby
Company opened a third distribu on center in Las Vegas and just two years ago opened a
second produc on plant in San Bernardino, California.
Manufacturing costs differ between the company’s produc on plants. The cost of each
meter produced at the El Paso plant is $10.50. The San Bernardino plant u lizes newer and
more efficient equipment; as a result, manufacturing cost is $0.50 per meter less than at the
El Paso plant.
Due to the company’s rapid growth, not much aOen on had been paid to the efficiency of its
supply chain, but Darby’s management decided that it is me to address this issue. The cost
of shipping a meter from each of the two plants to each of the three distribu on centers is
shown in Table 6.10.
The quarterly produc on capacity is 30,000 meters at the older El Paso plant and 20,000
meters at the San Bernardino plant. Note that no shipments are allowed from the San
Bernardino plant to the Fort Worth distribu on center.
The company serves nine customer zones from the three distribu on centers. The forecast
of the number of meters needed in each customer zone for the next quarter is shown in
Table 6.11.
The cost per unit of shipping from each distribu on center to each customer zone is given in
Table 6.12; note that some distribu on centers cannot serve certain customer zones. These
are indicated by a dash, “—”.
In its current supply chain, demand at the Dallas, San Antonio, Wichita, and Kansas City
customer zones is sa sfied by shipments from the Fort Worth distribu on center. In a similar
manner, the Denver, Salt Lake City, and Phoenix customer zones are served by the Santa Fe
distribu on center, and the Los Angeles and San Diego customer zones are served by the Las
Vegas distribu on center. To determine how many units to ship from each plant, the
quarterly customer demand forecasts are aggregated at the distribu on centers, and a
transporta on model is used to minimize the cost of shipping from the produc on plants to
the distribu on centers.