Calambra

Olive Oil
A simulation based approach to
managing uncertainties and
maximizing value

B32
Yehudi Baptiste, Akanksha Mishra, Wenyue Rong, Yanqing Shen, Mutong Zhang
Objectives
1. Identify the most important uncertainties in our business forecast
2. Run simulations on most important uncertainties
3. Determine the optimal order quantity for 1994
4. Analyze the risk associated with different levels of oil ordered under demand
uncertainty
5. Find optimal order quantities for different levels of risk tolerance
Simulating Demand
Simulating Demand - Demand in 1993
- Base Demand
Min 10% 50% 90% Max

40 50 370 450 460

- Catalog Sales
- Neiman Marcus Deal Demand and William Sonoma Deal Demand
- Yes-No Simulations: Neiman Marcus Deal? William Sonoma Deal?
- Catalog Boost
- NM Deal Boost and WS Deal Boost
- Yes-No Simulations: Neiman Marcus Deal? William Sonoma Deal? Each has a boost effect of:
Min 10% 50% 90% Max

9 10 20 50 51
Simulating Demand-Demand in 1994
- Use IF statement to select proper scenario:
- If Sold Out in 1993:
Min 10% 50% 90% Max

290 300 1200 1600 1610

- If not Sold Out in 1993:

- Simulate the percentage of 1993 sale
Min 10% 50% 90% Max

20% 25% 100% 300% 320%

- Demand in 1994 is therefore the simulated percentage * Demand in 1993

Simulating Demand
Correlations

1993 Demand x 1994 Broker Fee -0.5

1993 Demand x Price 0.5

Price x 1994 Broker Fee -0.25

Optimization
Profit given different order quantities

Lower order quantities reflect Original plan to order

lower MSE. This is expected. With Profit is highest at an 3000 gallons reflects a
lower order quantities, losses are order quantity of approx. loss of approx. $600, on
minimized if demand does not 800 gallons average
materialize. Moreover, higher
profit is limited if demand comes
in higher than orders.
Profit vs Orders
Two year Profit

Gallons of Oil Ordered (1994)

Order Levels and Risk
Utility Analysis
Utility Analysis
● At very low risk tolerance,
we observe negative
certainty equivalence,
meaning that Frank would
pay to stay out of
business--i.e. not deal with
the uncertainties
associated with his
business.
● Certainty equivalents
become positive when risk
tolerance is increased, as
expected.
● The higher risk tolerance
shows that Frank is more
willing to deal with the
higher variability in profit
associated with higher
order quantities.
Recommendations
Recommendations
- We highly advise Frank against
ordering his initial plan of 3000
gallons of oil.
- Instead, we recommend approx.
800 gallons, which results in the
highest simulated level of profit.
- However, mean simulated profit
is not the only factor to consider
when determining the optimal
quantity of gallons to order,
since different levels carry
different levels of risks.
Recommendations (2)
- Frank’s risk tolerance, of course,
plays a big part in our
recommendations.
- If Frank has a extremely low risk
tolerance (>30k), we recommend he
stay out of business entirely.
- But if Frank has a moderate risk
tolerance, lower order quantities are
recommended.
- Finally, if Frank has a high risk
tolerance, we recommend higher
order quantities (~800 gallons)
Thank you