Ateneo de Davao University

School of Business and Governance

Master in Business Administration (MBA) Program

Quantitative Tools in Business

Antonio A. Emberda, BSCE, MBA

Course Description

The course covers relevant trends and recent developments in Management

Science and Operations Research. Quantitative techniques introduced in this course
will help those with experience of management in an organization face increasingly
complex environment in decision-making, and provide would-be employees added
management skills.

Course Objectives

The course aims to expose MBA students to relevant knowledge and develop
appropriate skills in the use of quantitative tools, methods and applications in the
context of prevailing business decision-making areas. To accomplish this, practical
applications in actual business organizations are presented as worked examples
and cases.

Methodology

1. Students can form themselves in groups with two members per group to discuss
theories behind the topic, discuss assigned worked examples per topic and
answer problem cases. One member is going to present the theories applicable
(35 minutes presentation – refer to the book by Levin et. al) and another student
is going to analyze and discuss the assigned worked example (35 minutes
presentation and 8 minutes question and answer). The two members are going
to present the case (45 minutes presentation and 15 minutes question and
answer). Every pair will submit analysis of the cases assigned each meeting.
Non-reporting students will also submit their individual analysis of each case
every meeting.

2. Every group is expected to provide one set photocopies of case analysis

(maximum of three pages only) to every group in the class, which is to be
distributed before the presentation.
3. At the end of the semester, each student is required to submit a project paper (a
feasibility study or a live case illustrating a specific business problem with
quantitative/statistical analysis applied).

Grading System

Case analysis ------------------- 20%

Worked Examples - - - - - - - - - - - - - - - - - - - 25%
Project Paper ------------------- 25%
Midterm/Final Examination - - - - - - - - - - - - - - 20%
Class Participation - - - - - - - - - - - - - - - - - - - 10%

References : Levin, et al (1992), Quantitative Approaches to Management, 8th

edition, McGraw-Hill

Watsham and Parramore (1997), Quantitative Methods in

Finance, 1st edition, International Thomson Business Press

Wisniewski, M. (1997), Quantitative Methods For Decision

Makers, 2nd edition, Pitman Publishing

Schedule of Worked Examples and Case Analyses Reports

First Session :

Introduction
• Course Outline and Course Objectives
• Grading System
• Requirements
• Grouping Assignments

Assignment of Topics, Worked Examples and Case Analyses

• Presentation Requirements

Second Session :

Presentation of Data and Descriptive Statistics

Types of Data
 Presentation of Data
• Frequency Distribution

Descriptive Statistics
• Measures of Location or Central Tendency
• Measures of Dispersion
• Standard Deviation, Skewness & Kurtosis

Worked Example: ATM Data ( refer to page 71 Mik)

Third Session :

Forecasting I : Moving Averages and Time Series

• Road Traffic Casualties in Great Britain

Forecasting II : Simple Linear Regression

• Personal Spending Pattern at UK

Forecasting Case : Growers Chemical Company

Fourth Session :

SAS and other Computer Application of Forecasting

Fifth Session :

Linear Programming I : Solution (Graphical) Methods

• Statement of the Dimensions, Ltd.,

Linear Programming II : Simplex Method

• Statement of the Dimensions, Ltd.,

Linear Programming Case : New England Confectionery Company

Sixth Session :

Specially Structured LP : Transportation Methods (Stepping Stone and

MODI Approach)
• Bass Gravel Company

Transportation Case : California Chemical Company

Seventh Session :

Software application of Linear Programming and Transportation

Eighth Session :

Markov Process
• Evaluating Alternative Strategies

Markov Analysis Case : Do the Rich Get Richer and the Poor Poorer?

Nineth Session :

Stock Control / Inventory : Economic Order Quantity

• Local Education Authority

Inventory Case : Hallmark Cards and Recycled Paper Products

Tenth Session :

Software application of Inventory Management

Eleventh Session :

Waiting Lines (Queuing) : Single and Multiple Channel Queuing

• Teller Staffing at Banker’s Trust

Waiting Lines Case : Planning a Wedding Reception

Twelfth Session :

Simulation :
• Large Utility Company

Simulation Case : Betty’s Balloon Bouti que

Thirteenth Session :

Project Management : Networks / Dynamic Programming

• Short Management Training Course

Project Management Case : Housecrafters I

14th and 15th Sessions

Final and Submission of Project Paper

-0–0-
 PROJECT PAPER

FORMAT

Get a company

Project format:
Space between lines - 1½
Font - Arial
Indentation - 5
Left margin - 1.4
Right Margin - 1.0
Top margin - 1.4
Bottom margin - 1.0
Space between last line
and Subheadings - 2 spaces
Space between paragraphs - 2 spaces

Paper Outline:
Chapter I Introduction - macroperspective
Background of the Study
Company Profile
Statement of the Problem
Specific Problem - allied to Quantitative
Tools
Assumptions of the Study
Significance of the Study
Scope and Limitations of the Study

Chapter II Review of Related Studies

Foreign / Local Studies

Chapter III Methodology

Discuss tools and concepts to be used in specific
problem and related studies (i.e. linear
programming, transportation method, etc.)

Chapter IV Presentation and Analysis of Data

 First Session

Introduction
• Course Outline and Course
Objectives
• Grading System
• Requirements
• Grouping Assignments

Assignment of Topics, Worked Examples and

Case Analyses
• Presentation Requirements
 Second Session

Presentation of Data and Descriptive Statistics

Types of Data

Presentation of Data
• Frequency Distribution

Descriptive Statistics
• Measures of Location or Central Tendency
• Measures of Dispersion
• Standard Deviation, Skewness & Kurtosis

Worked Example: ATM Data ( refer to page 71 Mik)

 Third Session

Forecasting I : Moving Averages and Time Series

• Road Traffic Casualties in Great
Britain

Forecasting II : Simple Linear Regression

• Personal Spending Pattern at UK

Forecasting Case : Growers Chemical Company

 GROWERS CHEMICAL COMPANY
LAWRENCE L. LAPIN
SAN JOSE STATE UNIVERSITY

Growers Chemical Company is a cooperative company owned by groups of farmers in

Midwestern states. The company’s objective is to provide owners with a reliable and
affordable supply of essential agricultural chemicals, especially pesticides and fertilizers.
Growers does little in-house manufacturing, although the company does blend raw
technical chemical feedstocks and serves as a transshipment center. Raw chemicals and
technical bases are procured from many petrochemical suppliers, which send bulk
quantities to Growers Iowa mixing plant, where they are recombined, broken down into
smaller volumes, and shipped on demand directly to member farms.

Growers’ general manager, Tim Allen, is not satisfied with many aspects of the
operation. He has been particularly embarrassed by the high frequency of shortages of
essential chemicals. These force Growers’ farmer/owners to buy comparable products on
the outside market, usually at much higher prices. Growers’ cooperative bylaws require
that the company reimburse individual farmers for any extra cost they incur from buying
chemicals that it normally carries but for one reason or another could not supply.

Much of the difficulty stems from bad timing of shipments and disbursements.
Mr. Allen feels that better forecasts of final product demands are the key to minimizing
costly shortages. These will also be helpful for deciding how often the raw chemicals
should be procured in order to negotiate the best prices. He, also, is interested in
estimating various production costs, which will depend in part on the quantities involved.
Mr. Allen plans to use Growers’ pesticide, Malabug, as the initial product for testing
forecasting methods. The experience with that product will then be used to set up a
comprehensive statistical forecasting system for all Growers’ products.

Table 52-1 Demand for Malabug ( Thousands of Gallons)

Q u a r t e r
Year Winter Spring Summer Fall Total
1990 18 80 30 22 150
1991 24 105 54 27 210
1992 33 141 48 38 260
1993 40 150 75 48 313
1994 35 180 55 50 320
1995 48 205 70 57 380

Table 52-1 shows the historical demand for Malabug. Mr. Allen wants to use
these data to forecast demand for each quarter of 1996, as well as to develop short-range
and long-range annual forecasts. From an industry trade association, Mr. Allen has
obtained the data in table 52-2. These provide the national production quantities of the
foundation technical base for Malabug. For budgeting and planning, Mr. Allen wants to
determine a relationship for predicting the direct processing costs of Malabug. He has
gathered the data in table 52-3, obtained from records for the past five production runs.

You have been retained as a consultant to assist Mr. Allen in making predictions
and forecasts.

Questions

1. Applying classical time-series analysis to the data in Table 52-1, determine the
seasonal indexes for Malabug demand.

2. Deseasonalized values for any quarter may be found by dividing actual values by
the seasonal index. Using the data in Table 52-1 and your answers to Question 1,
determine for each quarter the deseasonalized Malabug demand volume.

Table 52-2 Annual Production Quantities of the Chemical B

(Thousands of Gallons) for Malabug
Production Production
Year Quantity Year Quantity
1986 587 1991 1,639
1987 648 1992 2,059
1988 815 1993 2,655
1989 1,050 1994 3,050

Table 52-3 Growers Production Cost Data for Malabug

Direct Cost Technical Base Raw Stock
(Per Gallon) (gallons) (gallons)
$ 9.82 500 1,000
$ 9.14 1,000 500
$ 8.75 700 800
$ 9.24 400 1,100
$ 8.33 350 1,150

3. Use the total annual demands in Table 52-1 to find .a regression equation for
Malabug demand. Then use that equation to predict demand for the following
years:
a) 1996
b) 2000
c) 2005

4. Using the forecast from Question 3(a) for 1996 Malabug sales, apply the seasonal
indexes found in Question 1 to make Malabug forecasts for each quarter of 1996.
5. An alternative procedure is to use seasonal exponential smoothing. Determine
Growers’ forecast for 1996 Malabug quarterly sales by using α = 0.5 (trend-
smoothing constant); γ = 0.5 (slope-smoothing constant), and β = 0.5 (seasonal
factor). Compute the MSE (mean squared error).

6. Compare your answers to Questions 4 & 5. Which procedure do you prefer?

Explain.

7. Exponential smoothing maybe used to forecast future production levels of the

Malabug technical base. Use the data from Table 52-2 to determine the forecast
values using each of the following sets of parameter values. In each case compute
the MSE.
a) α = 0.20 ; γ = 0.40
b) α = 0.30 ; γ = 0.30
c) Which set of parameters appears to provide the best fit to the actual
data?

8. Mr. Allen assumes that Growers’ Malabug production will continue to consume
40% of the technical base market. Using the best set of parameters from Question
7, forecast the 1996 industry production quantity. From that quantity, determine
Growers’ forecast technical needs for 1996.

9. Using the data in Table 52-3, find the regression equation for predicting direct
cost per gallon of Malabug for a batch with a known volume of technical base
and raw stock. Then, estimate the direct cost per gallon for the following
production runs:
a) Base: 1,000 gallons; raw stock: 1,000 gallons
b) Base: 500 gallons; raw stock: 750 gallons
c) Base: 750 gallons; raw stock: 500 gallons
d) Base: 400 gallons; raw stock: 600 gallons
 Fourth Session

SAS and other Computer Application of

Forecasting
 Fifth Session :

Linear Programming I : Solution (Graphical)

Methods
• Statement of the Dimensions, Ltd.,
[Quantitative Approaches to Management – 8th ed.(p.380)]

Linear Programming II : Simplex Method

• Statement of the Dimensions, Ltd.,
[Quantitative Approaches to Management – 8th ed. (p.422)]

Linear Programming Case :

New England Confectionery Company
 NEW ENGLAND CONFECTIONERY COMPANY
LAWRENCE L. LAPIN
SAN JOSE STATE UNIVERSITY

FOR almost 50 years, the McGregor family has owned the New England Confectionery
Company. Originally, the company sold saltwater taffy out of a beach resort store on
Cape Cod, Massachusetts. The company is now a major supplier of high-quality
chocolate candies to gift shops throughout New England.

PART A. FIRST APPROXIMATIONS FOR OPERATIONAL DECISIONS

Phil McGregor, director of operations, has recently completed his M.B.A. at the
University of Connecticut. He has been discussing with Roberta Miller, the marketing
vice-president, how the company might improve the overall efficiency of its cand
packaging and manufacturing. He is exploring using linear programming in a variety of
ways. The simplest application involves configuring the standard boxed assortments to
achieve an optimal mix of various candy types. He wants to see how a formula derived
from the linear programming approach compares to the existing scheme. He wants to
make comparisons in terms of cost, as well as in terms of profitability.

New England Confectionery currently makes six mixtures, each featuring two of
the four candy types described in Table 9-1. Although current definitions of the mixtures
are very detailed, Mr. McGregor has analyzed them and has been able to redefine the
mixtures in terms of the specifications in Table 9-2. New England Confectionery
currently plans an assortment so that each particular candy has a specific location in the
box. For example, the cherry nougat crème for the 1-pound Mayflower box must lie in
position 3 of row 2. No Mayflower boxes can be assembled until that candy piece and a
rigid list of others – each of which also has an assigned box position – are in inventory.
Mr. McGregor feels that this “template” approach to assembling mixed candies is
unnecessarily restrictive and may result in excessive stale stock because of imbalances in
quantities. Stale candies must be sold at a loss for the value of the ingredients to a large
ice cream manufacturer.

Table 9-1 Ingredient Percentages and Costs for Various

Key Ingredient Fudge Cream Toffee Truffles

Nut Weight 15% 10% 14% 0%
Fruit Weight 4% 6% 0% 5.50%
Caramel Weight 0% 10% 8% 0%
Marshmallow Weight 4% 2% 0% 0%
Average Cost per ounce $ 0.09 $ 0.14 $ 0.08 $ 0.16

Ms. Miller maintains that the “templates” are a legacy from Mr. McGregor’s
grandfather and are not essential to product identity or perceived quality. It would not be
harmful to have some boxes with two peach melba crèmes and no cherry piece, or vice
versa. It would even be all right for a Mayflower box to have an extra mocha fudge in
place of either of those pieces, although the final box should achieve targeted standards in
terms of mix diversity and proportional representation of the major candy types.
Positioning of the pieces is irrelevant, since marketing research shows that customers do
not expect a particular candy always to lie at a particular coordinate position within the
box.

Also at issue is the manner of determining production quantities for specific

candy types. If New England Confectionery is free of the lock-step approached producing
exactly one cherry nougat crème per box containing creams, then production quantities
may vary with changing supply conditions and fluctuating kitchen states. Linear
programming is a very useful tool to use in establishing optimal production quantities for
the various types. The data in table 9-3 apply for cream candies already scheduled to be
made on a particular day. On this day, four themes of two candies each are to be made.

Part A Questions

1. Formulate a linear program for determining at minimum cost the weight of the
respective candy groups for a 1-pound Mayflower box (or for some other box, as
assigned). Incorporate the restriction that the box must contain exactly 1 pound of
candy. Then solve the problem. (The graphical procedure may be used).

2. Using the data from Table 9-3, formulate a linear program for determining how
many candies of the cherry theme (or for some other theme, as assigned) New
England Confectionery should make in order to maximize average profit for that
theme. Then solve the problem. (The graphical procedure may be used.)

3. When Ms. Miller examined one of Mr. McGregor’s linear programs of the
Question 2 type, she exclaimed, “That can’t be right. You’ve left out the
chocolate, sugar, and vanilla, to name a few ingredients.” Suggest an answer for
Mr. McGregor to give in reply.

4. New England sells two sizes of boxes: 1-pound and 2-pound. Suppose that half of
the boxes are of each weight. From your solution to Question 1, what will be the
respective weights of the candy types going into a 2-pound box?

5. Suppose that the linear program in Question 1 is modified so that each box must
contain at least 1 pound of candy. Should the modified linear program provide the
same solution? Verify this by solving the revised linear program. (Although
having more than 1 pound of candy might require changing the proportional
specification constraints, for simplicity change only the total weight constraint.) If
the solutions are different, do you think Mr. McGregor should use the newer
solution or the one for Question 1? Explain.
Table 9-2 SPECIFICATIONS FOR DIFFERENT MIXTURES (Candy Assortments)

ASSORTMENT BRAND
Specifications
Mayflower Cape Cod Salem Acadia Vermont Hampshire
Cream ≤ 40% Cream ≤ 40% Fudge ≤ 90% Fudge ≤ 60% Toffee ≤ 70% Cream ≤ 70%
Candy Groups
Fudge ≤ 90% Toffee ≤ 80% Toffee ≤ 70% Truffles ≤ 80% Truffles ≤ 50% Truffles ≤ 50%
Proportional
Nut Weight
≥ 13% ≥ 7% ≥ 14.75% ≤ 7% Unrestricted Unrestricted
Proportional
Fruit Weight
≥ 4.5% ≥ 1% Unrestricted ≥ 5% Unrestricted ≥ 5%
Proportional
Caramel Weight
≤ 5% ≥ 8.5% Unrestricted Unrestricted ≥ 2% ≤ 9%
Proportional
Marshmallow ≥ 3% Unrestricted ≥ 2% ≥ 1% Unrestricted Unrestricted
Weight
Table 9-3 Production Data for One Day's Output of Four Candy Themes
Candy Piece and Requirements
Listed Cherry Burgundy Coconut Shredded Peach Chunky Available
Theme Nougat Cherry Hazelnut Walnut Crème Coconut Melba Peach Quantity
Cherry 2 1 500
Peaches 5 25 500
Hazelnut 2 1,000
Walnut 5 500
Coconut 2 oz 3 oz 300
Mixing 0.5 min 1.0 min 2.0 min 3.0 min 0.5 min 4.0 min 1.0 min 0.5 min 500
Labor 0.5 min 1.5 min 5.0 min 0.8 min 0.5 min 4.0 min 1.5 min 0.8 min 1,500
Molds 1 1 1 1 1 1 1 1 1,000
Maximum
160 200 300 200 none 200 250 200
pieces
Piece Ave
$ 0.08 $ 0.11 $ 0.06 $ 0.07 $ 0.08 $ 0.09 $ 0.11 $ 0.09
Profit
The candy theme production can be staggered so that each theme group will have 400 minutes of mixing time,
500 minutes of labor and 550 molds
Table 9-4 Average Piece Weights of Candy Types
Toffee Cream Fudge Truffle
Average Piece Weight 1.1 oz 0.8 oz 0.9 oz 1.0 oz

6. Table 9-4 lists the average weights per candy piece for each of the four main
candy types. For your solution in Question 1, determine how many pieces of
average weight from each candy group must be used to meet the required weights
for the 1 – pound box. Do you notice anything unusual that might complicate Mr.
McGregor’s ability to make the assortment?

7. A more realistic approach to solving the assortment mixture problem would be to

allow for each box to have a total weight lying within ±0.5 ounce of the 1 –
pound target, so that total weight must be ≤ 16.5 ounces and must be ≥ 15.5
ounces. The variables could then be redefined to be the number of candy pieces
from each group, and the solution could be restricted to integer values (whole
numbers).

a. For the assortment type used in Question 1, formulate the new problem.
For simplicity, use the same ingredient specification constraints as in
Question 1, just as if the mixture were to contain exactly 1 pound of
candy. Modify each of those constraints so that ingredient weight (in
common units) is represented by the left-and-right- hand sides.

b. Find the optimal solution to the problem formulated in part (a) that
involves whole pieces of candy only. (Graphical methods may be used).

c. Round the values from Question 6 for the number of pieces to the nearest
integers. Comparing these quantities to those found in part (b), what may
you conclude regarding the desirability of using rounded values to arrive
at integer solutions?

PART B. EVALUATIONS USING THE EXPANDED LINEAR PROGRAMS

Mr. McGregor does not think he will truly optimize the candy mixing decision if each
assortment is evaluated separately. Three assortments require each candy group, so an
overall optimal solution may not be reached when the decisions are made independently.
The problems formulated in Part A also ignore two important factors: available candy
quantities in each group, shown in Table 9-5; and the number of boxes of each assortment
that must be filled given in Table 9-6. (These are all 1–pounders; 2-pound boxes are
made by sacking two 1-pound trays).
 Using as variables the total weight of the particular candy group to be inserted
into boxes of the respective assortment, a linear program may be formulated that
considers all assortments and candy groups simultaneously. The overall objective is to
minimize total cost while satisfying the demands within the available candy quantities.
That must be done so that each assortment meets the specifications in Tables 9-1 and 9-2.

Mr. McGregor also believes that he cannot truly optimize the candy production
quantity decisions if each cream theme is evaluated separately. Production resources are
shared by each theme and have been artificially allocated evenly among them. But it may
be more profitable, for example, to use more labor on cherries than on coconuts.

Table 9-5 Available Candy Quantities by Group

Candy Group Available Quantity (lb)
Cream 1,000
Fudge 1,000
Toffee 1,500
Truffles 1,000

Table 9-6 Number of Boxes of Each Assortment

That must be Filled
Assortment Required Number of Boxes
Mayflower 500
Cape Cod 750
Salem 1,000
Acadia 500
Vermont 1,000
Hampshire 1,000

Part B Questions

1. Consider the problem of simultaneously determining the total volumes of candy

types going into each assortment.
a. Formulate the linear program. Fractional quantities are acceptable as a
first approximation.
b. Use a spreadsheet to summarize the formulation from part (a) in a table.
The column headings should be the variables. The first row of the table
should have the coefficients of the variables in the objective function and
should indicate whether it is maximization or minimization. Subsequent
rows should have the exchange (or technological) coefficients of each
constraint, the form of the coefficient ( ≤ ; = ; or ≥ ), and the right hand
side numbers.
2. Attempt to solve the linear program formulated in Question 1. Can the problem be
solved? Discuss the situation and give a recommendation to Mr. McGregor.

3. After contemplating various recommended modifications to his planning, Mr.

McGregor decides to reduce the minimum quantity for Salem to 500 pounds, so
that the shortage will be added to next period’s demand for that assortment. Solve
the modified linear program.

4. Consider the problem in which all eight candies from Table 9-3 are combined into
a single decision for the cream group.
a. Formulate a single linear program.
b. Use a spreadsheet to summarize the formulation from part (a) in a table.
The column headings should be the variables. The first row of the table
should have the coefficients of the variables in the objective function and
should indicate whether it is maximization or minimization. Subsequent
rows should have the exchange (or technological) coefficients of each
constraint, the form of the coefficient ( ≤ ; = ; or ≥ ), and the right hand
side numbers.

5. Solve the linear program formulated in Question 4. Can the problem be solved?
Discuss the situation and give a recommendation to Mr. McGregor.

6. Mr. McGregor considered various modifications to his decision problem, as a

stopgap measure, he retrieved 1,000 extra (and older) candy molds from storage.
Modify the linear program in Question 5 and find the solution.

PART C. IMPROVING THE STRUCTURE OF THE BUSINESS

Phil McGregor has extensively employed linear programming to plan the company’s
everyday operations. Ms. Miller now is engaged in getting her own M.B.A.
 Sixth Session

Specially Structured LP : Transportation Methods

(Stepping Stone and MODI Approach)
• Bass Gravel Company
[Quantitative Approaches to Management – 8th ed. (p.521)]

Transportation Case :
California Chemical Company
 CALIFORNIA CHEMICAL COMPANY

LAWRENCE L. LAPIN
SAN JOSE STATE UNIVERSITY

California Chemical Company supplies farmers with ammonium sulfate fertilizer.

This chemical is quite bulky and is most economically shipped by rail. California
Chemical has two plants, one located in Red Bluff (annual capacity 1.5 million
tons) and the other in Bakersfield (1 million tons). Unfortunately, since individual
farmers do not order sufficient quantities for rail shipments and are usually far
from the tracks anyway, they receive their ammonium sulfate by truck, regardless
of point of origin. To take advantage of transportation savings, the company has
two warehouses, each with a 500,000-ton capacity, situated in Sacramento and
Visalia. All shipments to the warehouses come by rail. Each California Chemical
facility lies near the center of gravity of a local sales territory.

California Chemical’s plants serve the warehouse function for the territory in
which they are situated. Any warehouse may deliver to customers in neighboring
territories, within geographical constraints. Table 1 provides the territory the
demands and the applicable distances. Blank entries indicate that no shipments
are allowed over that route.

Table 1 Mileage Data and Allowed Routes for the California

Chemical Company
DISTANCE
Territory 1 2 3 4 5 6 7 8 9 Demand
( tons)
1.Bakersfiel (customer 35 240 240 ---- 210 150 140 150 50 260,000
and plant)
2. Imperial ---- 10 ---- ---- ---- ---- 130 ---- ---- 300,000
3. Napa North Coast ---- ---- 20 ---- 50 100 ---- 100 ---- 150,000
4. Red Bluff ---- ---- 120 30 110 240 ---- 200 280 200,000
(customers and plant
5. Sacramento ---- ---- 50 ---- 25 140 ---- 70 ---- 400,000
(customers and
Warehouse)
6. Salinas ---- ---- 100 ---- ---- 15 ---- 80 160 400,000
7. San Bernardino ---- 130 ---- ---- ---- ---- 15 ---- ---- 200,000
8. Turlock ---- ---- 100 ---- ---- 80 ---- 25 ---- 150,000
9. Visalia ( customer ---- ---- ---- ---- ---- 160 ---- 95 20 300,000
and warehouse)
 PART A. SCHEDULING SHIPMENTS

The number along the main diagonal in Table 1 represents average delivery
distances from the central point to customers within the territory. To determine
the distance to a customer within the territory, that final lag must be added to the
distance from the shipping point to the center of the territory. For example, 10
miles is the average distance from the center to the customers within the Imperial
territory. A shipment from the Bakersfield plant to the Imperial customer group
first goes 240 miles from the plant to the territory center and from there another
10 miles to reach the customer – all by truck- over a total distance of 240+10 =
250 miles. Likewise a shipment to a Turlock customer may be made directly from
the Bakersfield plant, a truck distance of 150+25=175 miles; or the same Turlock
customer might instead receive shipments through the Visalia warehouse, a
distance of 95+25=120 miles from that warehouse by truck. Shipments from the
Bakersfield plant to the Visalia warehouse travel 50 miles by rail, but only in bulk
volumes that are later split into smaller quantities for individual customers. Plant-
to-warehouse shipments cannot be identified with any particular customer
destination. (Since rail and truck routes differ, the total distances are not the
same). Freight costs per ton-mile are $ 0.02 by truck and $ 0.01 by rail.

PART A. QUESTIONS

1. Construct a transportation problem matrix for California Chemical’s

distribution. Be sure to set up the schedule as a transshipment problem,
so that each warehouse serves as both a source and a destination.
Warehouses may not ship to another warehouse, and the corresponding
variables should be represented in the shipment schedule as impossible
cells, as should forbidden routings. These cells should have an arbitrary
high cost. A dummy source or destination will be needed to make total
demand equal to total capacity.

2. Solve the transportation problem formulated in Question 1 to find the

minimum transportation cost. If possible, do this with computer
assistance.

3. Suppose the warehouse capacities are increased to 750,000 tons each,

determine the new optimal shipment schedule and its total cost.

PART B. LOCATING WAREHOUSES

A consultant is studying California Chemical’s distribution system to determine

whether the company might achieve significant cost reductions by increasing its
number of warehouses. Each current California warehouse has a capacity of
500,000 tons per year and cost $400,000 to operate. Any new warehouse would
have identical capacity and cost and would be located at the center of agricultural
activity within one of the five sales territories that does not currently have a
California Chemical facility.

PART B. QUESTIONS

1. Construct a transportation problem matrix for California Chemical’s

distribution, assuming that no new warehouses are built. Add a dummy
row or column to make total demand to total capacity.
2. Find the optimal solution to the problem formulated in Quesion1. Then
calculate total distribution cost by adding the warehouse operating and
freight costs.
3. Three possible solutions to the warehouse location are given in Table2.
Including the present situation (no new warehouses), how many solutions
are possible to the warehouse location problem?
4. Solve California Chemicals distribution for each of the cases listed in
Question 3. In doing this, add a new row and column to the transportation
problem, as formulated in Question 1, for each new warehouse location.
Then the minimum-cost shipping schedule must be found for that set
locations. The total distribution cost is then determined by adding the
warehouse operating costs to the total freight cost. Which set of location-
(a), (b), or (c) –has the lowest distribution cost?

Table 2. POSSIBLE SOLUTIONS TO WAREHOUSE LOCATION PROBLEM

Location Set
Territory (A) (B) (C)
1. Bakersfield Plant Plant Plant
2. Imperial New warehouse New warehouse New warehouse
3. Napa/North Coast ---- ---- New warehouse
4. Red Bluff Plant Plant Plant
5. Sacramento Warehouse Warehouse Warehouse
6. Salinas ---- New warehouse New warehouse
7. San Bernardino ---- ---- New warehouse
8.Turlock ---- ---- New warehouse
9. Visalia Warehouse Warehouse Warehouse

5. Describe what you must do to guarantee the optimal distribution system.

 Seventh Session

Software application of Linear Programming and

Transportation
 Eighth Session

Markov Process
• Evaluating Alternative Strategies
[Quantitative Approaches to Management – 8th ed. (p.821)]

Markov Analysis Case : Do the Rich Get Richer

and the Poor Poorer?
 DO THE RICH GET RICHER
AND THE POOR POORER?

William D. Whisler
California State University, Hayward

During the 1992 presidential campaign the Democratic nominee, Bill Clinton advocated
increasing taxes on “the rich” and giving middle-and lower – income taxpayers a break.
One function of the U.S. Treasury Department is to study tax proposal and determine
how they will affect the country – the economy, the income distribution of the population,
tax collections, and so on. One of the Treasury Department’s studies, based on 14,351
taxpayers who filed returns every year between 1979 and 1988, found that significant
numbers of low-income Americans moved up in the income ladder while those at the
very top tended to remain there.1 The data in Table 44-1 show the percentage of
taxpayers who had moved into a different income bracket at the end of the decade
(adjusted for inflation). For example, 47.3% of the taxpayers who earned more than
$200,000 at the beginning of the 10-year period were still in that income category at the
end of the period; 38.6% saw their incomes drop to the next highest category ($45,000
to $199,999); 7.7% had an income decrease to the $25,000 to $49,999 range, and so
forth, including 2.2% who lost almost everything and became “poor” with no income less
than $7,000. Sarah Hu, a senior analyst in a nonprofit research institute has been
assigned to a project to analyze the income distribution of the U.S. population and the
effect of various tax proposals. Recently, some interest groups have charged that in the
United States “the rich gets richer and the poor poorer”

Table 44-1 INCOME MOBILITY

Income at end of Decade
Income at Beginning $200,000 $45,000 $25,000 $15,000 $7,000
of Decade OR TO TO TO TO
MORE $199,999 $44,999 $24,999 $14,999
$200,000 or more 47.3% 38.6% 7.7% 3.8% 0.4%
$45,000 to $ 199,999 5.3 59.4 20.3 9.4 4.4
$25,000 to $ 44,999 0.6 34.8 37.5 14.9 9.3
$15,000 to $ 24,999 0.4 14.6 32.3 33.0 14.0
$7,000 to $ 14,999 0.3 10.8 19.6 29.6 29.0
Less than $7,000 0.3 14.4 25.3 25.0 28.0

and Ms. Hu has been asked to determine whether the results of the recent Treasury
Department study shed any light on this question. She is particularly intrigued by the
similarity between Table 44-1 and some Markov processes that she studied while
attending graduate courses at a nearby university.
_______________
Adapted from David Wessel, “Low Income Mobility Was High in 1980. Wall Street Journal, June 2,1992.
p.2 with additional estimates made for taxpayers in the lowest bracket who are not required to file returns.
 Ms. Hu has estimated that 1% of the population currently earns more than
$200,000; 19% have incomes in the $45,000 to $199,999 range; 20% have income
between $25,000 and $44,999; 20% have income in the range $15,00 to $24,999; 20%
have incomes between $7,000 and $14,999 and 20% have incomes less than $ 7,000.2

Questions

1. Based on the data in Table 44-1, how will the current income distribution change
at the end of the decade? What about at the end of the second, third, and fourth
decades? What is the long-run income distribution?
2. Assuming that there are 120 million taxpayers in the United States, estimate the
total dollar amount of taxes paid at the current time, using the estimated tax
payments for each income group given in Table 44-2.
3. What would the expected tax payments be 10,20,30 and 40 years later? in the
long run?
4. Suppose that a confiscatory “poor tax” takes all income from all taxpayers who
earn more than $200,000; that is, all these taxpayers receive zero income at the
end of the decade. What happens to the income distribution and the taxes
collected? Now suppose that rather than becoming poor all the $200,000
taxpayers become middle class with half having incomes between $15,000 and
$24,999 and the other half having incomes between

Table 44-2 Average Taxes Paid

SY Income Category
Income Average Taxes Paid
More than $200,000 $ 124,000
$45,000 to $ 199,999 $ 10,900
$25,000 to $ 44,999 $ 3,600
$15,000 to $ 24,999 $ 1,500
$7,000 to $ 14,999 $ 700
Less than $7,000 $200

Table 44-3 Initial Income Distribution

with No One Earning
Less than $7,000
Income Percent of Population
More than $200,000 1
$45,000 to $ 199,999 19
$25,000 to $ 44,999 20
$15,000 to $ 24,999 20
$7,000 to $ 14,999 40
Less than $7,000 0
_______________
2
Both these data and the data in Table 44-2 have been adapted from the Statistical Abstract of the United
States 1992 Washington D.C. 19921. p. 327.
 $25,000 and $44,999. What are the income distribution and taxes collected in
this case? What about in the long run in both cases?
5. Suppose that poverty is eliminated and no taxpayers are classified as “poor” –
that is, having incomes of less than $7,000. The current income distribution is
this case is that given in Table 44-3. Using the income mobility data in Table 44-
1, what percentage of the population will be in the different income categories at
the end of the next decade? In 20,30, and 40 years, and in the long run? What
happens to the total expected tax payments?
6. Finally, suppose that no one earns $200,000 or more and that no one is poor at
the beginning of the decade. In fact, suppose that everyone in the country is
earns $15,000 to $24,999. What percentage of the population would be in the
various categories at the decade’s end? What about after 20,30, and 40 years,
and in the long run? Calculate the total expected tax payments for all these
cases.
7. A new government program is being contemplated. It will guarantee that anyone
who is “poor’ (income less than $7,000 now will not be “poor” 10 years later all
such persons will have incomes in the $7,000 to $14,999 range. How would this
affect income distribution and total expected tax payments? Analyze this situation
for the same 10,20,30 and 40 year time horizons and for the long run.
 Ninth Session

Stock Control / Inventory : Economic Order

Quantity
• Local Education Authority

Inventory Case :
Hallmark Cards and Recycled Paper Products
 CASE 2

HALLMARK CARDS AND

RECYCLED PAPER PRODUCTS

LAWRENCE L. LAPIN
SAN JOSE STATE UNIVERSITY

Recycled paper products (RPP) has rapidly grown from an innovative alternative
greeting card company to a major player in the social expression industry. The company
supplies thousands of retailers of various types and sizes. Although there is little
evidence that RPP has emulated Hallmark Cards, the reverse is evident and may largely
be responsible for Hallmark creation of its Shoebox line of cards. But Hallmark does
have much to emulate. A management consultant for RPP decided to study whether or
not RPP should adopt certain of Hallmark’s dealer servicing and inventory management
procedures. Hallmark bundles cards in wholesale packet units--- each package
containing multiple copies of exactly the same card, but the number of cards varying
depending on the retail price of the card--- so that the packets all have a retail value of
about $12. Historically, RPP’s cards have not varied nearly as much in price as
Hallmark’s, although greater variation in the card line is contemplated.
Dan Hildebrandt is charged with the responsibility of developing a clone to the
Hallmark system for distribution of RPP cards, which he proposes should follow
Hallmark’s pattern of different prices, depending on the degree of elaborateness and
artistic quality. Working under the assumption that RPP will adopt that pattern, he
recommends that RPP distribute its cards in packets according to the quantities in Table
2-1.

TABLE 2-1 PACKET SIZES FOR

PROPOSED RPP CARDS

NUMBER OF CARDS
RETAIL PRICE IN WHOLESALE PACKET
(1) $1.00 12
(2) $1.50 8
(3) $2.00 6
(4) $2.50 5
(5) $3.00 4
(6) $4.00 3
(7) $5.00 3

Mr. Hildebrandt is analyzing the inventory decision from the retailer’s point of
view. He assumes that a typical retailer will achieve a rate of return of 15% on working
capital. Prior study has shown that retailers who use automated reordering experience
an ordering cost of about $25 per card design ordered. The data in Table 2-2 are
assumed to apply for a typical RPP dealer.
 Mr. Hildebrandt recommends that RPP advise its retailers that at any time 95% of
the display pockets should hold at least one of the proper cards assigned to that space,
with obsolete filler cards inserted into the other 5% until they can be restocked.
Customers will not backorder any card that is out of stock, taking the filler instead. Since
customers are ordinarily not fully satisfied with the filler. Mr. Hildebrandt believes that the
actual shortage penalty, experienced grows with the duration of the shortage. The
shortage causes some percentage of disappointed customers to shift their business
elsewhere, culminating in the retailer’s losing some percentage of future profits. Mr.
Hildebrandt believes that the amount and effect are similar to what might be experienced
in connection with stationery item of comparable value for which backordering would
make sense. Although the model is not literally correct, he assumes as a first
approximation that the traditional EOQ actual model with backordering applies.

TABLE 2-2 PACKETS SIZES FOR PROPOSED RPP CARDS

AVERAGE ANNUAL NUMBER OF

RETAIL PRICE DEMAND PER DESIGN DIFFERENT DESIGNS

(1) $1.00 150 150

(2) $1.50 200 245
(3) $2.00 75 330
(4) $2.50 50 178
(5) $3.00 25 56
(6) $4.00 10 85
(7) $5.00 10 36

Questions

1. EOQ models can only be used to approximate the retailer’s optimal ordering
decisions. Discuss some of the assumptions that may not strictly apply here.
Comment on the suitability of using the models inspite of their limitations.

2. Determine how many cards of a single design in each retail category a typical
store should order, and identify the corresponding reorder points, so as to
minimize total annual relevant inventory cost. Mr. Hildebrandt will recommend
that these amounts be adopted as the packet quantities.

3. Compute the retailer’s total annual relevant inventory cost for ordering each
design in each price category with the order quantities found in Question 2.

4. Compute the same costs as in Question 3, but assume that RPP only lets
retailers order exactly one, two, or three packets of the type in Table 2-1 for a
particular design, and assume further that the retailer in each case orders the
number of packets that yields an order quantity most closely matching the EOQ
found in Question 2. Then determine the net annual inventory cost savings per
design in each price category by instead using the true EOQ.
 TABLE 2-3 ANNUAL CARD DEMANDS AT CHARLOTTE'S WEB BOUTIQUE

(1) (2) (3) (4)

HUMOROUS ELEGANT FANCY
BIRTHDAY ANNIVERSARY SYMPATHY RETIREMENT

632 157 54 62

5. The preceding analysis was based on the assumption that each design has the
same annual demand as the average for that price category. Actual experience
shows that each card in a particular price category has its own demand,
independent of the rest. Comment on the validity of the EOQs computed in
Question 2.

6. Suppose that Charlotte’s Web Boutique experiences the annual demands for
selected S2 cards shown in Table 2-3
a. Determine Charlotte’s EOQ for each card in Table 2-3
b. If RPP accepts Mr. Hildebrandt’s recommendations, the company will
only accept orders for any number of the new-type packets of the size
found in Question 2. Determine for each of the designs in table 2-3 which
number of the new-type packets comes closest to achieving the optimal
order sizes found in part (a).
 Tenth Session

Software application of Inventory Management

 Eleventh Session

Waiting Lines (Queuing) : Single and Multiple

Channel Queuing
• Teller Staffing at Banker’s Trust
[Quantitative Approaches to Management – 8th ed. (p. 750)]

Waiting Lines Case :

Planning a Wedding Reception
 Case 34

PLANNING A WEDDING RECEPTION

David Aviel
California State University, Hayward

Two years after joining American Corporation, James Hart was promoted to Vice
President of Operations. He was given membership in the Silicon Valley Country
Club and a large office on VP row, two doors down from the Vice President of
Personnel, Ann Olsen. A few months Ann and James announce their
engagement. Since Ann is an orphan, she and James will be jointly financing the
wedding reception. He has agreed to make all the arrangements. In preparing for
the wedding, they are going over the 980-person guest list for the tenth time to
ascertain that no one has been left out. The list reads like Who’s Who on the
science, space, aviation, and political establishment. It includes corporate
executives, senators, representatives, Pentagon and NASA officials, lobbyists,
military attaches, suppliers, major customers- domestic and foreign- and
important intermediaries. Ann and James have a unique queuing problem
because costs cannot be determined in conventional dollars and cents. The
benefits, however, could be very substantial, especially to the intermediaries
coming from faraway countries. On reflection, Ann and James decide that the
objective should be to minimize the time these dignitaries and VIPs must wait in
line for valet parking, at the table and especially at the bar. Therefore, it is
important to secure the correct number of parking attendants, waiters, and
bartenders. Ann comments that since the bar is the bottleneck, attention should
be focused there.

Since the reception will be held between 2:00 P.M. and 10:00 P.M. and since the
guests, many of them flying their own airplanes, will be coming from such varies
points of origin as Silicon Valley, Southern California, Georgia, Washington D.C.,
Alabama, New York, Florida, and various foreign countries, then arrival will be
spread out over the afternoon, with the majority arriving between 4:00 P.M and
8:00 P.M.. Consequently, Ann and James focus on this time stock, during which
a queuing problem is most likely to occur and come up with the following
estimates; arrivals will follow an exponential distribution, with an average rate of
175 per hour service times similarly can be approximated by an exponential
distribution, with an average rate of 90 per hour, and no longer than 1 minute
should be spent waiting for a drink.
 Questions

1. Help Ann and James settle some key question.

a. How many bartenders will be needed?
b. How many people will be in line and in the system on average?
2. Ann who has a flare for public relations, is not completely satisfied with the
results.

“Look honey, Senator Simley has two other fund-raising functions to attend that
afternoon and will probably spend only a few minutes at ours. We can’t let her
wait in line. Besides, even though the wait is only 1 minute, it looks bad for
arriving dignitaries to see a line. How about cutting the wait to 10 seconds or
less?

How many bartenders are needed, and how long will the guests spend waiting in
line and in the system?

3. Waiters sand bartenders are members of a union and are paid $ 15 per
hour plus a mandatory tip of 20%.They are guaranteed a minimum 8-hour
shift. If they are kept longer than 8 hours, the overtime wages are time-and-
a-half plus $ 10 for dinner and $ 18 for cab fare home. How much will it cost
if guests wait in line 1 minute on average, and how much if the wait is only
10 seconds?
4. James’s gardener’s cousin has a caterer services that employs young,
diligent, and hardworking people, most of them recent arrival in United
States. This caterer charges $ 6 per worker per hour , his employees are
polite, eager to please, and do not take coffee breaks. However, since their
English is not too good and they are not familiar with the terminology of the
different cocktails, each of them can serve only 80 guests per hour.

a. How many bartenders will you have to order from this caterer, and
how long will the guests spend in line and in the system?
b. How much will it cost to engage the caterer in part (a)?
c. Because of the lower cost of the second caterer, Ann suggest that
additional attendants be hired to eliminate the wait altogether. How
many additional attendants will be needed, and how much will it
cost?
 CALIFORNIA CHEMICAL COMPANY

LAWRENCE L. LAPIN
SAN JOSE STATE UNIVERSITY

California Chemical Company supplies farmers with ammonium sulfate fertilizer.

This chemical is quite bulky and is most economically shipped by rail. California
Chemical has two plants, one located in Red Bluff ( annual capacity 1.5 million
tons) and the other in Bakersfield ( 1 million tons). Unfortunately, since individual
farmers do not order sufficient quantities for rail shipments and are usually far
from the tracks anyway, they receive their ammonium sulfate by truck, regardless
of point of origin. To take advantage of transportation savings, the company has
two warehouses, each with a 500,000 capacity, situated in Sacramento and
Visalia. All shipments to the warehouses come of a local sales territory.

California Chemical’s plants serve the warehouse function for the territory in
which they are situated. Any warehouse may deliver to customers in neighboring
territories, within geographical constraints. Table 1 provides the territory the
demands and the applicable distances. Blank entries indicate that no shipments
are allowed over that route.

Table 1 Mileage Data and Allowed Routes for the California

Chemical Company
DISTANCE
Territory 1 2 3 4 5 6 7 8 9 Demand
( tons)
1.Bakersfiel (customer 35 240 240 ---- 210 150 140 150 50 260,000
and plant)
2. Imperial ---- 10 ---- ---- ---- ---- 130 ---- ---- 300,000
3. Napa North Coast ---- ---- 20 ---- 50 100 ---- 100 ---- 150,000
4. Red Bluff ---- ---- 120 30 110 240 ---- 200 280 200,000
(customers and plant
5. Sacramento ---- ---- 50 ---- 25 140 ---- 70 ---- 400,000
(customers and
Warehouse)
6. Salinas ---- ---- 100 ---- ---- 15 ---- 80 160 400,000
7. San Bernardino ---- 130 ---- ---- ---- ---- 15 ---- ---- 200,000
8. Turlock ---- ---- 100 ---- ---- 80 ---- 25 ---- 150,000
9. Visalia ( customer ---- ---- ---- ---- ---- 160 ---- 95 20 300,000
and warehouse)

PART A. SCHEDULING SHIPMENTS

The number along the main diagonal in Table 1 represent average delivery
distances fro the central point to customers within the territory. To determine the
distance to a customer within the territory, that final lag must be added to the
distance from the shipping point to the center of the territory. For example, 10
miles is the average distance from the center to the customers within the Imperial
territory. A shipment from the Bakersfield plant to the Imperial customer group
first goes 240 miles from the plant to the territory center, and from there another
10 miles to reach the customer – all by truck- over a total distance of 240+10 =
120 miles from what warehouse by truck. Shipments from the Bakersfield plant to
the Visalia warehouse travel 50 miles by rail, but only in bulk volumes that are
later split into smaller quantities for individual customers. Plant-to-warehouse
shipments cannot be identified with any particular customer destination. (Since
rail and truck routes differ, the total distances are not the same). Freight costs
per ton-mile are $ 0.02 by truck and $ 0.01 by rail.

PART A. QUESTIONS

1. Construct a transportation problem matrix for California Chemical’s

distribution. Be sure to set up the schedule as a transshipment problem,
so that each warehouse serves as both a source and a destination.
Warehouses may not ship to another warehouse, and the corresponding
variables should be represented in the shipment schedule as impossible
cells, as should forbidden routings. These cells should have an arbitrary
high cost. A dummy source or destination will be needed to make total
demand equal to total capacity.

2. Solve the transportation problem formulated in Question 1 to find the

minimum transportation cost. If possible, do this with computer
assistance.

3. Suppose the warehouse capacities are increased to 750,000 tons each,

determine the new optimal shipment schedule and its total cost.

PART B. LOCATING WAREHOUSES

A consultant is studying California Chemical’s distribution system to determine

whether the company might achieve significant cost reductions by increasing its
number of warehouses. Each current California warehouse has a capacity of
500,000 tons per year and cost and would be located at the center of agricultural
activity within one of the five sales territories that does not currently have a
California Chemical facility.
 PART B. QUESTIONS

1. Construct a transportation problem matrix for California Chemical’s

distribution, assuming that no new warehouses are built. Add a dummy
row or column to make total demand to total capacity.
2. Find the optimal solution to the problem formulated in Quesion1. Then
calculate total distribution cost by adding the warehouse operating and
freight costs.
3. Three possible solutions to the warehouse location are given in t\Table2.
Including the present situation (no new warehouses), how many solutions
are possible to the warehouse location problem?
4. Solve California Chemicals distribution for each of the cases listed in
Question 3. In doing this, add a new row and column to the transportation
problem, as formulated in Question 1, for each new warehouse location.
Then the minimum-cost shipping schedule must be found for that set
locations. The total distribution cost is then determined by adding the
warehouse operating costs to the total freight cost. Which set of location-
(a), (b), or (c) –has the lowest distribution cost?

Table 2. POSSIBLE SOLUTIONS TO WAREHOUSE LOCATION PROBLEM

Location Set
Territory (A) (B) (C)
1. Bakersfield Plant Plant Plant
2. Imperial New warehouse New warehouse New warehouse
3. Napa/North Coast ---- ---- New warehouse
4. Red Bluff Plant Plant Plant
5. Sacramento Warehouse Warehouse Warehouse
6. Salinas ---- New warehouse New warehouse
7. San Bernardino ---- ---- New warehouse
8.Turlock ---- ---- New warehouse
9. Visalia Warehouse Warehouse Warehouse

5. Describe what you must do to guarantee the optimal distribution system.

 Twelfth Session

Simulation :
• Large Utility Company

Simulation Case :
Betty’s Balloon Boutique
 CASE 35

BETTY’S BALLLOON BOUTIQUE

LAWRENCE L. LAPIN
SAN JOSE STATE UNIVERSITY

Betty Smidler is a former marketing manager for a cosmetics firm. Bored

and burned out, she accepted an early retirement package. But missing the
excitement of daily interaction with people at work, Betty explored various
possible new career paths, ultimately deciding on an entrepreneurial trajectory.
Since her savings and pension were large enough to support her in comfort,
Betty could afford to run any business requiring minimal capital. She did not need
the income, although a good return on her time and investment would be
preferable. What mattered to her were the human interaction and the satisfaction
of filling a real need.
Her search for a business began with restaurants. She soon learned that
prepared food was the riskiest segment of retailing, requiring huge investments.
Most new restaurants fail very rapidly, and even the successful ones require
huge time and energy commitments from their owners, who almost never take
days off, much less vacations. She found that small retail shops suffered from
similar ills, but a few did provide their owners with a good living. The successful
stores were heavy on service and generally were owner-operated, with few
employees.
Retailing fitted Betty’s background and personality. She needed to find a
low-risk situation where she could meet lots of people and fill an important niche.
She found a very small 500-square foot store space in a very heavily trafficked
retail area. The rent was low and the landlord was flexible, and she would only
need to repaint and install a sign. On impulse, Betty took the space—even
before deciding what to do with it. She finally decided that she would sell
balloons. These items require a very low inventory investment, with minimal need
for equipment and supplies. For $2,000, Betty started Betty’s Balloon Boutique.
TABLE 35-1 FREQUENCY DISTRIBUTION FOR
DAILY MYLAR BALLOON DEMAND

NUMBER OF BALLOONS PER

CUSTOMERS PROPORTION CUSTOMER PROPORTION
15 0.05 1 0.20
16 0.10 2 0.15
17 0.15 3 0.10
18 0.15 4 0.07
19 0.10 5 0.07
20 0.10 6 0.06
21 0.10 7 0.06
22 0.08 8 0.05
23 0.07 9 0.05
24 0.06 10 0.04
25 0.04 11 0.04
12 0.04
13 0.03
14 0.02
15 0.02

Her business was an instant success, and she immediately began

supplying balloons for special occasions. Most of Betty’s business consists of
balloon bouquets for birthdays, anniversaries, promotions, and similar occasions.
Betty has had trouble keeping enough stock on hand. She has been
making two or three trips each month to balloon wholesalers to get the fast-
selling Mylar balloons. During those trips, she has to close the shop, losing
whatever business might have been generated. Betty knows that she could do
better by ordering more balloons, but she wants to find the best combination of
reorder point and order quantity for those items.
Table 35-1 provides the historical frequency distributions for balloon
demands.
Betty pays $.50 for each Mylar balloon, and each sells for $1.25 when
inflated with helium (which, along with other supplies, costs $.25 per Mylar). Each
dollar tied up in inventory costs Betty $.001 per day. She incurs a cost of
approximately $10 to place, track. Process up her balloons in person and will rely
instead on UPS delivery. Table 35-2 shows the probability distributions assumed
for each order. The supplier is rarely able to fill the entire order, and shorted
items are not backordered from the supplier.
When Betty’s is out of Mylars, 70% of the customers settle for rubber
balloons, each bringing a markup of $.20. The remaining customers leave
without making a purchase. Additionally, Betty believes that the expected present
value of future profits lost due to being out of Mylars is $.30 per balloon.
 Betty knows that this situation, simple thought it seems, is too complicated
to be solved using traditional inventory models. She wants to conduct Monte
Carlo simulations, and you have been retained to help her.

TABLE 35-2 PROBABILITY DISTRIBUTIONS FOR MYLAR LEAD TIME AND

PROPORTION OF ORDER FILLED

LEAD TIME PROPORTION OF

(DAYS) PROBABILITY ORDER FILLED PROBABILITY
2 .10 0.75 0.10
3 .15 0.80 0.20
4 .22 0.85 0.25
5 .20 0.90 0.30
6 .15 0.95 0.10
7 .10 1.00 0.05
8 .10

QUESTIONS

1. Set up a schedule of random number assignments for number of customers.

Demand per customer, lead time, proportion of order filled and whether or not
a customer leaves without buying anything when the store is out of Mylar
stock.
2. Set up necessary simulation worksheets for determining the Mylar balloon
profit for several days of operation. (this can be greatly streamlined by using
electronic spreadsheets.)
3. Conduct a 20-day simulation using a reorder point of 200 Mylar balloons and
an order quantity of 500. Then , compute the total Mylar profit for the period.
Assume that Betty’s orders are placed at the beginning of the day, depending
on the opening inventory, andthat shipments arrive just before the store
opens on the date indicated by the lead time. Assume also that the Mylar
balloon customer who arrives just before stockout will accept any available
quantity and will fill his or her remaining demand with rubber balloons.
4. Betty’s son, who has an M.B.A., tells her that a 20 day simulation is too short
to be statistically significant and that a run of at least 100 days is needed.
a. Do a 100-day simulation, and compare the results with those of
Question 3. Are the results the same? Why?
b. Do another 100-day simulation but this time a reorder point of 100
balloons. Compare the results with those of Question 3. Are the
results the same? Why?
5. Repeat the simulation in Question 3 using 100 trials if practical, for different
reorder point and order quantity combinations until you are satisfied that you
have found the best combination. What do you recommend to Betty?
 Thirteenth Session

Project Management : Networks / Dynamic

Programming
• Short Management Training Course

Project Management Case :

Housecrafters I
 CASE 26

HOUSE CRAFTERS 1

Lawrence L. Lapin
San Jose State University

House Crafters is a medium-size builder of California tract homes. Mr.

Peter Gordon has just assumed the position of general construction manager.
His background is in large-scale construction- office buildings, public works,
and shopping centers. In those projects he made extensive use of project
planning tools, especially those associated with PERT. Mr. Gordon wants to
implement PERT as the standard planning tool for scheduling the construction
of individual custom-ordered homes within HouseCrafters tracts. Trial
implementation of PERT will be conducted in the Vista de la Butte tract, north
of Sacramento, on one large four-bedroom house that contractually must be
completed within two months.

Mr. Gordon met for an entire morning with John Swit, project foreman,
to iron out project planning logic for the house. They began by arranging the
tasks into meaningful packages of work. The predecessor-successor logic
was determined, after considerable debate over whether certain tasks really
had to be done before others or whether the sequencing was just traditional.
Then the expected activity completion times were determined. Table 26-1
shows the results of the meeting.

Mr. Gordon believes that the data in Table 26-1 reflect optimal
expenditures of labor and resources. The expected times were determined
from the more detailed three-time estimate information in Table 26-2, which
also identifies direct cost data- including materials and supplies- for each
activity, as provided by the subcontractors for the house project. Additional
house construction direct costs are $51,000.

A few activities can be speeded up. By working extended hours,

carpenters can complete the walls in 8 days at a total cost of $4,500. Working
at night, workers can complete the sheetrock in 2 days at a total cost of
$3,500.
TABLE 26-1
DATA FOR HOUSE CONSTRUCTION ACTIVITIES

IMMEDIATE EXPECTED
PRECEDING COMPLETION
ACTIVITY ACTIVITY TIME (DAYS)

(a) Grace ---- 3

(b) Excavate ---- 4
(c) Set piers b 1
(d) Foundation a, c 2
(e) Floor joists d 3
(f) Exterior plumbing a, c 3
(g) Floor e, l 2
(h) Power on d 1
(i) Walls g 10
(j)Wire h, i 2
(k) Communicating lines j 1
(l) Inside Plumbing i 5
(m) Windows l 2
(n) Doors l 2
(0) Sheetrock k, l 3
(p) Interior trim n, o 5
(q) Exterior trim n 4
(r) Paint m, p, q 3
(s) Carter r 1
(t) Buyer Inspection s 1

For a premium of $700, the plumbing contractor can complete inside plumbing
in 3 days. Using night lighting, crews can finish the excavation in 2 days at a
total cost of $3.500 and can complete the grading for $1,600.
You have been retained by HouseCrafters to assist in the PERT
evaluations.

QUESTIONS

1. Construct a PERT network for the project, entering the expected

activity completion times alongside the applicable arrows (using
activity-on-arrow diagram) or inside the node (using an activity-on-node
diagram).

2. Depending on the type of diagram used, do one of the following:

(i) Activity on arrow: Find for each event the earliest possible and latest
allowable completion times and slacked times.
(ii) Activity in node: Find for each activity the early start and finish and
the late start and finish times. Then compute the activity slack times.

Then establish the critical path. How long is the project expected to
take?
 3. Assuming that the expected activity completion times are the actual
regular times, determine a sequence of plans for HouseCrafters, each
plan representing a one-day savings in project completion times at a
minimal cost.

TABLE 26-2
DATA FOR HOUSE CONSTRUCTION ACTIVITIES

OPTIMISTIC MOST LIKELY PESSIMISTIC

ACTIVITY TIME (DAYS) TIME (DAYS) TIME (DAYS) COST

(a) Grace 2 3 4 $1,000

(b) Excavate 2 3 10 2,500
(c) Set piers 1 1 1 4,400
(d) Foundation 2 2 2 5,600
(e) Floor joists 1 3 5 2,000
(f) Exterior plumbing 3 3 3 500
(g) Floor 2 2 2 3,000
(h) Power on 1 1 1 600
(i) Walls 7 9 7 4,000
(j) Wire 1.5 2 2.5 2,300
(k) Communication lines 0.5 1 1.5 200
(l) Inside plumbing 3 5.25 6 1,500
(m) Windows 1 2 3 2,300
(n) Doors 2 2 2 1,000
(o) Sheetrock 2.5 3 3.5 3,200
(p) Interior trim 4 4.75 7 8,000
(q) Exterior trim 3 4 5 3,000
(r) Paint 3 3 3 3,000
(s) Carpet 1 1 1 5,000
(t) Buyer inspection 1 1 1 0

4. 4. HouseCrafters has accepted an incentive clause that provides for a

payment of $400 for each day saved from the anticipated 40-day
duration of the project. Which plan identified in Question 3 should be
implemented? Specify which activities should be speeded up and by
how many days. What is HouseCrafters’ net project cost using the
optimal plan?

5. Analysis in Question 1-4 has all been based on expected activity

completion times. Mr. Gordon is concerned that the uncertainties in the
project have so far been downplayed. The expected activity times
given in Table 26-1 were computed from the three estimates in Table
26-2. Compute the variance in the completion time for each of those
activities.
6. The modified beta distribution for each activity time has four possible
appearances: it is positively skewed if the most likely time estimate m
is closer to the optimistic time estimate a than to the pessimistic time
estimate b: it is symmetrical if m is closer to h than a, m and b are all
equal.
a. For each activity, determine which case applies.
b. For the zero-variance activity times, what may you conclude
regarding the completion time probabilities?

7. Consider the critical path found in Question 2.

a. Find the variance for the duration of that path.
b. Determine the probability that the path will take than 42days.

8. Consider the “nearly” critical path b-c-d-e-g-i-j-k-o-p-r-s-t.

a. Find the expected duration and variance for that path.
b. Determine the probability that the path will take more than 42
days.
c. Compare your answers to those found in Question 7. What may
you conclude about using any single-path probability to estimate
a probability for project completion time?

9. The entire PERT analysis in Question 1-8 involves the original logic
given in Table 26-1, thereby making quicker project completion
possible. For instance, the activity that takes longest is the walls
(activity i) which precedes both wire (activity j) and inside plumbing
(activity l). Mr. Gordon can divide the inside plumbing into the following
two activities, with their expected times:

l(1) Below- floor plumbing 2.0 days preceded by

activity g
l(2) In-wall plumbing 3.0 days preceded by
activities /L/ and i

Walls must precede only the in-wall plumbing. Activities m (windows), n

(doors), and o (sheetrock) would then be preceded by l(2) instead of
the original 1.
a. Replace activity l with l(2). Construct the new PERT network,
and find the critical path. What is the expected duration of that
path? What are the overall time savings over the original plan?
b. Recommend to Mr. Gordon similar changes that might
compress overall project duration further.
 14th and 15th Sessions

Final and Submission of Project Paper

- 0–0–
QUANTITATIVE TOOLS

in

BUSINESS