Part 1 – Splitting Decisions (10 points)
In lecture 14, we discussed how Costume Gallery “split” their manufacturing between China and New Jersey to change their relationship with demand risk and obtain both build-to-stock and build-to-order benefits. Then, in Lecture 16, we discussed how splitting business-model-design decisions is key in managing risk in new ventures.
The concept of “splitting a big bet into a sequence of smaller, less consequential bets” is instrumental in management. In this part of the exam, you will have to identify a case where “splitting decisions” was useful or could be useful. To do so, complete the following steps:
Describe a management decision and the information risks associated with this decision. This decision can be from an internship you have done, from a job you worked at, that you observed in practice, or from your personal life. (2 points)
What are the consequences and/or costs of getting this decision wrong? (2 points)
Describe how this decision can be “split” (2 points).
How does splitting this decision change the relationship with the risks you described in point 1? (2 points)
What are the costs associated with splitting this decision? (2 points)
Note: Please be succinct. A few sentences for each point suffices. Answers in bullet-point format are fine too.
Part 2 – Stanplus (15 points)
Across Asia, ambulance fleets are fragmented and uncoordinated. Ambulances struggle to respond to patients and suffer from low utilization rates. In India, the status of emergency response is particularly dire. Unlike other countries, there is no single emergency dispatch number in India. Every hospital, clinic, and nursing home has its own emergency number. This leads to confusion in case of an emergency. The caller has no idea of how far the ambulance is or what the response time will be.
Stanplus, a fast-growing startup, is attempting to address these problems. StanPlus is a platform that allows for efficient and central dispatching of ambulances and emergency care. Below is a slide from their pitch deck.
Here is a part of a news article about StanPlus:
StanPlus: The Uber for ambulances does much more than mere aggregation
Chhavi Tyagi, Economic Times, 2016/12/13
StanPlus-1.png
According to StanPlus, cofounder and CEO Prabhdeep Singh, 75% of the patients who need an ambulance use their own personal vehicle to reach a hospital and 30% of those brought in by an ambulance arrive dead. It is to change these horrific statistics that Singh started his ambulance aggregation and standardisation startup, StanPlus, along with two co-founders – Antoine Poirson and Jose Leon.
“We are building India’s largest private medical helpline and consolidating private ambulances to service this helpline. The objective is to reduce the time it takes for an ambulance to reach a patient from the current average time of 40 minutes to less than 15 minutes. These ambulances are optimised according to patients’ needs and use the power of network to match the patient with closest hospital that has facilities to take care of them. We are also standardizing the fare, care, and equipment,” explains Singh. “Customers can trust that, by calling our helpline in an emergency, they will have a high-quality ambulance readily available at a standardized and fair price”.
After months of detailed research and planning the company launched its commercial operations last month in Hyderabad. “Hyderabad is a very important medical market and we want to focus on it for the time being. We want to have the quality and the confidence of Hyderabad’s patients and ambulance providers before we engage other markets. We do not wish to grow too fast and then fail,” says Singh. The startup claims to have 50 ambulances on its network already and the ability to service 50% of Hyderabad’s population within 15 minutes and 85% of the population under 30 minutes.
The startup does not simply aggregate the available ambulances, but also standardizes, trains drivers on CPR and first aid, quality checks the inside of the ambulances, among other things. It also provides a live tracking feature to the patients through SMS.
“Ambulance market in India is fragmented and suffers from low asset utilization. The owners of the fleets are unable to upgrade the ambulances because of demand spreading very thin. By focusing the demand on standardized ambulances, we are increasing the asset utilisation and thereby incentivising the owners to improve the quality – both of hardware, and what we call ‘care-ware’,” says Singh. “We also give the option to ambulance providers to use our platform or their own dispatch system” he adds.
The company is in the process of partnering with corporates and hospitals to expand its reach and plans to engage patients directly through advertising once it finalizes its seed funding.
“We are already in talks with multiple players and expect to close the funding by February. We plan to raise anywhere between $600,000-1 million in the round,” Singh divulges. The next step for the startup is to provide a team of well-trained care staff including paramedics and nurses for the patients.
The company charges users a fair share per ride but plans to increase collaboration with insurance companies and hospitals to decrease the burden on the patients. It also offers fleet management to ambulance owners as a source of revenue.
Based on the information above, please answer the following questions. Short and objective explanations suffice.
Question 1 (10 points)
What are the benefits StanPlus (the intermediary) is bringing to this environment? How are they operationalizing these benefits? Structure your response using the marketplaces discussion from class. (Only limited information has been provided in the question statement, so answer as best as you can with the information available).
Question 2 (5 points)
List two other concepts from class that StanPlus is using (besides intermediation/marketplaces/platforms from Lecture 11), describe how they are using them and what are the advantages of these tools. If you can’t think of two, describe one concept from class that they are using, and describe another concept that they could benefit from and how it could be used.
Part 3 – Forecasting at Pear (10 points)
After graduating from Georgia Tech, you accept a job at the top analytics consulting firm Buzzlytics. Your first client is Pear, one of the largest manufacturers and distributors of medical devices in the USA. Their CEO has hired Buzzlytics to revamp their demand forecasting methodology. As you ride your taxi back to your hotel after a day of extensive interviews with Pear’s leadership at the company’s headquarters, you look at your notes where three quotes are highlighted:
“We do the best we can in our forecasts – it is not our fault that our operations team ignores our demand estimates and does whatever comes to their minds” – Pear’s Head of Sales;
“These salespeople ALWAYS inflate their demand estimates – look at the past accuracy of their forecasts. These guys are clearly sending us garbage data” – Pear’s Head of Operations;
“We should create an independent data analytics team – machine learning and big data are the future. This analytics team should be solely responsible for creating forecasts.” – Pear’s CTO.
You look out the window of the car and remember your MGT 3501 course at Georgia Tech. Describe three things you can suggest to Pear’s CEO to improve their demand forecasting process.
Part 4 – Multiple Choice Questions (10 points)
Question 1 (2 points)
In a particular setting where the newsvendor model applies, demand is Normally distributed, and the critical ratio is known to be 0.8. Then, if you ordered the profit-maximizing ordering quantity,
The expected sales are less than expected demand;
The expected sales are greater than expected demand;
The expected sales are exactly equal to expected demand;
The expected sales could be less than, equal to, or greater than expected demand.
Question 2 (3 points)
Which of the following principles are important to keep in mind when establishing a forecasting process within your organization:
Convergence: Allowing individuals within your organization to discuss and brainstorm together as a group before submitting their forecasts to ensure that they have as much relevant information as possible.
Incentives: Ensuring that individuals are incentivized to report their forecast accurately.
Diversity: Invite a diverse set of individuals from across the company to participate in the forecasting process.
A only.
B only.
C only
A and B only.
A and C only
B and C only
A, B, and C (i.e., all of them)
None of the above (i.e., none of them).
Question 3 (2 points)
A high-end clothing boutique is considering offering customers the following option: if a customer does not find the right size of a dress on the shelves, the customer can leave an order at the store. The store manager will then order that size from the supplier and inform the customer when the dress becomes available. How does the optimal order quantity of dresses that the store should place to suppliers change under this option?
The new optimal order quantity is larger than before.
The new optimal order quantity is smaller than before.
The new optimal order quantity is the same as before.
The answer cannot be determined based on the given information.
Question 4 (3 points)
Which of the following statement is key in explaining the success of ZARA.
Zara runs an impressive advertising campaign that attracts audiences to its unique product offering.
Zara has mastered the art of building relationships with its suppliers that are all based in China. This allows it to provide the most fashionable products.
Zara produces locally at high costs, but it has lower lead times to respond to market trends.
A only.
B only.
C only
A and B only.
A and C only
B and C only
A, B, and C (i.e., all of them)
Part 5: EOQ (15 points)
After impressing Pear’s management with your forecasting advice (and beautiful PowerPoint slides), you are promoted to Associate at Buzzlytics. Your first project as an Associate Consultant is to assist a major solar panel company with their inventory management strategy for their flagship 350-Watt solar panel.
The solar panel company manufactures its panels in China and sells them in the USA. Given the Covid-19 crisis, they forecast that their demand will be constant for the foreseeable future. They expect install 70MW (70,000,000 Watts) of solar panels per year, i.e., their demand will be of 200,000 units of their 350-Watt solar panel per year.
The solar panels are shipped from China to the USA by ocean in a cargo ship. Specifically, the solar panel are packed onto shipping pallets and put on a 40-foot shipping container. Each container can fit up to 800 solar panels.
Pandemic-related supply chain disruptions have dramatically increased the cost of renting and shipping a container from China to the USA (see https://www.statista.com/statistics/1250636/global-container-freight-index/ (Links to an external site.) for reference). The cost of a shipping container is $6,000. Thus, the variable shipping cost is about $6000/800 = $7.5 per solar panel (it might be a bit more if containers are not completely full – for the purpose of this question, assume the variable shipping cost is $7.5 per panel independent of shipment size).
You estimate that the fixed cost of executing a shipment from China to the company’s warehouse in the USA is $10,000 per shipment (this is the cost of packing, handling customs, hiring a shipping company, buying shipping insurance, and coordinating shipping and delivery). You also estimate that the holding cost of a solar panel in the company’s warehouse in the USA is $10 per panel per year.
Question 1 (7 points)
What is the economic ordering quantity and order frequency (in months) of solar panels from the factory in China? How many containers will you need for each order?
Question 2 (2 points)
It takes 30 days between the moment the company places an order to the factory in China until the order arrives in your warehouse. Thus, the company must order 30 days in advance. What is the inventory level at the warehouse when an order is placed (i.e., what’s the reorder point)?
Question 3 (3 points)
The recent Covid-19 lockdown in China has affected shipping container prices, and the cost of a shipping container has risen from $6000 to $12,000 per container. Hence, the variable shipping cost increased to $15 per panel from $7.5 per panel. All other costs remain the same. How does this cost increase affect your economic ordering quantity?
Question 4 (3 points)
The company is investing in a new blockchain-based traceability technology to track shipments in real-time. The new technology will increase the shipping cost by 10% – the fixed shipping costs rise from $10,000 to $11,000. How does this technology change your economic ordering quantity and frequency? Compared to your answer in Question 1, what percentage do the total ordering costs change if the company adopts this technology?
Part 6: Becoming CO2 neutral (20 points)
Georgina Burdell has recently become the CEO of Buzz Airlines, a major American airline. One of her first projects as a CEO is ordering a report of the company’s environmental performance. She is surprised to find the company is very far from being green. Furthermore, customers and shareholders are pressuring Georgina to reduce the company’s carbon footprint. Drastic times call for drastic measures, so Georgina decides to make the company CO2 neutral.
To enact her plan, she commissions a team of scientists to understand the necessary steps to become CO2 neutral. The yearly CO2 of emissions of Buzz Airlines depend on the total passenger demand. The current demand forecast for fiscal year 2023 has some uncertainty due to the pandemic. Nevertheless, the scientist teams estimate that the Buzz Airlines CO2 emissions for 2023 follows a normal distribution with mean 1.5 million metric tons of CO2 and a standard deviation of 300,000 metric tons of CO2.
Georgina then asks you – a newly hired operations analyst -to find the most economical way to proceed. She is considering two options:
A) The company can buy deforested land in Brazil and pay an NGO to reforest the land. Purchasing and reforesting one acre of land in Brazil costs about $20,000. Furthermore, one acre of land offsets 1000 metric tons of CO2.The process of buying land and reforesting as a foreign company is complex. As a result, to claim CO2 offsets next fiscal year, you need to decide how much land to buy this year. Thus, the land purchasing decision is made before you observe your emissions.
B) The company can buy CO2 offsets in a carbon market. High-quality offsets are expensive, and the market price of offsets is $30 per metric ton of CO2 to offset your emissions. In this case, you can buy offsets after observing your emissions.
Question 1 (5 points)
Formulate the problem of deciding how many acres of land to buy in Brazil as a newsvendor problem. What is the “order quantity” in this case? What are the underage and overage costs?
Question 2 (10 points)
What is the optimal amount of land to purchase in Brazil to become carbon neutral? How much offsets will you buy in the carbon market in this case? What is the total cost to become carbon neutral?
Question 3 (5points)
A new government program to incentivize decarbonization has emerged. Through a series of tax incentives and investments in carbon markets, you can now buy CO2 offsets in a carbon market for $18 per metric ton. How much land should you purchase in Brazil in this case? Why?
Part 7: Web Services at Techify (20 points)
You graduate and join Techify, a startup that launched a “Spotify-like” platform for educational videos and for streaming tutoring sessions aimed at college students. Your first decision is to decide how much server capacity Techify should contract to run the platform for the next year.
Given your growth forecasts, you estimate that the platform will have about 500,000 active users during the next year. The total number of hours of content streamed in the next year is uncertain and using multiple forecasting methods you model the total number of hours of content streamed as a Normal random variable with mean 20 million streamed hours and standard deviation of 3 million streamed hours.
Techify’s revenue model is a mix of subscriiption and advertisement, and you estimate that Techify makes $0.25 per streamed hour of content.
You currently are in discussions with Amazon Web Services (AWS) and with Alphabet (with its Google Cloud service) for video storing and streaming solutions. The current offers from Amazon and Alphabet are:
AWS’s offer: You can advance-purchase server and storage capacity for the next year at a cost of $0.05 per streamed hour of content. If the purchased server capacity is insufficient to meet demand, you can purchase additional “flexible” server capacity on-demand as needed for $0.08 per streamed hour.
Alphabet’s Cloud’s offer: You can advance-purchase server and storage capacity for the next year at a cost of $0.04 per streamed hour. If the capacity is insufficient to meet demand, you can purchase additional “flexible” server capacity on-demand as needed for $0.1 per streamed hour.
You must decide which offer Techify should choose and how much server and storage capacity to advance-purchase under each option.
Question 1 (5 points)
Formulate the decision of how much server and storage capacity to advance-purchase under each offer as a Newsvendor problem. How many streaming hours of capacity would you advance purchase under AWS’s and under Alphabet’s offers? How many do you expect to purchase on-demand under each offer? Which offer is most profitable?
Question 2 (8 points)
After chatting with Techify’s COO, you come up with a third option for managing server and storage capacity. In this option, you would advance-purchase capacity from Alphabet (at $0.04 per streamed hour). Then, if needed, you purchase additional flexible capacity from Amazon (at $0.08 per streamed hour). However, this option would require an investment of $50k per year to adapt Techify’s technology stack to run on both AWS and Alphabet. Should Techify pursue this option?
Question 3 (7 points)
The sales team from Microsoft Azure (Microsoft’s cloud service) contacts you with an alternative offer. In this offer, Techify can advance-purchase server and storage capacity for the next year at a cost of $0.0425 per streamed hour of content. Furthermore, if the advanced-purchase capacity is insufficient to meet demand, Techify can purchase additional “flexible” server capacity on-demand as needed for $0.09 per streamed hour.
However, unlike Amazon’s and Alphabet’s offers, in this new offer, any leftover capacity of the advance-purchase order is credited back to Techify for $s per hour (i.e., Microsoft “buys back” the streaming hours for $s per hour). What is the minimum value of $s for this offer to be better than the ones from Alphabet and Amazon? Note: if solving for s exactly is too complex, feel free to try s = 0.01, 0.02, 0.03, etc, and give your answer in cents.
