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Part 1 – Splitting Example (15 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 15, 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. (4 points)

What are the consequences and/or costs of getting this decision wrong? (3 points)

Describe how this decision can be split (3 points) .

How does splitting this decision change the relationship with the risks you described in point 1? (3 points)

What are the costs associated with splitting this decision? (2 points)

Note: Please be succinct. A few sentences for each point suffices.

Part 2 – Idea Generation (10 points)

After reviewing the material in Lecture 15, you decide to take a break by having a video chat with your high school friends. One of your friends suggests that you should all do a post-pandemic trip and reunion. Everyone is excited!

Another friend suggests a video chat later in the week to brainstorm trip ideas together and decide on a destination and itinerary. As you reflect on Lecture 15s material (and on Lecture 11), you argue that brainstorming together is not the best idea-generation process. Why? Suggest an alternative process to generate trip ideas and choose a destination. How does your proposed process address the 4 ideation levers discussed in class?

Part 3 – Forecasting (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 Pears leadership at the companys 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 – Pears 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 – Pears Head of Operations;

We should create a data analytics team machine learning and big data are the future. They should be solely responsible for creating forecasts. – Pears 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 Pears CEO to improve their demand forecasting process.

Part 4 – Multiple Choice (15 points)

Question 1 (3 points)

Cisco Systems, the networking equipment industry’s market leader, has implemented a world-class reverse logistics program. As a part of this program, retailers of Ciscos equipment are offered a rebate on unsold inventory at the end of each quarter. The retailers sell unsold equipment back to Cisco at a price set by Cisco systems (i.e., the retailer has no pricing power). However, based on the sales price and the rebate offered by Cisco, the retailers can decide the order quantity. The result of this rebate is

The retailers underage cost increases; hence they order a larger quantity from Cisco.

The retailers underage cost decreases; hence they order a smaller quantity from Cisco.

The retailers overage cost increases; hence they order a smaller quantity from Cisco.

The retailers overage cost decreases; hence they order a larger quantity from Cisco.

The retailers expected profits will always decrease.

Ciscos expected profit will always decrease.

None of the above.

Why?

Question 2 (3 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 3 (3 points)

Which of the following principles are important to keep in mind when establishing a forecasting process within your organization:

A) 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.

B) Incentives: Ensuring that individuals are incentivized to report their forecast accurately.

C) 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 4 (3 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 5 (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 – Managing Diapers (15 points)

As part of your internship at Amazon, you are responsible for managing the diaper inventory at an Amazon warehouse. Demand for diaper boxes from this warehouse is predictable and is about 10,000 boxes per month. The fixed cost of placing a diaper box order from a supplier is $400 per order (mostly due to fixed transportation costs). Furthermore, you estimate that the holding cost of a box of diapers is about $0.5 per month. The wholesale cost of each box of diapers from the supplier is $15 per box.

Question 1 (7 points)

What is the cost-minimizing number of boxes that you should order from your supplier? How often should you place this order?

Question 2 (8 points)

Due to the consolidation of replenishment orders of different products, your manager informs you that you are constrained to re-ordering diaper boxes only once a month (i.e., you must place a replenishment order once every month). What should be your ordering quantity in this case? By how much does your average monthly costs increase compared to the ordering quantity in Question 1?

Part 6 – Vaccines (20 points)

After graduating from Georgia Tech, Georgina Burdell started a company that manufactures and sells flu vaccines at a discount to underdeveloped countries’ governments. Georgina decided to use her Operations Management skills to optimize the manufacturing process and reduce production costs. The optimized process will enable her to offer vaccines at a lower price than her competitors.

After some serious process optimization, Georgina reduces the vaccine production costs to $6 per dose (a “dose” is a vaccine for one person). However, because of capacity constraints, her company must manufacture the vaccine before the flu season. During the flu season, Georgina sells doses to governments for $20 per dose. The selling price is significantly lower than other suppliers in the market but is sufficient to cover her fixed costs such as salaries etc.

While the manufacturing process is optimized, Georgina realizes that she can do nothing about the world’s uncertainty, where sometimes the flu season is mild and not all doses that are produced are sold if a dose is not sold during the season then it is worthless and must be thrown out.

For the forthcoming flu season, Georginas forecasts for her vaccine’s demand follows the Normal distribution with a mean of 50 million doses and a standard deviation of 15 million (thus ?? = 50 million and ?? = 15 million).

Question 1 (7 points)

Find the profit-maximizing number of doses that Georgina should manufacture (i.e. find her newsvendor ordering quantity). What is her expected profit in this case?

Question 2 (7 points)

New regulation may come out soon. It stipulates that, for sanitary and environmental reasons, vaccine manufacturers must hire a specialized agency to assist with the disposal of unsold vaccines. The disposal fee is $1 per unsold vaccine. How would this change the optimal order quantity? Calculate the optimal order quantity and expected profits in this case.

Question 3 (6 points)

In 2012, there was a huge shortage of flu vaccines in the world. To improve public health, the World Health Organization (WHO) is considering incentives for Georginas company to encourage higher levels of vaccine production.

In particular, WHO would like Georgina to make enough vaccines so that the probability of not meeting the demand is 20%. One possible incentive is to purchase all unused doses of vaccine (a buy-back program). For example, if Georgina manufactures 50 million doses and sells 40 million, WHO will buy back each of the remaining 10 million doses for some price. There are no disposal fees in this case.

What price per unit must WHO offer for each unused dose to best incentivize Georgina to meet the 20% goal?

Part 7 – BuzzAir (15 points)

A group of recent Georgia Tech grads decides to open a new airline company called BuzzAir. They buy one airplane that has nn seats. They estimate that two types of travelers will purchase tickets for a certain flight on a certain date:

Leisure travelers, who are willing to pay only the discounted fare $dd ;

Business travelers, who are willing to pay the full fare $ff (where f>df>d ).

After quite a bit of market research, they conclude that the number of leisure travelers requesting tickets for this flight will be greater than nn for sure, while the number of business travelers requesting tickets is random. Please assume that the leisure travelers always purchase their tickets before the business travelers do. (In practice, this is roughly true, which is why airfares increase as the flight date gets closer).

BuzzAir wishes to sell as many seats as possible to business travelers since they are willing to pay more. However, since the number of such travelers is random and these customers arrive near the flight’s departure date, a sensible strategy is for BuzzAir to allocate a certain number of seats QQ for full fares and the remainder, n?Qn?Q for discount fares.

The discount fares are sold first: The first n?Qn?Q customers requesting tickets will be charged $dd per ticket and the remaining (at most QQ ) customers will be offered the full price $ff . Since leisure travelers are only willing to pay $dd , they will decline to buy a full-fare ticket. Thus, if there are less than QQ ticket requests from business travelers, some seats will not be sold (and BuzzAir regrets not selling them to leisure travelers). Conversely, it is possible that some of the seats sold to leisure travelers for $dd could have been sold to business travelers who would have been willing to pay $ff .

Question 1 (7 points)

Show that the problem of finding the optimal number of full-fare seats, QQ , is equivalent to a newsvendor problem. Clearly define the underage cost, overage cost, and uncertainty. What is the critical ratio?

Question 2 (3 points)

Suppose that demand for full-fare seats is normally distributed with a mean of 40 and a standard deviation of 18 (thus ?? = 40 and ?? = 18). There are n=100n=100 seats on the flight and the fares are d=$175d=$175 and f=$400f=$400 . What is the optimal number of full-fare seats? (Fractional solutions are OK)

Question 3 (5 points)

For each situation below, explain how the underage cost and the overage cost will change. How will this affect the optimal quantity reserved for full-fare customers? (No need to recalculate the optimal quantity – a qualitative answer is sufficient)

Situation 1: The full-fare tickets are fully refundable and, with some probability, each business traveler will cancel his or her ticket at the last minute, too late for BuzzAir to re-sell the newly vacant seat.

Situation 2: Any unsold seats may be sold at the very last minute for a steeply discounted price, $ss (s