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Network Design Assignment

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MANAGEMENT ANALYTICS 1

NETWORK DESIGN

Prof. Ou Tang, PhD

Group 6:

Dhwanit Patel

Dylan Zhang

Pablo Iannantuono

Siddhant Agrawal


MANAGEMENT ANALYTICS REPORT

NETWORK DESIGN

Introduction

This report will analyze the merger between two European companies: Hot&Cold and CaldoFreddo. Both companies have several production plants and are manufacturers of home appliances that serve only the European market, which is divided into four regions: North, East, West and South. All the information regarding the cost structure and demand of each plant and market is summarized in the following table:

Variable production and shipping cost (€/un)

Annual Capacity (million un.)

Annual Fixed Costs

(million €)

Profit Tax

North

East

South

West

Hot&Cold

France

100

110

105

100

50

1000

25%

Germany

95

105

110

105

50

1000

25%

Finland

90

100

115

110

40

850

30%

Demand (million €)

30

20

20

35

CaldoFreddo

UK

105

120

110

90

50

1000

20%

Italy

110

105

90

115

60

1150

35%

Demand (million €)

15

20

30

20

Total Demand

45

40

50

55

Besides, the average selling price of each home appliance is €300 for all the European market.

This report will also analyze the optimal network design for both pre and post-merger situations, considering and assuming that the costs structure of each plant remain the same, the demand is constant throughout the year and the total demand results from the sum of the demand of each company and, finally, if a plant is decided to be shut down, all of its fixed annual costs will be saved.

Network design

To effectively design the network of these two companies, the analysis will focus on maximizing the total net profit of the company/ies. Since each individual plant is treated as a profit center and taxes vary from country to country, minimizing the total cost will not take into account these differences in taxes and will not arrive to the optimal solution. However, the cost will be relevant as of considering financial cash flows. Maximizing the total profit does not imply a minimum cost, hence the company should be financially capable of bearing those costs.

In consequence, the system of equations where the total net profit is going to be maximized is the following:

 [pic 1]

Where:

        i: subindex related to the plant (1=France, 2=Germany, 3=Finland, 4=UK, 5=Italy),

        j: subindex related to the demand region (1=North, 2=East, 3=South, 4=West),

        kij: Variable production and shipping cost of the “i" Plant and for the “j” region,

        xij: demand supplied by the “i” Plant in the “j” region,

        Fci: Fixed cost of the “i” Plant,

        ti: Tax rate applicable to the “i” Plant,

        yi: (1/0 – binary) indicates if the “i” plant is close or open,

        P: Price (€300 per home appliance),

Constraints

        Pre-merger

                             [pic 2][pic 3][pic 4]

Post-merger

                     [pic 5][pic 6]

Where:

        dHCj: demand in “j” region for Hot&Cold Company,

        dCFj: demand in “j” region for CaldoFreddo Company and,

        ci: Capacity of the “i" Plant.

This equation with its constraints, will be solved by using Microsoft Solver in an Excel sheet. In the following sections, the results will be shown in summary tables.

It is important to notice that previous to the merger, all the plants are open. Hence, all the values of “yi” will be equal to 1 and can be omitted for the calculations.

Pre-merger situation

To analyze the best network design before the merger happened, Microsoft Solver was used and the results are as follows:

North

East

South

West

Revenue

Variable Costs

Fixed Costs

Gross Profit

Taxes

Net Profit

(million units)

(million €)

Hot & Cold

France

0

0

20

30

15,000.00

5,100.00

1,000.00

8,900.00

2,225.00

6,675.00

Germany

30

15

0

5

15,000.00

4,950.00

1,000.00

9,050.00

2,262.50

6,787.50

Finland

0

5

0

0

1,500.00

500.00

850.00

150.00

45.00

105.00

Total

30

20

20

35

31,500.00

10,550.00

2,850.00

18,100.00

4,532.50

13,567.50

Caldo Freddo

UK

15

15

0

20

15,000.00

5,175.00

1,000.00

8,825.00

1,765.00

7,060.00

Italy

0

5

30

0

10,500.00

3,225.00

1,150.00

6,125.00

2,143.75

3,981.25

Total

15

20

30

20

25,500.00

8,400.00

2,150.00

14,950.00

3,908.75

11,041.25

Total Profit (million €)

24,608.75

...

...

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