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WEEK 6 Analysis PROJECT

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Question;WEEKLY SESSION B -TERM;END;PROJECT;Sun Dish, Inc.;Sun Dish, Inc. is a well-established company in the business of cable;and dish TV. Headquarteredat Indianapolis, the company was started in;1989 as a small cable company that servedhouseholds in the states of;Indiana, Wisconsin, Michigan, Ohio, and Kentucky. As business grew over the years, the company extended its business;to other states such as Illinois, Minnesota, Kansas, and Colorado. Over the;sixteen years of its existence, the company has grown into amajor competitor in the cable TV business;competing with companies such as Cablevision andComcast.;Rich Field has just joined Sun Dish, as a manager reporting to Vice;President (VP) (Planning), Rudy Eberle. Rudy is a seasoned veteran in the;industry, having worked in the industry for thepast 20 years, of which the last;10 years have been at Sun Dish. Rudy played a key role in the expansion at Sun;Dish and was primarily responsible for the extension of Sun Dish's services to;Kansas and Colorado.;Rich has just finished his MBA from a premier institution in the Midwest;after a stint of 10 yearsin the pharmaceutical and chemical;industries. He has a graduate degree in Chemical Science andpursued the MBA because he wanted to switch over from a technical role;to a managerial role.When the opportunity came with Sun Dish, he;gladly accepted the position because not onlywould he get experience in a new;industry but would also work with an expert like Rudy.;While interviewing Rich for the job, Rudy discussed an expansion;project that the company wasplanning in the satellite dish business. Ironically, despite the;name of the company, Sun Dish was not involved;in the satellite dish business earlier. The company's founder, Ray Sun, thought;thetechnology was too new and the business was not mature enough to;take the risk. However, since then the;satellite dish business has grown by leaps and bounds, and the managers at Sun;Dishthink that now is a good time to get into this business.;This being Rich's first project, Rudy will actively mentor Rich to make;sure everything is ontrack. However, because Rudy is actively;managing multiple projects, Rich will be responsiblefor most of;the detailed work and analysis for the project. Specifically, Rich is expected;toanalyze decisions related to media;selection, an investment portfolio, a product mix, a decisiontree, and a;simulation.;In the next few frames, you;will see how Rich gathers the information regarding each of therequired areas;by interacting with;Rudy;Eberle, Vice President (VP) (Planning)Sarah Johnson, Marketing Manager;Ron Floyd, Financial Manager;Vick Shaw, VP (Operations);Rich and Rudy in a Management Meeting;During a management meeting, Rudy;talks to Rich about the possible areas Rich would need to analyze so that the company managers can make an;intelligent decision about the venture into thesatellite dish market.;Here are some excerpts from the conversation.;Rich: "Rudy, this is a big project that you are;handing me as my first task.;Rudy: "Yes, that was the plan ever since we decided to hire you. You;can apply the knowledge you gained in your MBA program. Of course, I will be;mentoring you and making sure you areon track. We do have a strict;deadline for the project, but we need to first understand someissues.;Rich: "Can you give me a quick rundown on the;details of this project?;Rudy: "Yes. As with any other project in which we look at a new;service or a new market for anexisting service, we have to look at two;major aspects: forecasting the demand and mediaselection.;We don't normally use only one or two specific media outlets but five or six of;them. The decision, then, is determining the optimal mix of each outlet to use;so that customer exposureis maximized.;Rich: "I can understand why;forecasting is important to look at because you have to know thedemand before;you venture into a new market, but why media selection?;Rudy: "Rich, you will soon learn that in this business, advertising;is everything. If you can catch the cable viewers' attention with a catchy;slogan and put yourself in the limelight by a clever mixof different;media outlets, it will make a big difference in whether you succeed or;not.;Rich: "OK, I understand that these are two of;the decisions. Are there any other aspects to be considered?;Rudy: We have to look at three additional aspects. The first is how we;will build capacity forthe new equipment that we will need forthe venture. Second, we need to decide on;the productmix oftwo main products: receivers and;satellite dishes. The third is an investment decision. We have a fixed sum of;money sanctioned for this venture. However, because we will not use all the money in the first week or month of the project, we;have to invest it for the period so that thereturns are;maximized.;Rich: "OK... that makes;five decisions in all ? media selection, demand forecasting, capacity planning;product mix, and investment portfolio. Are there any more?;Rudy: "Yes, there are a few;more, but why don't you analyze these five decisions first and create a report?;Then, we'll talk of the remaining areas.;Rich;"OK, I'll do that. Why don't I get back to you in a week with the results;of the analysis?"Rudy: "That would be great, Rich. I will look forward to;reading the report.;Rich's Meeting;with Sarah;Rich thinks it;is a good idea to address each of five problems that Rudy talked about one at a;time He decides to look at the media;selection issue first. To get data on this, Rich approachesSarah, the;marketing manager. The following are excerpts from Rich's conversation with;Sarah.;Rich: "Sarah, you have been the marketing manager of the company;for the last five years. I needsome information from you;regarding how the company approached the media selection issue inthe past for;services in new markets. Can you help me with that?;Sarah: "Sure, is this for the satellite dish;venture'?;Rich: "You've got it. So, I understand from Rudy that your;department has already identifiedsome preliminary requirements related to how we are;going to approach the media selection issue for this project?;Sarah: "Yes, let me share that information with;you.;Media Selection;Data;The marketing department's plan for the;advertisement campaign has a budget of$100,000. Previous experience has shown that;the exposure to potential customers as aresult of the advertising effort will be, as follows;?;Forevery sign;placed by the roadside, 10 additional customers will sign up for the service.;?;For every newspaper insert, 30 additional customers will sign up for the;service.;?;For every hundred weekend flyers in supermarkets, 10 additional;customers will sign up forthe service.;?;For every hundred personal mailings to potential customers, 40 additional;customers will signup for the;service.;?;For everyTV advertisement placed daily in the last;month before the service is launched, 490additional;customers will sign up for the service.;The costs for;each of these advertising measures, along with the practical minimum and maximum number that should be planned for each;are shown in the following table;Advertising device;Cost;Minimum;Maximum;Roadside sign;25;100;500;Newspaper insert;60;50;300;Weekend;Byers;(hundreds);30;40;100;Personal mailings (hundreds);82;500;800;Daily TV ads;1000;3;12;Notes;?;The data presented here are only for the month preceding the launch of;the service.;n;This is a critical time to register new customers, therefore, the;initial analysis needs to focus only on this month.;?;The cost data in the table are the $ cost per insert for each type.;?;The practical maximum and minimum numbers in the table are the maximum;and minimumnumber of;inserts possible for each media type.;Itis important tonote that in real-life situations, it takes significant effort to collect;databy examining;various documents and interviewing different people, to developassumptions for simplifying analysis, and to;present the data in an understandable form.;Rich:"So, this;data is from your experience and shows the number of potential customers thatwe can get from each media option;correct?;Sarah: "Yes. In addition, we have;estimated the costs and the maximum and minimum number ofunits that we can feasibly show on each media;outlet.;Rich: "OK, I think I can model this;media selection data as a mathematical programming model.That will give us a combination of media;outlets that will maximize the number of customers wereach.;Sarah: "Great! That will be a;good start.;Rich's Meeting with Ron Floyd;After getting the data for the media;selection decision, Rich goes to Ron, the company's financialmanager, to understand the details of the;investment situation Rudy had talked about.;Rich: "Ron, I'm here about the satellite;dish project, and I need some information regarding thefinances for this project.;Ron: "Sure, what do you need to;know?;Rich: "Well, to start with;Rudy indicated that there is a sum of money earmarked for thisproject?;Ron: "Yeah, call it a pot of gold because it is almost $2 million;dollars that we are talking abouthere.;Rich: "Really? That's why Rudy mentioned;that we needed to look at ways to invest this moneyin alternative investments before we use it;for the project.;Ron: "Yes, that is sensible because you;won't need the entire amount right away.;Rich: "So are there any rules that we;traditionally follow when we decide on such investments?;Ron: "Yes, there are. Let me tell you some of these guiding;principles as we discuss the investment;options data.;Investment Options Data;The company has traditionally hedged its;investments across a variety of investment options. The optionsavailable to the company with their expected;annual returns are shown in the following table. In addition, thetable shows the levels of liquidity and risk;for each of the six types of investments.;Investment type;Expected annual rate of return (%);Liquidity level;Risk level;Money market funds;12.25;High;High;Stocks;11.50;High;High;School bonds;4.00;Low;Low;Certificates of deposit;3.00;Low;Low;Tax-free municipal bonds;6.50;Low;Low;Treasury bills;7.50;High;Low;In addition;the companyhas the;following corporate principles for investing;1.;The company will not invest more than 30 percent of the money in either;of the first twoinvestments;because these are too risky.;2.;For the same reason, not more than 50 percent of the total money will be;put in the first twoinvestments together.;3.;The company will need the money whenever required for the satellite dish;venture. Therefore, not more than 30 percent of the total money will be;invested in investments with low liquidity, that is,school bonds, certificates of deposit, and;tax-free municipal bonds.;4.;The company considers treasury bills issued by the Federal Reserve as;less risky and having highliquidity. Therefore, the company wants at least 15 percent of the;total money to be invested intreasury bills.;To diversify across the investment types, there is a corporate policy;limit on each of the six types ofinvestment. These are listed in the following table;Investment type;Maximum % of total money;that can be invested;Money market funds;30;Stocks;30;School bonds;20;Certificates of deposit;25;Tax-free municipal bonds;40;Treasury bills;25;5. For the same reason of diversification, a;minimum of10percent of;the total money will be investedin each of the funds.;Notes;1.;In the company, investments with a high liquidity level are known as;"liquid" investments and thosewith a low liquidity level are known as;"non-liquid" investments.;2.;Similarly, investments with a high risk level are known as;"risky" investments and those with a lowrisk level are known as;"less-risky" investments.;It is important to note that in real-life;situations, it takes significant effort to collect data by examining variousdocuments and interviewing different people;to develop assumptions for simplifying analysis, and to presentthe data in an understandable form.;Rich's Meeting with VP (Operations), Vick Shaw;Having received;data for two decisions, Rich wants to gather data for the remaining threedecisions before analyzing any data. Next on his list are issues related;to product mix andcapacity planning. For both of these, Rich;decides to approach Vick Shaw, the long-time VP(Operations) at;Sun Dish. Rich;remembers from his Operations Management course in the MBAprogram that the product mix issue is related;to costs, and capacity planning is related to futureplanning of how production requirements will;be achieved. He, therefore, thinks that the VP(Operations) is the right person to approach.;Here are some excerpts from Rich's conversationwith Vick.;Rich: "Hi Vick, I hope you;remember me. You came with Rudy to interview me?"Vick: "Oh yes, you are Rich;right? So, we finally got you here, eh?;Rich: "You sure did. I am working on this;satellite dish project with Rudy, and I need some helpfrom you.;Vick: "Sure. This will be an important;venture for our company, so I'll be glad to help in anyway I can.;Rich: "Well, there are two issues on;which you can probably give me some information. One isthe aggregate production plan for the new equipment, the other is the;capacity planning issue.Rudy mentioned that we don't have sufficient;current capacity to handle production of the newequipment.;Vick;"Yes, that's right. But first, let me give you some idea about production;planning."Rich: "OK.;Aggregate Production Plan Data;The Sun Dish satellite system requires;manufacture of three products: a High Definition (HD) receiver, adigital receiver, and a satellite dish. The;initial production plan is for the first six months after launch ofservice. The production capacity cannot be;changed quickly. Consequently, the production plan would be alevel plan in which the production levels;for the first six months stay the same. The company wishes tomake at least as many units of each of the;three products as the number of customers who can be reached,as predicted by the media selection;analysis. In other words, the company wishes to produce at least50,000 units of each of the three products if;the media selection analysis shows that a total of 50,000 customers will be;reached through the various media outlets. In addition, because fewer customers;willneed HD;receivers compared to digital receivers, the company has to ensure that the;number of HDreceivers;produced is not more than 50 percent of the number of digital receivers;produced.;The other details related to each of the products are listed in;the following two tables.;Fabrication time (hrs);Assembly time (hrs);Inspection and testing time (hrs);Packing;time (hrs);HD receivers;0.1;.15;.10;.05;Digital receivers;0.15;.12;.12;.05;Satellite dishes;0.2;.18;.15;.05;Fabrication;Assembly;Inspection and testing;Packing;Workforce costihr ($);7.00;9.00;8.5;7.25;Available time (hrs);30,000;30,000;30,000;10,000;it is important;to note that inreal-life;situations, it takes significant effort to collect databy examining various documents and;interviewing different people, to developassumptions for simplifying analysis, and to;present the data in an understandable form.;Capacity Planning Data;The company needs to plan for the capacity;required to produce the new equipment forthe satellite dish venture because the;existing capacity is insufficient. There are severaloptions to add capacity, however, the;selection depends on the market for the new;service.;The basic;decision is to do one of the followingto increase capacity;1.;Builda new plant in;Wisconsin.;2.;Buy an existing plant in Indiana from a;smaller company.;3.;Subcontract the required capacity from available vendors.;4.;Buy new equipment to boost the capacity of existing plants.;If the company;undertakes the second option, it can engage the services of a surveycompany to narrow the search for a potential;plant that can be bought. Of course, the decision depends on how the market for;the new service turns out in the future. Thecompany managers think the market can be;predicted to turn in one of three ways:favorable, average, or unfavorable. The data;related to the four options available forincreasing capacity and the expected payoffs with the market;events are shown in the following table;Option;Cost of the option ($);Payoffs with market conditions ($);Favorable;Average;Unfavorable;Build a newplant in Wisconsin;300,000;1,100,000;750,000;400,000;Buy an existingplant in Indianafrom a smallercompany;100,000;With thesurvey;companyoption;1,000,000;500,000;300,000;Without thesurvey;company;option;600,000;300,000;100,000;Subcontract therequired;capacity fromavailable;vendors;10,000;800,000;400,000;200,000;Buy new equipment to boost;capacity inexisting plants;30,000;300,000;200,000;150,000;Notes;The cost of the services from the survey company is $15,000.;The payoff values are;different for each option because of the different capacity available for eachoption. For instance, if a new plant is;built, the payoffs are greater because the company would havegreater capacity to handle the demand.;The probabilities of the market conditions are;n Favorable: 20%;?;Average: 50%;?;Unfavorable: 30%;it is important to note thatin real-life situations, it takes significant;effort to collect databy examining various documents and interviewing different people, to;developassumptions for;simplifying analysis, and to present the data in an understandable form.;Lastly, Rich wants to see whether he can;estimate the demand for the new service. As with anynew venture, the success of the project will;depend on how the new service is perceived bycustomers. Rich thinks he should get some;historical data concerning the demand for Sun Dish's other services when they;were introduced for thefirst time.He then plans to use a simulationmodel to;determine the level of demand the company can expect for the satellite dish;service.;Demand Forecasting Data;Historical;Demand Distribution for New Services;Monthly demand (Number of new customer;sign-ups);Percentage of time a demand level occurs;1,000;5;2,000;15;3,500;20;5,000;30;7,000;25;9,000;5;In addition to the historical demand, the;company knowsthat the selling price percustomer is a random value between $50 and$80. The selling price is the monthly bill;fora customer, and;the variability in the selling price is due to the different packages orderedby different customers. The random value of the;selling price has been traditionallydetermined within Sun Dish by a discrete;uniform distribution.;Notes;The monthly demand data shown is an average;of the demand from the first six months after thenewservice is introduced.;The data;about the percentage of time a specific demand level occurs is based on;historical data overa number of observations.;The simulated monthly demand multiplied by the simulated selling price;gives the monthly revenue.;Normally, the;company runs 200 replications in simulation models such as this one. The 200replications;are used to determine the average revenue and the standard deviation of revenue;that isexpected from a new service offering.;It is important tonote that in real-life situations, it takes a significant amount of;effort tocollect data;by examining various documents and interviewing different people, todevelop assumptions for simplifying analysis;and to present the data in anunderstandable;form.;Assume that you are Rich and your job during the week is to work on the;five decisions assigned to you by Rudy. As requested by Rudy, prepare a;detailed analysis of each of thefive decision;areas and provide a summary memo to describe what you have done.;Project Deliverables and Guidelines;There are six deliverables in this project. A;breakdown of the deliverables and someguidelines are specified in the following;table because this is your first project. Pleaseremember that in real-life situations, you;might not be given guidelines.;Deliverable;Gradeweight;Deliverable;#1;Prepare a memo to send to Rudy that;provides a two-page summary of what you have done.The first paragraph should contain general;comments relating to your experience over the week.The other five paragraphs should summarize;your conclusions about each of the tasks. Attachfive exhibits showing your detailed work.;The details of each exhibit are shown in the remainingdeliverables listed here.;5%;Deliverable #2;Exhibit '1 ?;Media Selection;Model the media selection problem as a;mathematical programming model to determine theoptimal combination of media outlets and;the number of units in eachthat would maximize thenumber of potential customers reached. Use Microsoft Excel's OM to;solve the problem.;4%;Deliverable #3;Exhibit 2 ? Investment Options;Model the investment options problem as a;mathematical programming model to maximize thereturns for the money invested by the;company. Use Microsoft Excel's QM to solve the problem.;4%;Deliverable;#4;Exhibit 3 ? Aggregate Production Planning;Model the aggregate production-planning;problem as a product-mix problem to determine the optimal mix of products to;be manufactured, given the constraints. Use Microsoft Excel's QM tosolve the problem.;4%;Deliverable;#5;Exhibit 4 ? CapacityAnalysis;Prepare a decision tree for the specified;decisions and market events. Determine the bestdecision for the company based on the;expected payoff from the possible alternatives. UseTreePlan to solve the problem.;4%;Deliverable #6;Exhibit 5 ?;Demand Forecast;Use the specified historical demand data;to simulate the demand for the new service. Use theMonte Carlo method to determine the;expected average monthly demand over the first sixmonths of the service. Conduct 200;replications of the simulation model to determine your results.;4%

 

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