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Jeanne Yi-Chun Hsieh

Chinenye Nwangwu

R.U. Redddie Report

Memo

The R.U. Reddie Corporation which manufactures clothing for stuffed cartoon animals has projected the
market demand in the following years to be substantially greater than current plant capacity. To be more
profitable, the company is considering opening a new plant to produce more units to satisfy the market
demand. Two specific locations for the new plant are under consideration: St. Louis and Denver.

The two locations have its own specification in terms of market demand, labor, environmental regulations
and different level of proximity to the suppliers. Nevertheless, the most important factors for R.U. Reddie
Corp are the combination of production cost and shipping cost for each option. The company wants to
know between St. Louis and Denver, which one is a better location to achieve its objective of minimizing
the total variable costs.

Model Description

We built a linear model using the data gathered for R.U.Reddie which indicates different production
costs, plant capacity and the road mileage between the cities. The objective of our model was to minimize
total variable costs, which are the combination of production cost and transportation costs, while
satisfying the market demand. We’ve built 2 models, one for Denver and one for St. Louis, incorporating
20 variables and 9 constraints for each one. We’ve also compute the NPV for each alternative, using the
COGS derived from our linear model to evaluate the new plant project.

Optimal distribution plan for plant in St. Louis and in Denver with the project NPV

From our analysis, in the scenario where the new plant locates in St. Louis, the calculated NPV is
$585,630 and the optimal distribution plan for R.U. Reddie and the corresponding COGS is:

In Year 1, the COGS is expected to be $5,935,500


● The plant in Boston should produce 300,000 units, among which 80,000 should be kept to satisfy
Boston market and 220,000 units should be shipped to Denver.
● The plant in Cleveland should produce 400,000 units, among which 200,000 should be kept to
satisfy Cleveland market and 200,000 units should be shipped to Chicago.
● The plant in Chicago should produce 500,000 units, among which 170,000 should be kept to
satisfy Chicago market and 330,000 units should be shipped to Denver.
● The plant in St. Louis should produce 500,000 units, among which 440,000 should be kept to
satisfy St. Louis market and 60,000 should be shipped to Denver.

From Year 2 to Year 10, The annual COGS is expected to be $6,689,500


● The plant in Boston should produce 200,000 units, among which 140,000 should be kept to
satisfy Boston market and 60,000 units should be shipped to Denver.
● The plant in Cleveland should produce 400,000 units, among which 260,000 should be kept to
satisfy Cleveland market and 140,000 units should be shipped to Chicago.

1
Jeanne Yi-Chun Hsieh
Chinenye Nwangwu

● The plant in Chicago should produce 500,000 units, among which 290,000 should be kept to
satisfy Chicago market and 210,000 units should be shipped to Denver.
● The plant in St. Louis should produce 900,000 units, among which 500,000 should be kept to
satisfy St. Louis market and 400,000 should be shipped to Denver.

In the scenario where the new plant locates in Denver, the calculated NPV is $419,740 and the optimal
distribution plan for R.U. Reddie and the corresponding COGS is:

In Year 1, the COGS is expected to be $5,790,000


● The plant in Boston should produce 300,000 units, among which 80,000 should be kept to satisfy
Boston market and 220,000 units should be shipped to St. Louis.
● The plant in Cleveland should produce 400,000 units, among which 200,000 should be kept to
satisfy Cleveland market and 200,000 units should be shipped to St. Louis.
● The plant in Chicago should produce 500,000 units, among which 370,000 should be kept to
satisfy Chicago market, 20,000 units should be shipped to St. Louis and 110,000 units shipped to
Denver.
● The plant in Denver should produce 500,000 units, and all of the produced units should be kept in
Denver to satisfy Denver market.

From Year 2 to Year 10, The annual COGS is expected to be $6,606,250


● The plant in Boston should produce 200,000 units, among which 140,000 should be kept to
satisfy Boston market and 60,000 units should be shipped to St. Louis.
● The plant in Cleveland should produce 400,000 units, among which 260,000 should be kept to
satisfy Cleveland market and 140,000 units should be shipped to St Louis.
● The plant in Chicago should produce 500,000 units, among which 430,000 should be kept to
satisfy Chicago market and 70,000 units should be shipped to St. Louis.
● The plant in Denver should produce 900,000 units, among which 670,000 should be kept to
satisfy Denver market and 230,000 should be shipped to St. Louis.

Recommendation

Based on our finding above, we can conclude that St Louis would be the best location to build the new
plant. This recommendation is based on the fact that St Louis yielded higher NPVs in the base case;
therefore building the new plant in St Louis is more profitable than building in Denver.

2
Plant in St Louis
Shipping cost (per mile) $0.0005
Revenue (per outfit) $8.0000

City Capacity Y1 Capacity Y2~


Boston 400 400
Cleveland 400 400
Chicago 500 500
St. Louis 500 900
Denver 500 900

City Y1 demand Y2-10 demand Building&Equipment cost Fix cost production costs/unit Land B&E&L
Boston 80 140 $9,500 $600 $3.80 $500
Cleveland 200 260 $7,700 $300 $3.00 $400
Chicago 370 430 $8,600 $400 $3.25 $600
St. Louis 440 500 $12,100 $550 $3.05 $1,200
Denver 610 670
$37,900 $1,850 $2,700 $40,600

Mileage
Plant\Market Boston Cleveland Chicago St. Louis Denver
Boston - 650 1,000 1,200 2,000
Cleveland 650 - 350 600 1,400
Chicago 1,000 350 - 300 1,000
St. Louis 1,200 600 300 - 850
Denver 2,000 1,400 1,000 850 -

Production Plan (Y1)


Plant\Market Boston Cleveland Chicago St. Louis Denver Capacity
Boston 80 0 0 0 220 300 <= 400
Cleveland 0 200 200 0 0 400 <= 400
Chicago 0 0 170 0 330 500 <= 500
St. Louis 0 0 0 440 60 500 <= 500
80 200 370 440 610
>= >= >= >= >=
80 200 370 440 610

Production Plan (Y2-10)


Plant\Market Boston Cleveland Chicago St. Louis Denver Capacity
Boston 140 0 0 0 60 200 <= 400
Cleveland 0 260 140 0 0 400 <= 400
Chicago 0 0 290 0 210 500 <= 500
St. Louis 0 0 0 500 400 900 <= 900
140 260 430 500 670
>= >= >= >= >=
140 260 430 500 670

Total Demand Total Revenue Annual Production cost Shipping cost COGS
Y1 1700 $13,600 $5,490.00 $445.50 $5,935.50
Y2-Y10 2000 $16,000 $6,330.00 $359.50 $6,689.50
$12,625
Plant in St Louis
Tax rate 40%
WACC 11%
Terminal Value 50% 0f PP&E & Land
Land $ 800.00
Investment in PP&E $ 10,800.00
Number of years 10
StraightLine Depreciation rate 0.10
Salvage Value $ 5,800.00

1 2 3 4 5 6 7 8 9 10
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
SALES REVENUE $ - $ 3,200.00 $ 5,600.00 $ 5,600.00 $ 5,600.00 $ 5,600.00 $ 5,600.00 $ 5,600.00 $ 5,600.00 $ 5,600.00 $ 5,600.00
COGS $ - $ 1,243.50 $ 2,135.50 $ 2,135.50 $ 2,135.50 $ 2,135.50 $ 2,135.50 $ 2,135.50 $ 2,135.50 $ 2,135.50 $ 2,135.50
GROSS PROFIT $ - $ 1,956.50 $ 3,464.50 $ 3,464.50 $ 3,464.50 $ 3,464.50 $ 3,464.50 $ 3,464.50 $ 3,464.50 $ 3,464.50 $ 3,464.50
SG&A $ - $ 750.00 $ 750.00 $ 750.00 $ 750.00 $ 750.00 $ 750.00 $ 750.00 $ 750.00 $ 750.00 $ 750.00
EBITDA $ - $ 1,206.50 $ 2,714.50 $ 2,714.50 $ 2,714.50 $ 2,714.50 $ 2,714.50 $ 2,714.50 $ 2,714.50 $ 2,714.50 $ 2,714.50
DEPRECIATION $ - $ 580.00 $ 580.00 $ 580.00 $ 580.00 $ 580.00 $ 580.00 $ 580.00 $ 580.00 $ 580.00 $ 580.00
EBIT $ - $ 626.50 $ 2,134.50 $ 2,134.50 $ 2,134.50 $ 2,134.50 $ 2,134.50 $ 2,134.50 $ 2,134.50 $ 2,134.50 $ 2,134.50
INTEREST EXPENSE $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -
TAXABLE INCOME $ - $626.50 $2,134.50 $2,134.50 $2,134.50 $2,134.50 $2,134.50 $2,134.50 $2,134.50 $2,134.50 $2,134.50
INCOME TAX EXPENSE $ - $ 250.60 $ 853.80 $ 853.80 $ 853.80 $ 853.80 $ 853.80 $ 853.80 $ 853.80 $ 853.80 $ 853.80
NET INCOME $ - $ 375.90 $ 1,280.70 $ 1,280.70 $ 1,280.70 $ 1,280.70 $ 1,280.70 $ 1,280.70 $ 1,280.70 $ 1,280.70 $ 1,280.70

CAPITAL EXPENDITURE $ 11,600.00 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -

NOPLAT $ - $ 375.90 $ 1,280.70 $ 1,280.70 $ 1,280.70 $ 1,280.70 $ 1,280.70 $ 1,280.70 $ 1,280.70 $ 1,280.70 $ 1,280.70
Operating Cashflow $ - $ 955.90 $ 1,860.70 $ 1,860.70 $ 1,860.70 $ 1,860.70 $ 1,860.70 $ 1,860.70 $ 1,860.70 $ 1,860.70 $ 1,860.70

Financing Cashflow $ - $ - $ - $ - $ - $ - $ -
$ - $ -
$ - $ -
CAP EXPENDITURE $ 11,600.00 $ - $ - $ - $ - $ - $ -
$ - $ -
$ - $ -
Investing Cashflow $ (11,600.00) $ - $ - $ - $ - $ - $ -
$ - $ -
$ - $ -
UFCF $ (11,600.00) $ 955.90 $ 1,860.70 $ 1,860.70 $ 1,860.70 $ 1,860.70 $ 1,860.70 $ 1,860.70
$ 1,860.70 $ 1,860.70 $ 1,860.70
TV $ 5,800.00
PV CFs $ 861.17 $ 1,510.19 $ 1,360.53 $ 1,225.70 $ 1,104.23 $ 994.81 $ 896.22 $ 807.41 $ 727.39 $ 655.31
PV TV $ 2,042.67

ENTERPRISE VALUE $ 12,185.63

NPV $ 585.63

IRR 8% Larger than the WACC so this is a good project


Plant in Denver
Shipping cost (per mile) $0.0005
Revenue (per outfit) $8.0000

City Capacity Y1 Capacity Y2~


Boston 400 400
Cleveland 400 400
Chicago 500 500
St. Louis 500 900
Denver 500 900

City Y1 demand Y2-10 demand Building&Equipment cost Fix cost production costs/unit Land
Boston 80 140 $9,500 $600 $3.80 $500
Cleveland 200 260 $7,700 $300 $3.00 $400
Chicago 370 430 $8,600 $400 $3.25 $600
Denver 610 670 $10,800 $750 $3.15 $800
St. Louis 440 500 $12,100 $550 $3.05 $1,200

Mileage
Plant\Market Boston Cleveland Chicago St. Louis Denver
Boston - 650 1,000 1,200 2,000
Cleveland 650 - 350 600 1,400
Chicago 1,000 350 - 300 1,000
Denver 2,000 1,400 1,000 850 -

Production Plan (Y1) Capacity


Plant\Market Boston Cleveland Chicago St. Louis Denver <= 400
Boston 80 0 0 220 0 300 <= 400
Cleveland 0 200 0 200 0 400 <= 500
Chicago 0 0 370 20 110 500 <= 500
Denver 0 0 0 0 500 500
80 200 370 440 610
>= >= >= >= >=
80 200 370 440 610

Production Plan (Y2-10) Capacity


Plant\Market Boston Cleveland Chicago St. Louis Denver <= 400
Boston 140 0 0 60 0 200 <= 400
Cleveland 0 260 0 140 0 400 <= 500
Chicago 0 0 430 70 0 500 <= 900
Denver 0 0 0 230 670 900
140 260 430 500 670
>= >= >= >= >=
140 260 430 500 670

Total Demand Total revenue Annual Production cost Shipping cost COGS
Y1 1700 $13,600 $5,540.00 $250.00 $5,790.00
Y2-Y10 2000 $16,000 $6,420.00 $186.25 $6,606.25
$12,396
Plant in Denver
Tax rate 40%
WACC 11%
Terminal Value 50% 0f PP&E & Land
Land $ 1,200.00
Investment in PP&E $ 12,100.00
Number of years 10
StraightLine Depreciation rate 0.10
Salvage Value $ 6,650.00

1 2 3 4 5 6 7 8 9 10
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
SALES REVENUE $ - $ 3,200.00 $ 5,600.00 $ 5,600.00 $ 5,600.00 $ 5,600.00 $ 5,600.00 $ 5,600.00 $ 5,600.00 $ 5,600.00 $ 5,600.00
COGS $ - $ 1,098.00 $ 2,052.25 $ 2,052.25 $ 2,052.25 $ 2,052.25 $ 2,052.25 $ 2,052.25 $ 2,052.25 $ 2,052.25 $ 2,052.25
GROSS PROFIT $ - $ 2,102.00 $ 3,547.75 $ 3,547.75 $ 3,547.75 $ 3,547.75 $ 3,547.75 $ 3,547.75 $ 3,547.75 $ 3,547.75 $ 3,547.75
SG&A $ - $ 550.00 $ 550.00 $ 550.00 $ 550.00 $ 550.00 $ 550.00 $ 550.00 $ 550.00 $ 550.00 $ 550.00
EBITDA $ - $ 1,552.00 $ 2,997.75 $ 2,997.75 $ 2,997.75 $ 2,997.75 $ 2,997.75 $ 2,997.75 $ 2,997.75 $ 2,997.75 $ 2,997.75
DEPRECIATION $ - $ 665.00 $ 665.00 $ 665.00 $ 665.00 $ 665.00 $ 665.00 $ 665.00 $ 665.00 $ 665.00 $ 665.00
EBIT $ - $ 887.00 $ 2,332.75 $ 2,332.75 $ 2,332.75 $ 2,332.75 $ 2,332.75 $ 2,332.75 $ 2,332.75 $ 2,332.75 $ 2,332.75
INTEREST EXPENSE $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -
TAXABLE INCOME $ - $887.00 $2,332.75 $2,332.75 $2,332.75 $2,332.75 $2,332.75 $2,332.75 $2,332.75 $2,332.75 $2,332.75
INCOME TAX EXPENSE $ - $ 354.80 $ 933.10 $ 933.10 $ 933.10 $ 933.10 $ 933.10 $ 933.10 $ 933.10 $ 933.10 $ 933.10
NET INCOME $ - $ 532.20 $ 1,399.65 $ 1,399.65 $ 1,399.65 $ 1,399.65 $ 1,399.65 $ 1,399.65 $ 1,399.65 $ 1,399.65 $ 1,399.65

CAPITAL EXPENDITURE $ 13,300.00 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -

NOPLAT $ - $ 532.20 $ 1,399.65 $ 1,399.65 $ 1,399.65 $ 1,399.65 $ 1,399.65 $ 1,399.65 $ 1,399.65 $ 1,399.65 $ 1,399.65
Operating Cashflow $ - $ 1,197.20 $ 2,064.65 $ 2,064.65 $ 2,064.65 $ 2,064.65 $ 2,064.65 $ 2,064.65 $ 2,064.65 $ 2,064.65 $ 2,064.65

Financing Cashflow $ - $ - $ - $ - $ - $ - $ -
$ - $ -
$ - $ -
CAP EXPENDITURE $ 13,300.00 $ - $ - $ - $ - $ - $ -
$ - $ -
$ - $ -
Investing Cashflow $ (13,300.00) $ - $ - $ - $ - $ - $ -
$ - $ -
$ - $ -
UFCF $ (13,300.00) $ 1,197.20 $ 2,064.65 $ 2,064.65 $ 2,064.65 $ 2,064.65 $ 2,064.65 $ 2,064.65
$ 2,064.65 $ 2,064.65 $ 2,064.65
TV $ 6,650.00
PV CFs $ 1,078.56 $ 1,675.72 $ 1,509.65 $ 1,360.05 $ 1,225.27 $ 1,103.85 $ 994.46 $ 895.91 $ 807.12 $ 727.14
PV TV $ 2,342.03

ENTERPRISE VALUE $ 13,719.74

NPV $ 419.74

IRR 8% Larger than the WACC so this is a good project


CASE R. U. REDDIE FOR LOCATION
The R. U. Reddie Corporation, located in Chicago, manu- demands could be as low as 1,800,000 or as high as
factures clothing specially designed for stuffed cartoon 2,200,000, with each city being affected the same as the
animals such as Snoopy and Wile-E-Coyote. Among the others. Second, the marketing manager expressed a con-
popular products are a wedding tuxedo for Snoopy and a cern over a possible market shift from the Midwest and
flak jacket for Wile-E-Coyote. The latter is capable of Northeast to the West. Under this scenario, there would be
stopping an Acme Rocket at close range . . . sometimes. an additional demand of 50,000 units in St. Louis and
For many sales, the company relies upon the help of 150,000 units in Denver, with the other cities staying at
spoiled children who refuse to leave the toy store until the “most likely” demand projections.
their parents purchase a wardrobe for their stuffed toys. Financial. Rhonda realized that the net present value
Rhonda Ulysses Reddie, owner of the company, is con- (NPV) of each alternative is an important input to the
cerned over the market projections that indicate demand final decision. However, the accuracy of the estimates for
for the product is substantially greater than current plant the various costs is critical to determining good estimates
capacity. The “most likely” projections indicate that the of cash flows. She wondered if her decision would change
company will be short by 400,000 units next year, and if the COGS (variable production plus transportation
thereafter 700,000 units annually. As such, Rhonda is con- costs) for each option was off by !10%. That is, what if
sidering opening a new plant to produce additional units. the variable production costs and transportation costs of
St. Louis are 10% higher than estimated while the variable
BACKGROUND production costs and transportation costs for Denver are
10% lower than estimated? Or vice versa? Further, what if
The R. U. Reddie Corporation currently has three plants,
the estimate for fixed costs is off by !10%? For example,
which are located in Boston, Cleveland, and Chicago,
suppose St. Louis is 10% higher while Denver is 10%
respectively. The company’s first plant was the Chicago
lower, or vice versa. Would the recommendation change
plant, but as sales grew in the Midwest and Northeast, the
under any of these situations?
Cleveland and Boston plants were built in short order. As
Operations. The ultimate location of the new plant will
the demand for wardrobes for stuffed animals moved
determine the distribution assignments and the level of uti-
west, warehouse centers were opened in St. Louis and
lization of each plant in the network. Cutting back pro-
Denver. The capacities of the three plants were incremen-
duction in any of the plants will change the distribution
tally increased to accommodate the demand. Each plant
assignments of all plants. Since there will be excess capac-
has its own warehouse to satisfy demands in its own area.
ity in the system with a new plant under the assumption of
Extra capacity left over was used to ship product to St.
the “most likely” demand projections, the capacity of the
Louis or Denver.
Cleveland plant could be cut in year 2 and beyond.
The new long-term forecasts provided by the Sales
Suppose Cleveland cuts back production by 50 (000) units
Department were both good news and bad news. The
a year from year 2 and beyond. Will this affect the choice
added revenues would certainly help Rhonda’s profitabil-
between Denver and St. Louis? What is the impact on the
ity, but the company would have to buy another plant to
distribution assignments of the plant? Further, there are
realize the added profits. Space is not available at the exist-
some nonquantifiable concerns. First, the availability of a
ing plants, and the benefits of the new technology for man-
good workforce is much better in Denver than St. Louis
ufacturing stuffed animal wardrobes are tantalizing. These
because of the recent shutdown of a beanie baby factory.
factors motivated the search for the best location for a new
The labor market is much tighter in St. Louis and the prog-
plant. Rhonda has identified Denver and St. Louis as pos-
nosis is for continued short supply in the foreseeable
sible locations for the new plant.
future. Second, Denver metropolitan area has just insti-
tuted strict environmental regulations. Rhonda’s new
RHONDA’S CONCERNS
plant would adhere to existing laws, but the area is very
A plant addition is a big decision. Rhonda started to think environmentally conscious and more regulations may be
about the accuracy of the data she was able to obtain. She coming in the future. It is very costly to modify a plant
had market, financial, and operations concerns. once operations have begun. Finally, Denver has a number
Market. The projected demands for years 2 through 10 of good suppliers with the capability to assist in produc-
show an annual increase of 700,000 units to a total of tion design (new wardrobe fashions). St. Louis also has
2,000,000 units for each year. She had two concerns here. suppliers but they cannot help with product development.
First, what if the projections for each city were off plus or Proximity to suppliers with product development capabil-
minus 10% equally across the board? That is, total annual ity is a “plus” for this industry.

continued
continued
DATA b. The company presently has the following capacity
constraints:
The following data have been gathered for Rhonda:
a. The per-unit shipping cost based on the average CAPACITY1
ton-mile rates for the most efficient carriers is
$0.0005 per mile. The average revenue per outfit is (i) Boston 400
$8.00. (ii) Cleveland 400
(iii) Chicago 500

c. Data concerning the various locations is as follows:

MOST
MOST LIKELY ANNUAL
LIKELY DEMAND1 CURRENT COSTS FIXED VARIABLE
DEMAND1 AFTER BUILDING & COSTS PRODUCTION
CITY 1ST YEAR YEARS 2 – 10 EQUIPMENT1,2 (SGA)1,3 COSTS/UNIT LAND1

Boston 80 140 $9,500 $600 $3.80 $500


Cleveland 200 260 7,700 300 3.00 400
Chicago 370 430 8,600 400 3.25 600
St. Louis 440 500
Denver 610 670

d. New plant information:

ANNUAL
FIXED VARIABLE
BUILDING & COSTS PRODUCTION
ALTERNATIVE EQUIPMENT1 (SGA)1,3 COSTS/UNIT LAND1

Denver $12,100 $550 $3.15 $1,200


St. Louis 10,800 750 3.05 800

e. The road mileage between the cities is:

BOSTON CLEVELAND CHICAGO ST. LOUIS DENVER

Boston — 650 1,000 1,200 2,000


Cleveland — 350 600 1,400
Chicago — 300 1,000
St. Louis — 850
Denver —

1In 000s.
2Net book value of plant and equipment with remaining depreciable life of 10 years.
3Annual fixed costs do not include depreciation on plant and equipment.
f. Basic assumptions you should follow: 2. Model the location decision as a linear model. The
objective function should be to minimize the total vari-
❐ Terminal value (in 10 years) of the new invest-
able costs (production plus transportation costs). The
ment is 50% of plant, equipment, and land
variables should be the quantity to ship from each of
cost.
the plants (including one of the alternative new plants)
❐ Tax rate of 40%. to each of the warehouses. You should have 20 vari-
❐ Straight-line depreciation for all assets over a ables (four plants and five warehouses). You should
10-year life. also have 9 constraints (four plant capacity constraints
and five warehouse demand constraints). See the
❐ R. U. Reddie is a 100% equity company with
addendum for hints. You will need two models — one
all equity financing and a weighted average cost
for Denver and one for St. Louis.
of capital (WACC) of 11%.
3. Use the Linear Programming Solver or the Trans-
❐ Capacity of the new plant production for the portation Method Solver in OM Explorer to solve for
first year will be 500 (000) units. the optimal distribution plan for each alternative (i.e.,
❐ Capacity of the new plant production thereafter Denver and St. Louis).
will be 900 (000) units. 4. Compute the NPV of each alternative. Use the results
❐ Cost of goods sold (COGS) equals variable from the linear models for the COGS for each alterna-
costs of production plus total transportation tive. Hint: Your analysis will be simplified if you think
costs. in terms of incremental cash flows. Create an easy-to-
read spreadsheet for each alternative.
❐ There is no cost to ship from a plant to its own
5. Do a sensitivity analysis of the quantitative factors
warehouse. There is a production cost, how-
mentioned in the case: Forecast errors (across the board
ever.
and market shift), errors in COGS estimate, and errors
g. R. U. Reddie operations and logistics managers in fixed cost estimates. Do each factor independent of
determined the shipping plan and cost of goods the others and use the “most likely” projections as the
sold for the option of not building a new plant and base case. Summarize the results in one table.
simply using the existing capacities to their fullest 6. Use the analysis in (5) to identify the key quantitative
extent (Status Quo solution): variables that determine the superiority of one alternative
over another. Rationalize your final recommendation in
Year 1 COGS ! $4,692,000 light of all the considerations R. U. Reddie must make.
Boston to Boston 80
Boston to St. Louis 320 ADDENDUM
Cleveland to Chicago 80 Here are some hints for your model.
Cleveland to Cleveland 200
a. The capacity constraint for Boston would look like
Cleveland to St. Louis 120
this:
Chicago to Chicago 290
1B-B " 1B-CL " 1B-CH " 1B-D " 1B-SL # 400
Chicago to Denver 210
The variable B-CH means Boston to Chicago in this
Years 2 – 10 COGS ! $4,554,000 example. You will need a total of four capacity con-
straints, one for each of the existing sites and one
Boston to Boston 140
for the alternative site you are evaluating.
Boston to St. Louis 260 Remember that the new site will have a capacity
Cleveland to Cleveland 260 limit of 500 in the first year, and 900 in the second
Cleveland to St. Louis 140 year.
Chicago to Chicago 430 b. The demand constraint for Boston would look like
Chicago to St. Louis 70 this:
1B-B " 1CL-B " 1CH-B " 1D-B ! 140
Questions
The Denver location alternative is depicted in this
Your team has been asked to determine whether or not example (D-B represents the number of units pro-
R. U. Reddie should build a new plant and, if so, where it duced in Denver and shipped to Boston). You will
should be located. Your report should consist of six parts. need a total of five demand constraints, one for
1. A memo from your team to R. U. Reddie indicating each warehouse location. Notice that the demand
your recommendation and a brief overview of the sup- constraints have “!” signs to indicate that exactly
porting evidence. that quantity must be received at each warehouse.
continued
continued
c. There is no need to put three zeros after each d. Since the capacity and demand changes from year 1
demand and capacity value. Define your variables to year 2, you will have to run your model twice for
to be “thousands of units shipped.” Remember to each location to get the data you need. You will
multiply your final decisions and total variable also need to run the model and spreadsheets multi-
costs by a thousand after you get your solution ple times to do part (5) of the report.
from the model.

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