IE 418 - Homework 1 Due: Apr. 30, 2012 You can work in groups of two.

A-fon and B-fon are two major cell phone manufacturers that have recently merged. Their current market sizes are as shown in Table 1 below. All demand is in millions of units. Table 1. Global demand and duties for A-fon and B-fon
market A-fon B-fon Import duties N. America 10 12 3 S. America 4 1 20 Europe (EU) 20 4 4 Europe (nonEU) 3 8 15 2 7 4 Japan Rest of Asia & Australia 2 3 22 1 1 25 Africa

A-fon has three production facilities in Europe (EU), North America and South America. B-fon also has three production facilities in Europe (EU), North America and Rest of Asia. The capacity (in millions of units), annual fixed cost (in millions of $), and variable production cost ($ per unit) for each plant are shown in Table 2 below. Transportation costs between regions ($ per unit) are as shown in Table 3. Duties are applied on each unit based on the fixed cost per unit capacity, variable cost per unit, and transportation cost. Thus a unit currently shipped from North America to Africa has a fixed cost per unit of capacity of $ 5, a variable production cost of $ 5.5, and a transportation cost of $ 2.20. The 25% import duty is thus applied on $12.70 (5+5.5+2.2) to give a total cost on import of $15.90. The merged company has estimated that scaling back a 20-million-unit plant to 10million units saves 30% in fixed costs. Variable costs at a scaled-back plant are unaffected. Shutting a plant down (either 10 million or 20 million units) saves 80% in fixed costs. Fixed costs are only partially recovered because of severance and other costs with a shutdown.

Table 2. Plant capacities and costs for A-fon and B-fon

capacity A-fon Europe (EU) N. America S. America B-fon Europe (EU) N. America Rest of Asia 20 20 10 20 20 10 Fixed cost/year 100 100 60 100 100 50 Variable cost/unit 6.0 5.5 5.3 6.0 5.5 5.0

Table 3. Transportation costs between regions ($ per unit)

N. America N. America S. America Europe (EU) Europe (nonEU) Japan Rest of Asia & Australia Africa 2.2 2.2 1.4 1.5 1.9 1.8 1 1 1.5 1.5 1.8 1.7 2 S. America 1.5 1 1.7 2 1.9 2.2 Europe (EU) 1.5 1.7 1 1.2 1.8 1.7 Europe (nonEU) 1.8 2 1.2 1 1.8 1.6 1.7 1.9 1.8 1.8 1 1.2 Japan Rest of Asia & Australia 2 2.2 1.7 1.6 1.2 1 2.2 2.2 1.4 1.5 1.9 1.8 Africa

(a) What is the lowest cost network design prior to the merger? (b) What is the lowest cost network design after the merger if none of the plants is shut down? (c) What is the lowest cost network design after the merger, if plants can be scaled back or shut down in batches of 10 million units of capacity? (d) How should the merged network be configured then? (e) If, after the merger, a warehouse with a fixed cost/year of $ 20 million is opened either in Europe (EU) or in nonEurope (nonEU) region, how should the merged network be configured then? (In the network with a warehouse, the transportation costs from the plants to the warehouse inbound transportation cost decreases by 20% because of economies of scale.)

(f) Management has estimated that demand in global markets is likely to grow. North America, Japan and Europe (EU) are relatively saturated and expect no growth. 1. South America, Africa, the rest of Asia/Australia and Europe (nonEU) markets do not expect a growth. This scenario is with a probability of 60%. 2. South America, Africa and Europe (nonEU) markets expect a growth of 20%, while the rest of Asia/Australia anticipates a growth of 200%. This market growth scenario is with a probability of 20%. 3. South America, Africa and Europe (nonEU) markets expect a growth of 30%, while the rest of Asia/Australia anticipates a growth of 150%. This market growth scenario is with a probability of 20%. There is an option of adding capacity at the plant in Rest of Asia/Australia. Adding 10 million units of capacity incurs additional fixed cost of $ 40 million per year. Adding 20 million units of capacity incurs additional fixed cost of $ 70 million per year. Re-model the network design problem with a warehouse as a stochastic programming model this time, considering min max(regret) criterion. How should the merged network be configured considering the market growth scenarios? Solve using any solver, and report the results in an organized manner. Comment on the results.