The AB Charity is planning its annual campaign to raise money. This year, three
ID: 3208350 • Letter: T
Question
The AB Charity is planning its annual campaign to raise money. This year, three alternative methods are being considered: (i) street collections, (ii) a television advertising campaign and (iii) a direct-mail appeal. After using simulation to assess the risk associated with the alternatives the charity’s managers have opted for a direct-mail appeal. The direct-mail appeal will involve sending out 343 000 letters to selected people. To encourage donation these will include a free ballpoint pen displaying the charity’s logo and people not replying after three weeks will receive a reminder. While the fixed costs of the campaign and the cost of sending out each letter and reminder are known for certain, the charity’s managers have had to estimate probability distributions for the following four factors:
a) The percentage of people who will reply to the first letter in the North (N), Central (C) and South (S) regions of the country, respectively.
(b) The average donation of those replying to the first letter in each of these regions.
(c) The percentage of people who will reply to the reminder in each of the three regions. 4
(d) The average donation of those replying to the reminder in each of the regions
Probability distributions have been estimated for the different regions because their different economic conditions are likely to have a major effect on people’s propensity to donate to the charity.
Figure 12.6 shows the cumulative probability distribution of net returns (i.e., the total value of donations less the cost of running the direct-mail appeal). It can be seen that there is approximately a 20% probability that the net returns will be negative, causing the charity to lose money. In the simulation the possible losses extended to nearly $150 000.
The managers of the charity are keen to take action to reduce this risk, but are not sure where their actions should be directed. Figure 12.7 shows a tornado diagram for the appeal. The numbers at the ends of the bars show what are thought to be the highest and lowest possible values for each factor. For example, the possible average donation in the North is thought to range from $2 to $17. Figure 12.7 –
Please show any work and formulas
(a) Identify the areas where risk management is likely to be most effective.
(b) Create a set of possible risk management strategies that might reduce the risk of the charity losing money and increase its expected return.
1.0 0.8 0.6 0.4 E 0.2 0.0 -200000-100000 0 100000 200000 300000 Surplus ($)Explanation / Answer
(a) We know that there is approximately a 20% probability that the net returns will be negative, causing the charity to lose money. In the simulation the possible losses extended to nearly $150 000. Looking at the Figure 2.7, only categories of the appeal showing that the charity surplus will be negatibe are Av. donation in N - 1st letter, % reply in N. So there is 20% probability of occurrence of these 2 events. Other events in the tornado diagram shows that the charity net returns will be positives (would be in surplus).
So, probability for occurence of these 2 events is high (20%) compared to other events. So there is high chance of improving the charity surplus by risk management strategies to reduce the probability of occurence of these 2 events.
Also, the variability in charity surplus for the events (Av. donation in N - 1st letter, % reply in N) is high. For the Av. donation in N - 1st letter, the possible average donation in the North is thought to range from $2 to $17 and causes the charity surplus to be in range from (< $30,000) to (>$180,000).
For the % reply in N, the possible % reply to the 1st mail in the North is thought to range from 2% to 15% and causes the charity surplus to be in range from (< $30,000) to (>$180,000).
Both these events have high variability (high range) as can be seen in the Fig 12.7. So there is high chance of improving the charity surplus by risk management strategies to reduce the variability for these 2 events.
Conclusion - As risk associated with these 2 events (Av. donation in N - 1st letter, % reply in N) can be controlled easily as compared with other events which have low variability in terms of charity surplus, these will be the areas for the effective risk management activities.
(b) Set of possible risk management strategies
As in part (a), we know that 2 events (Av. donation in N - 1st letter, % reply in N) should be priortized for the risk management strategies. As both events are associated with the North region, it shows that the North region has good economic condition as compared to other regions and there is high chance of getting more charity from this region. Following are the possible list of risk management strategies which should be applied only to the north region. We may not change the strategies for other regions
i) Increase the attractiveness/value of the gifts for the north region to encourage donations.
ii) Identify more people in the north region, and send direct mail appeal in north region (more than the earlier count 343 000 letters).
iii) Launch donor recognition programs ( and any other program to motivate donors) in north region.
iv) Promote advertising and marketing strategies (to promote the brand) in the north region.
Following are the possible list of risk management strategies which should be applied all regions.
i) Decrease the frequency of sending reminder mails and increase the count of sending reminder mails. For e.g. The reminder mail can be sent after 2 weeks and a 2nd reminder mail can be sent.
ii) As we can see that percent reply for that mails is low, this can be due to tedious long donation form. Donation form should be as simple as possible.
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