Problem Sleekfon and Sturdyfon are two major cell phone manufacturers that have

Question

Problem Sleekfon and Sturdyfon are two major cell phone manufacturers that have recently merged. Their current market sizes are as shown in Table 5-9. All demand is in millions of units Sleekfon has three production facilities in Europe (EU), North America, and South America Sturdyfon also has three production facilities in Europe (EU), North America, and Rest of Asia/Australia. The capacity (in millions of units), annual fixed cost (in millions of S), and variable production costs ($ per unit) for each plant are as shown in Table 5-10 Transportation costs between regions are as shown in Table 5-11. All transportation costs are shown in S per unit. 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 $5.00, a variable production cost of $5.50, and a transportation cost of S2.20. The 25 percent import duty is thus applied on $12.70 (5.00 5.502.20) to give a total cost on import of $15.88. For the questions below, assume that market demand is as in Table 5 The merged company has estimated that scaling back a 20-million-unit plant to 10 million unit:s saves 30 percent 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 percent in fixed costs. Fixed costs are only partially recovered because of severance and other costs associated with a shutdown a. What is the lowest cost achievable for the production and distribution network prior to the merger? Which plants serve which markets? b. What is the lowest cost achievable for the production and distribution network after the merger if none of the plants is shut down? Which plants serve which markets? C. What is the lowest cost achievable for the production and distribution network after the merger if plants can be scaled back or shut down in batches of 10 million units of capacity? Which plants serve which markets? d. How is the optimal network configuration affected if all duties are reduced to 0? e. How should the merged network be configured?

Explanation / Answer

I shall be answering the a and b parts since it is lenghty and takes time to enter data to excel and solve.

So, given are the costs, demand and transport costs.

a) In the first problem, our main goal is to satisfy demand at low cost.

This is prior to merger. So, each manufacturer has independent demand and plants.

First thing, I have done is to calculate total cost per unit to be manufatured and to be sent to a particular place.

Total cost = fixed cost/unit + variable cost + transport

And import duties are levied over.

First I am calculating Total cost = fixed cost/unit + variable cost + transport

The values I got are:

After calculating these costs, now we use solver to find the best possible solution where the over all cost is lower.

Take Sleekfon manufacturer for understanding.

Sleekfon has a demand of 10 million in North America which needs to be satisfied by the three plants.

And, EU plant can produce 20 million at maximum output.

So, two conditions we get are, the total quantity produced by a plant should not exceed its capacity.

A location should not get more quantity than the demand given.

These become conditions that need to be entered in solver.

The main goal is total cost for sleekfon = cost incurred to satisfy demand at locations

For EU, cost = units sent*total cost*import cost

If we sum up for EU, NA and SA; we get cost incurred by Sleekfon.

Using solver, I got the following results.

So, the 0 indicates nothing is sent and hence no cost incurred.

In Sleekfon, EU plant sent for South America, EU and Africa.

b) If we look at 2nd question, we are being asked to consider it as a whole market i.e.; entire demand and entire production rather than manufacturer wise.

So, here constraints are total demand needs to be satisfied where as the plants capacity is same.

Total cost incurred after merger is

total cost per unit Plant capacities and costs Production place North America South America EU Non EU Japan Australia Africa Sleekfon EU 12.5 12.7 12 12.2 12.8 12.7 12.4 North America 11.5 12 12 12.3 12.2 12.5 12.7 South America 12.8 12.3 13 13.3 13.2 13.5 13.5 Sturdyfon EU 12.5 12.7 12 12.2 12.8 12.7 12.4 North America 11.5 12 12 12.3 12.2 12.5 12.7 Australia 12 12.2 11.7 11.6 11.2 11 11.8

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