University of Bath SCHOOL OF MANAGEMENT MIN30266 Decision Making Wednesday 22 January 2014 16:30 to 18:30 2 hours ‘Answer THREE of the four questions All questions carry equal marks ‘Acclean copy of the Johnson's Supermarket case study will be supplied Graph Paper is supplied Only calculators provided by the University may be used. PLEASE FILL IN THE DETAILS ON THE FRONT OF YOUR ANSWER BOOK/COVER AND SIGN IN THE SECTION ON THE RIGHT OF YOUR ANSWER BOOK/COVER, PEEL AWAY ADHESIVE ‘STRIP AND SEAL. TAKE CARE TO ENTER THE CORRECT CANDIDATE NUMBER AS DETAILED ON YOUR DESK LABEL. DO NOT TURN OVER YOUR QUESTION PAPER UNTIL INSTRUCTED TO BY THE CHIEF INVIGILATOR, MN30266Answer THREE of the four questions ai. Q2. THIS QUESTION RELATES TO PROBLEM 1 IN THE CASE STUDY. Johnson's latest quarterly sales figures have been a huge disappointment. While the sales of their competitors have risen Johnson's sales are down by 3.4%. This has served only to stiffen Pete Johnson's resolve to expand the business to the USA. He has called a meeting of the directors for next Monday evening to make the decision, even though only preliminary market research figures and financial data are available. The meeting will start at 7.00pm but Johnson intends that it will be over by 8.00. It is known that Johnson would like the expansion to go ahead very quickly, but this might mean compromising the company’s environmental Policies. Because there would not be time to set up supply chains with local producers, many of the products would have to be shipped from the UK, adding enormously to the food miles that Johnson's have a reputation for minimizing. (a) Discuss the problems that are likely to be associated with the decision process that will take place next Monday evening. [50% of marks on question] (b) Discuss how the group decision-making process could be improved, in the unlikely event that Pete Johnson agrees that the company should reach the decision in another way. [50% of marks on question] THIS QUESTION RELATES TO PROBLEM 2 IN THE CASE STUDY. (a) What would be the limitations of using each of the following two approaches to reach a decision on whether the Glastonbury supermarket should go ahead? (i) A senior manager, who has many years of experience in the industry uses her judgment to estimate the probabilities that the return on the investment over the ten year period will be less than 5% at each location. (i) Single figure estimates of the cash inflows and outflows over the ten year period are produced by the company's accountant for each potential location and the net present value (NPV) is calculated for each site assuming a 5% discount rate. 140% of marks on question] (b) Given below are the results of risk analyses of the returns on the investments at each location based on Monte-Carlo simulations of 20,000 possible scenarios. Return on investment (%) to under 0 0 to under 2 2 to under 4 4 to under 6 6 to under 8 Page 2 of 4 MN30266University of Bath SCHOOL OF MANAGEMENT MN30266 Decision Mal CASE STUDY FOR EXAMINATION Handing out date : Friday 6 December 2013 FOUR questions relating to this case study will appear on the examination paper on 22 January and you will be asked to answer any THREE of these questions. A clean copy of this case study will be issued at the start of the examination Johnson's Supermarkets Johnson's supermarket started in the 1890s as a single stall on Manchester market selling fresh vegetables. It gradually expanded the range of products it sold and its number of outlets, opening shops in several large towns. In 1962 it opened its first supermarket in Chorley with 4000 square feet of sales space and by 1985, following a take over of the CR Davis group, it had 25 supermarkets, across northern England, Another, takeover of the struggling Superbuy group in 1998 allowed it to expand across the whole of mainland Britain, though it stil has only 5 stores in Scotland, Currently the company serves seven million customers a week in its 30 stores. It has 102,000 employees but, despite its size, the Johnson family has always had the major stake in the business and the current Chairman, Pete Johnson, is the great-great grandson of the founder. Although he prides himself on the ethical standards he has brought to his business, he is also known for his no-nonsense decision making style. Among many middle managers there is a perception that he has deliberately surrounded himself with senior managers and directors who are either family members or friends and that they will ‘rubber stamp’ whatever he wants to do without challenging any of his ideas or decisions. The company is well known for promoting its environmental policy. It claims that its products are sourced as locally as possible and all packaging is designed to be recycled or composted where possible. In England it charges 4 pence for customers requiring plastic bags and bio-fuels are sold in filling stations at 50 of its stores. It has just started using electric vehicles for its on-line delivery service and there are plans to introduce recharging stations for electric cars at 90 stores. The supermarket industry is fiercely competitive. Johnson's are always aiming to expand the business and they are constantly on the look out for new locations for their stores. . The company operates two distribution centres in Rotherham and Hemel Hempstead, both of which are close to the M1 motorway. However, the increased volume of sales means that the current distribution centre at Hemel Hempstead is operating at close to capacity. There is no possibility of extending the facilities there because of other buildings close to the warehouse so a new location may be needed within the next four years. Four decisions that the company is currently facing are set out below.Mnigo26b Problem 1: De jon on whether to open shops in the western USA ‘The company is considering opening a chain of stores in the states of Oregon and California in the USA. It thinks that its environmental policy will go down well there and the intention ‘would be to source many of its products from within that region. While Pete Johnson is strongly in favour of expanding the business to America it is known that Tesco recently withdrew from a similar operation there so the decision would be a highly risky one. Problem 2. Decision on site for new store in Somerset Johnson's are considering opening a new store at Glastonbury in Somerset. Two locations, Frome Road and Tor Avenue are being considered. Both are on the outskirts of the town and Johnson's are almost certain that they would obtain planning permission from the local authority to build the store at either location. However, there is quite a lot of uncertainty about whether the financial return on a new supermarket in Glastonbury would make the investment worthwhile. The company needs to identify which location would bring the best retums over a ten year period to see if the project should be given the go-ahead at that location. These returns will depend on a large number of factors, including the construction costs, the share of the local market that the supermarket could attract and sustain over the ten year period, labour and distribution costs over this period and annual turnover. Problem 3: Selection of location for a new warehousing facility Johnson's are considering a number of sites to establish a new warehousing facility that would be an addition to the distribution centre at Hemel Hempstead. Currently, the sites under consideration are in Cannock (Staffordshire), Mapperley (Derbyshire), Bradford (West Yorkshire), Newoastle upon Tyne, and Douglas (South Lanarkshire). The choice of location will be based on attributes such as access to major roads, proximity to major markets, the cost of energy, expected environmental impact created, ability to complement the existing warehouse, and availability of a skilled workforce in the area. Problem 4: Decision on new environmental policy advertising campaign Johnson's have for a while been considering a new advertising campaign to further publicise its environmental policy. However, there has been hesitation to do this, mainly due to concerns about those parts of the business that have not performed particularly well from an environmental standpoint. For example, the logistics fleet of the company is still the largest part of the company's environmental impact, and refrigeration continues to be an issue that environmental groups have picked up on.Q3. Stating any assumptions you have made, determine whether it is possible to use first- or second-order stochastic dominance to identify the best location, given that the decision will only be made on the basis of the return on the investment. If it is possible, identify whether the best location is Frome Road or Tor Avenue. (c) The manager in part (a) (i) esti investment would be less than 5 [40% of marks on question} imated a 0.1 probability that the return on the Frome Road % and 0.4 probability that Tor Avenue would yield less than 5%. Briefly explain why the estimates derived from the risk analysis are likely to be more reliable. [20% of marks on question] THIS QUESTION RELATES TO PROBLEM 3 IN THE CASE STUDY Johnson's management are considering using SMART in their next meeting of managers as a tool that will make the warehousing facility decision for them. (a) Discuss the advantages and disadvantages of using SMART in this context. [20% of marks on question] (b) After some deliberation, management have come up with the value tree below. How would you help management evaluate the quality of their value tree? VALUE Costs Benefits Labour costs | | Property costs ‘Access to | Fit withcurrent | Education Cost of transportation network level of eae labour pool Page 3 of 4 [40% of marks on question] MN30266(c) After the elicitation process, the managers have come up with the following profile: Location Costs (£1000/month) | Benefits (points) Cannock 0 2500 Mapperley 350 3000 Bradford 150 2000 Newcastle 450 1500 Douglas 500 2800 {i) Plot the efficient frontier for the warehouse facility location problem, clearly listing which locations are on the efficient frontier and why. tep by step, describe the process through which a provisional decision can be made. [40% of marks on question] Q4. THIS QUESTION RELATES TO PROBLEM 4 IN THE CASE STUDY In looking at future scenarios, Johnson's management estimates that there is about a 40% chance that such a campaign will be successful, in which case they expect a contribution of around £2m to profits. However, if the campaign is unsuccessful, there would be a loss in demand causing a loss of around £3m. There are costs to not doing anything, however: if there is no advertising campaign then there is a 50% chance that a competitor will start a ‘smear campaign, in which case the losses for the firm would be around £1.5m. (a) Construct a decision tree and describe what Johnson's should do assuming that the company’s objective is to maximize expected profits. [10% of marks on question] (b) Johnson's could hire an industrial spy to learn whether the competitor is planning a smear campaign. ()) How much should Johnson's pay the spy if the spy will provide perfect information? (ii) If, in similar previous situations, the spy has predicted that the competitor will start a ‘smear campaign 70% of the time, how much should Johnson's pay the spy if the spy's predictions turn out to be true only 80% of the time? [40% of marks on question] (c) Pete Johnson is concerned that the decision obtained in part (a) does not consider the risk involved in the decision. (i) Describe how the risk involved in the decision, and the management's attitude towards risk, can be captured in the solution. ii) Assuming risk averse decision makers, derive sample utilities and apply them to the problem in part (a) to obtain the expected utiity-maximising decision. Describe the limitations of the approach suggested in parts (i) and (i). [50% of marks on question] PG/BY Page 4 of 4 MN30266