Data, Models and Decisions (2011 IMBA FDMS)

Reference Solution to AOG case

2011.9.

Some Explanations

A critical component of the cost analysis is the internal AOG cost itself, that is, the
cost of keeping the aircraft CML 19 out of service for its regular 2-day cycle.

This reference solution is based on the following scenario assumption. Latin Airlines
has four planes serving the Santiago-Miami line. That is, when two planes (CML 19
and CSM 20) fly from Santiago to Miami on a certain day (e.g. Tuesday), there are
other two planes fly from Miami to Santiago at about the same time. Thus, the latter
two planes will fly from Santiago to Miami the following evening (e.g. Wednesday).

m
er as
This is common phenomenon for a mutual air route.

co
eH w
The plane of SCL-MIA CSM 20 has the same capacity as that of CML 19.

o.
rs e
ou urc
2-Day Aircraft Cycle Cost

On-ground passenger costs due to overnight stays:

o
aC s

Business Class:
vi y re

28  0.80  0.30  (30 + 150 + 100)  2 = $3,763.20

(This is expected passengers overnight times costs, for the two flights in the 2-day
cycle. Don’t forget, if the flight from Santiago to Miami is cancelled one day, the
ed d

flight from Miami to Santiago on the following day is also cancelled. The costs
ar stu

should be doubled.)

Coach Class:
is

185  0.70  0.50  (10 + 75 + 45)  2 = $16,835.00

Th

Total On-Ground Stay Costs: $20,598.20 ( = $3,763.20 + $16,835.00 )

Tickets costs due to overnight stays:

sh

Business Class:
28  0.80  0.30  (6,930  0.70)  2 = $65,197.44
(This is expected passengers overnight times costs of free ticket coupons, for the two
flights in the 2-day cycle. By some calculation, one may see that all the overnight
passengers can be booked on the two LAC flights the next day.)

This study source was downloaded by 100000832329125 from CourseHero.com on 09-18-2021 22:24:12 GMT -05:00

https://www.coursehero.com/file/12728282/Reference-solution-to-AOG-case/
 Data, Models and Decisions (2011 IMBA FDMS)

Coach Class:
185  0.70  0.50  (2,750  0.50)  2 = $178,062.50

Total On-Ground Tickets Cost: $243,259.94 ( = $65,197.44 + $178,062.50 )

Total costs paid to other airlines for re-booked passengers flying same night:

Business Class:
28  0.80  0.70 = 15.68 is number of passengers re-booking.
28  0.20 = 5.60 is the number of seats available on the other LAC flight (CSM 20).
15.68  5.60 = 10.08 is the number of passengers to re-book on competitor (AA).
Cost is 10.08  (6,500 / 2)  0.95  2 + 5.60  0  2 = $62,244.00
(Note that all the ticket prices are round-trip fairs.)

Coach Class:

m
185  0.70  0.50 = 64.75 is the number of passengers re-booking.

er as
185  0.30 = 55.5 is the number of seats available on the other LAC flight (CMS 20).

co
eH w
64.75  55.5 = 9.25 is the number of passengers to re-book on competitor (AA).
Cost is 9.25  (2,600 / 2)  0.95  2 + 55.5  0  2= $22,847.50.

o.
rs e
ou urc
Total Re-Booking Costs: $85,091.50 ( = $62,244.00 + $22,847.50 )
o

Fuel Saving
aC s
vi y re

The actual flying time is 8.417 hours.

Fuel savings = 1,669  3.00  8.417  2 = $84,284.50
(You can also use the average flight leg time 5.1 hours to do the calculation.)
ed d
ar stu

Total Cost of AOG for 2 days

is

$264,665.14= $20,598.20 + $243,259.94 + $85,091.50  $84,284.50

Th

Call this number Z for future use.

sh

This study source was downloaded by 100000832329125 from CourseHero.com on 09-18-2021 22:24:12 GMT -05:00

https://www.coursehero.com/file/12728282/Reference-solution-to-AOG-case/
 Data, Models and Decisions (2011 IMBA FDMS)

The Decision Tree

a
vi
d
re
ha
s
as
w
m e
co rc
o. o u
er res
se dy
stu

3
H
s
hi

This study source was downloaded by 100000832329125 from CourseHero.com on 09-18-2021 22:24:12 GMT -05:00
 Data, Models and Decisions (2011 IMBA FDMS)

Evaluate the Final Branches

Final branch A
A = $1,000,000 + $3,000 + Z = $1,267,665

Final branch B
B = $1,000,000 + $3,000 + 2  Z = $1,532,330

The reason for the extra 2-day AOG cycle delay (2  Z instead of Z) is as follows. The
component starts loading at 7Am Tulsa time, and leaves by truck at 8AM Tulsa time.
This is 9AM Miami time. If the trip takes more than 11 hours, it arrives in Miami after
20:00 Miami time, and so cannot be loaded onto LAC Cargo in time.

Final branch C
C = $1,000,000 + $65,000 + Z = $1,329,665

m
er as
co
Final branch D

eH w
D = $500,000 + $70,000 + Z = $834,665

o.
Final branch E
rs e
ou urc
Cost of failed component is:
Y = $500,000  (1  2/3) + 70,000 + 70,000 + Z
o

Bennett would send the component from Paris to Madrid on Wednesday and then
aC s

overnight from Madrid to Santiago arriving in Santiago on Thursday at 5:50AM. LAC

vi y re

would then start the installation of the component. They would find out that the
component fails by 19:00 on Thursday, leading the cancelling of the flight on that
evening. Thus, we are back at the same point in the cycle-time as we were when we
ed d

got the initial AOG call on Tuesday at 19:00.

ar stu

E = Y + $1,352,757 (from branch A) = $1,838,997

is

Final branch F
Th

F = Y + $1,702,513 (from branch B) = $2,103,662

Final branch G
G = Y + $1,414,757 (from branch C) = $1,900,997
sh

Final branch H
H = $2,100,000  (1 + 0.05) + $2,100,000  0.15
–$ 2,100,000  (1  0.1  0.1)  (1/1.10)^2 + Z = $1,396,235

Final branch I
I = Y + $1,481,327 (from branch H) = $1,975,567.

This study source was downloaded by 100000832329125 from CourseHero.com on 09-18-2021 22:24:12 GMT -05:00

https://www.coursehero.com/file/12728282/Reference-solution-to-AOG-case/
 Data, Models and Decisions (2011 IMBA FDMS)

Solve the Decision Tree

a
vi
d
re
ha
s
as
w
m e
co rc
o. o u
er res
se dy
stu

5
H
s
hi

This study source was downloaded by 100000832329125 from CourseHero.com on 09-18-2021 22:24:12 GMT -05:00
 Data, Models and Decisions (2011 IMBA FDMS)

Comments

In reality it would be wise to use EMV as a guide but not as the definitive criterion
here. Given how close the expected costs of ArcSolution by land is to those of
ArcSolution by air, it is probably wiser to go with ArcSolution by air.

Sensitivity Analysis

Land transportation reliability

Probability p that land transportation from Tulsa to Miami will cause a delay.

m
er as
co
eH w
o.
rs e
ou urc
o
aC s
vi y re
ed d
ar stu
is

As long as the delay probability p is smaller than 23.4%, use ArcSolution and use
Th

transportation by land remains the optimal choice. If p increases to be larger than

23.4%, one should choose transportation by air based on EMV.
sh

This study source was downloaded by 100000832329125 from CourseHero.com on 09-18-2021 22:24:12 GMT -05:00

https://www.coursehero.com/file/12728282/Reference-solution-to-AOG-case/
 Data, Models and Decisions (2011 IMBA FDMS)

Fit Uncertainty

Let p denote the probability that the Bennett component will fit.

m
er as
co
eH w
o.
rs e
ou urc
o
aC s

When p becomes larger than 46.9%, going with Bennett Cargo becomes more
vi y re

attractive than the Miami supplier.

When p becomes larger than 54.1%, going with Bennett Cargo becomes more
ed d

attractive than ArcSolution, and hence the optimal solution.

ar stu
is
Th
sh

This study source was downloaded by 100000832329125 from CourseHero.com on 09-18-2021 22:24:12 GMT -05:00

https://www.coursehero.com/file/12728282/Reference-solution-to-AOG-case/
 Data, Models and Decisions (2011 IMBA FDMS)

AOG 2-Day Cycle Cost

m
er as
co
eH w
o.
rs e
ou urc
Purchasing from ArcSolution is the best option regardless of the cost of the 2-day
AOG cycle cost.
o

Going with Bennett Cargo becomes more attractive than purchasing from Miami
aC s

supplier when the AOG 2-day cycle cost is less than about $102,500.
vi y re
ed d
ar stu
is
Th
sh

This study source was downloaded by 100000832329125 from CourseHero.com on 09-18-2021 22:24:12 GMT -05:00

https://www.coursehero.com/file/12728282/Reference-solution-to-AOG-case/
Powered by TCPDF (www.tcpdf.org)