Week 7

Supply Management:
1) Case: Pagoda.com. BH chap. 7, p. 239‐240.
Formulating LP models:
2) Problem 2‐21. BRS p. 58. Formulate the problem as a linear program.
Note: The objective is to maximise the contribution margin, not
revenue.
3) Problem 2‐37. BRS p. 60. Formulate the problem as a linear program.
Note that 1 pound equals 16 ounces.
4) Problem Chemical Process in the list of additional problems below.
Case information: Pagoda.com, BH chap. 7, p. 239.
Individual consumers

Pagoda.com Small business

(Internet service provider) (require a high service level & are
willing to pay a premium for it)
Pagoda.com offers:
 Email applications
 Web-building software
 Storage space
 Fast access via high-speed servers

One of Pagoda’s services: Online help desk

Job description: Handle technical problems & answer questions in a one-on-one
chat room (within 10 minutes/problem)

A firm in New Delhi proposes an outsourcing of the online help desk.

Their personnel speak English and have appropriate technical background.
Question 1
• Calculate the total cost of outsourcing the online help desk versus
staying with the current solution. Which option is cheaper?
Case: Pagoda.com, BH chap. 7, p. 239.

Question 1
Current Online Help Desk
Personnel costs:
40 FTE technical experts @40.000/year 1,600,000
3 Supervisors @70.000/year 210,000
Equipment costs:
4 servers @2.000/year 8,000
20 PCs @1.000/year 20,000
Variable cost
800.000 requests/year @1.5 1,200,000
Total cost/year 3,038,000

New Delhi Proposal

Fixed cost 1,500,000
Variable cost
800.000 requests/year @0.5 400,000
Total cost/year 1,900,000
Question 2
• What other factors, other than costs, should Pagoda consider?
Case: Pagoda.com, BH chap. 7, p. 239.
Question: 2

Other factors:
Speed (10 minutes for problem solution, very important)
Availability (Having enough capacity)
Quality (Having the right know how and customer abilities)
Uptime (crashes are very important to avoid)
Consistency/familiarity (customers knows what they get)
Question 3
• Should Pagoda.com outsource its online help desk? Why or why not?
Be sure to consider table 7.7 and 7.8 when framing your answer.
 Insourcing
Advantages Disadvantages
High degree of control Reduced strategic flexibility
Ability to oversee the entire process Required high investment
Economies of scale and/or scope Potential suppliers may offer superior products and services
Outsourcing
Advantages Disadvantages
High strategic flexibility Possibility of choosing a bad supplier
Low invesment risk Loss of control over the process and core technologies
Improved cash flow Communication/coordination challenges
Access to state-of-the-art products and services Increased risk ok supply chain disruption
Customer social responsibility (CSR) risk

It is an open case and is definitely up for discussion, but the

most important part is backing an argument from the theory.

Regarding table 7.7 it would say that this case here is the
dilemma between cost and control when looking at the pros
and cons of insourcing vs outsourcing
Regarding table 7.8 I would highlight the importance of core
competencies and the ability to monitor the New Delhi firm to
be the most important elements of that table
Question 4
• A statement of work typically specifies performance measurements
that the buying firm can use to determine whether the service
provider is meeting the terms of the contract.
• What performance measurments would you recommend be put in
place? What should happen if the service provider fails to meet these
requirements?
Case: Pagoda.com, BH chap. 7, p. 239.

Question 4

Service measures that should be put in place include:

• a quality metric of contacts resolved on first contact (not having to
open a second contact for the same issue later)
• a time metric around the speed of answer for a customer opening a
new support chat
• a customer satisfaction metric around how customers perceive the
service received.

Failure to meet the requirements should result in penalties that the

service provider must pay to Pagoda.com.
Defining LP-models
1. Identification and definition of decisions
variables and parameters

2. Objective Function

3. Constraints (verbal and mathematical)

Problem 2-21, BRS p. 58
A decorating store specializing in do-it-yourself home decorators must decide how
many information packets to prepare for the summer season:
• # painting packets
• # glazing packets
Demand requirements:
• At least 400 painting packets
• At least 300 glazing packets
Production (printing and collating) constraints:
• Each painting packet takes 2.5 minutes for printing and 1.8 minutes for collating
• Each glazing packet takes 2 minutes for printing and 2 minutes for collating
• Time available: 36 hours for printing and 30 hours for collation.
Contribution to profit:
• Each painting packet sells for $5.5 and costs $1: $4.5
• Each glazing packet sells for $4.5 and costs $1: $3.5

How many of each packet should the store order to maximize ’contribution margin.
Problem 2-21
LP model
Decision variables:
P = # painting packets
G = # glazing packets

Objective function:
max z = 4.5 P + 3.5 G

Constraints:
• Demand for painting packets P ≥ 400
• Demand for glazing packets G ≥ 300
• Printing capacity 2.5 P + 2 G ≤ 2160 (= 36*60)
• Collation capacity 1.8 P + 2 G ≤ 1800 (= 30*60)
• Non-negativity P, G ≥ 0
Problem 2-21

Solution from Excel

P G
Painting Glazing
# Packets 624 300 Total
Profit 4,5 3,5 3858
Constraints:
Demand Painting 1 624 > 400
Demand Glazing 1 300 > 300
Printing capacity 2,5 2 2160 < 2160
Collation capacity 1,8 2 1723,2 < 1800
Problem 2-37
• The owners of a feedlot seek to determine the amounts of cattle feed
to buy so that minimum nutritional standards are satisfied to ensure
proper weight gain, while total feed costs are minimized.

• Note that 1 pound equals 16 ounces.

Problem 2-37
• Feed mixes costs per pound: Restriction:
• X: $3 • Max 5 pounds of mix Z per cattle
• Y: $4 per day
• Z: $2,25

• Min. requirement of pounds per

cattle per day:
• Nutrient A: 4
• Nutrient B: 5
• Nutrient C: 1
• Nutrient D: 8
Problem 2-37
Decision variables:
X = # pounds feed mix X to buy*
Y = # pounds feed mix Y to buy*
Z = # pounds feed mix Z to buy*

Objective function:
min z = 3 X + 4 Y + 2.25 Z

Constraints:
• Nutrient A 3 X + 2 Y + 4 Z ≥ 64 (= 4*16)
• Nutrient B 2 X + 3 Y + Z ≥ 80 (= 5*16)
• Nutrient C X + 2 Z ≥ 16 (= 1*16)
• Nutrient D 6 X + 8 Y + 4 Z ≥ 128 (= 8*16)
• Z available Z≤5
• Non-negativity X, Y, Z ≥ 0

*: measured per cow per day  subsequent scaling for 100 cattle
Problem 2-37

Solution from Excel

X Y Z
Mix X Mix Y Mix Z
# Pounds 16 16 0 Total
Cost 3,00 4,00 2,25 112
Constraints:
Nutrient A 3 2 4 80 > 64
Nutrient B 2 3 1 80 > 80
Nutrient C 1 2 16 > 16
Nutrient D 6 8 4 224 > 128
Z available 1 0 < 5
Additional problem week 7: Chemical
Process
• A company uses a chemical process to transform raw material R to
the products X and Y.

• Give a mathematical formulation of this planning problem as a linear

programming problem.
Chemical Process
• 1 kg of R results in:
• 0.2 kg product X
• 0.7 kg product Y
• Selling limitations:
• Product X: 1.000 kg
• Produce > 1.000 kg;
destroy at cost DKK 30 per kg
• Product Y: Unlimited
• Sales prices:
• Product X: DKK 200 per kg
• Product Y: DKK 340 per kg
• Production costs:
• Material costs: R per kg DKK 100
• Process costs: DKK 45 per kg R
• Packing costs:
• Product X: Per kg DKK 25
• Product Y: Per kg DKK 30
• Capacity production facility: 10.000 kg R
per month.
Chemical Process

Decision variables:
R = Qty. raw material R to buy
Y = Qty. product Y to produce
X1 = Qty. product X to be sold
X2 = Qty. product X to be disposed of

All variables are measured in kg.

Chemical Process

Sales Total
Product Material Process Packing Destruction
price (DKK)
R -100 -45 −145

Y 340 -30 310

X1 200 -25 175

X2 -30 −30

Objective function:
max z = −145 R + 310 Y + 175 X1 − 30 X2
Chemical Process

Constraints:
• Quantity Y from R Y = 0.7 R Y − 0.7 R = 0
• Quantity X from R X1 + X2 − 0.2 R = 0
• Production capacity R ≤ 10000
• Max sales of X X1 ≤ 1000
• Non-negativity R, X1, X2, Y ≥ 0
Chemical Process
Entire Model
Objective function:
max z = −145 R + 310 Y + 175 X1 − 30 X2

Constraints:
• Quantity Y from R Y = 0.7 R Y − 0.7 R = 0
• Quantity X from R X1 + X2 − 0.2 R = 0
• Production capacity R ≤ 10000
• Max sales of X X1 ≤ 1000
• Non-negativity R, X1, X2, Y ≥ 0
Chemical Process

Solution from Excel

R X1 X2 Y
Quantity 10000 1000 1000 7000 Total
Profit -145 175 -30 310 865000
Constraints:
Qty. Y from R -0,7 1 0 = 0
Qty. X from R -0,2 1 1 0 = 0
Production cap. 1 10000 < 10000
Max sales X 1 1000 < 1000