Read the following case study, and then answer the questions below:
Case Study - Ohio Polymer Inc
Question 1 - What decision(s) does Norman Vincent need to make?
Question 2 - Without undertaking any extensive calculations and based on their average requirements, how much contract ethylene should Ohio Polymer purchase? What price should they be prepared to pay?
Question 3 - What are the shortcomings of using the average requirements in these calculations?
Question 4 - Consider how you might develop a cut down or 'demo' simulation model for Ohio Polymer in a spreadsheet. Develop a demo model showing 10 days of production at the Ethylene 1 plant and 10 days of consumption at the HPPE 1 plant. The template below in Table 1 suggests how to lay out your demo simulation model. Use the demo simulation model to calculate the daily spot purchase requirements, assuming there is no capacity for storing unused gas.
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A
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B
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C
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D
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E
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F
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G
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Day
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Random Number
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Ethylene 1 production
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Random Number
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HPPE1 consumption
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Production - Consumption
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Amount to spot purchase
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1
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2
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3
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4
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5
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6
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7
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8
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9
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10
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Hint: Entries for Ethylene 1 and HPPE1 need to use a formula similar to that introduced in Lesson 7.3.2.
A copy of the full simulation model is attached below along with the documentation of this model. You do not have to fully read the attached documentation but you may find it helpful when familiarising yourself with the model.
Two important things to notice about the model:
- We have 'fixed' the random numbers used by the model; this means that when you use the model, you should get the same answers as those found in the solutions.
- To use the full simulation model to create a decision aid you need to add the price of the contract - if you're unsure how add this to the model, have a discussion with others in your study group about how you might do this.
Question 5 - Suppose that Norman believes that ProBut are thinking in terms of a price of $60/ton. What advice can you give him on the quantity that he should look for?
Question 6 - Alternatively, suppose that Norman believes that ProBut are keen to supply around 40 tons a day. What advice can you give him on the price that he should look to pay?
Question 7 - Table 2 shows a section of a decision aid derived from the simulation model that could be of use to Norman. It shows the mean daily contract costs for various price/volume combinations. Before answering the questions, try to replicate some of the numbers in the table (in other words, spend some time experimenting with the model).
Using the decision aid, answer the following questions.
- Write a paragraph explaining to Norman how he might use the table. Are there any patterns observable in the table that suggest some general principles that he can in his negotiations? Questions 5 and 6 should help you.
- Currently Ohio have a contract for the supply of 30 tons/day at a price of $60/ton. ProBut have indicated that they need to raise the price. How should Norman respond?
- Currently Ohio have a contract for the supply of 40 tons/day at a price of $60/ton. ProBut have indicated that they would like to increase the supply. How should Norman respond? (Ignore your answer to (ii) when answering this question)
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Price of ethylene taken on contract ($/ton)
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tons/day
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30
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40
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50
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60
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70
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80
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90
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100
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0
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8482
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8482
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8482
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8482
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8482
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8482
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8482
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8482
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10
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6890
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6990
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7090
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7190
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7290
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7390
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7490
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7590
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20
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5470
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5670
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5870
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6070
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6270
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6470
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6670
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6870
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30
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4332
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4632
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4932
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5232
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5532
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5832
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6132
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6432
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40
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3459
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3859
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4259
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4659
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5059
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5459
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5859
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6259
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50
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2974
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3474
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3974
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4474
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4974
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5474
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5974
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6474
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60
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2894
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3494
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4094
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4694
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5294
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5894
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6494
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7094
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70
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2977
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3677
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4377
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5077
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5777
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6477
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7177
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7877
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80
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3157
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3957
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4757
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5557
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6357
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7157
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7957
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8757
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Table 2: Mean daily contract costs (spot+storage+contract) for different contract levels (tons/day) where the contract price ranges between $30/ton and $100/ton
Question 8 - One of your colleagues makes the following comment:
Ohio have an average daily shortfall of 35 tons. So, at a first shot, they should determine an adequate reserve to be held in store and should contract for 35 tons to keep this reserve topped up. This will be the solution unless storage costs are prohibitively high, when a lower reserve and occasional spot purchases will be needed. But there can never be a case for contracting for more than 35, since the excess will just keep building up in store. You don't need all this analysis stuff, you just need to think about the problem!
With this comment in mind, give three potential advantages and benefits of using the simulation model to support negotiations on the contract to supply ethylene.
Attachment:- Assignment Files.rar