Term Paper

PASAY VENTURES

INCORPORATED

Submitted to:

Mr. Marvin Norona

In Completion of the course requirements in

MANASCI K39

Daniel Villena

Isaac Cancino

Kevin Canlas

Date: April 3, 2012

I. Introduction

A. Why the area of interest? (Rationale)

Decision making is and will always be something that can make or break companies. Even the most established companies can be crippled by a lack of informed decisions that leave the company susceptible to certain risks that may be far greater than the returns that may come from them. This is why the development of a strenuous decision making criteria is important in any organization that faces the question to do or not to do. It will also be a matter of revealing new doors and which door to open; the one that will satisfy certain criteria and needs.

B. Company background

Pasay Venture’s Incorporated’s, a family owned corporation, main line of business is creating quality cleaning products at prices that can compete with the main competitors in the industry. Their ultimate goal is to eventually serve the interests of the everyday person by providing a cheap alternative to the highly priced premium brands of cleaning products without compromising the quality that any person who does dishes would need at his or her disposal.

C. Description of the specific area of interest (ex. production, marketing)

This study will focus on reducing the costs of delivery for the product and also minimizing the required time it takes to deliver the products from the two warehouses that PVI owns.

D. Situation analysis (problem area of application)

Currently, PVI delivers to 5 locations around the Metro specifically, Cainta; Manila; Pasig; Pasay and Quezon. The company has two options to deliver from namely, from the main administrative office located in Pasig which has a small storage space for products and the small scale factory located in Cainta where all the products are made.

The company has numerous alternatives but for this paper, we are only considering three and they are:

1. The company may opt to purchase a second hand van to make the deliveries since the current delivery scheme uses the family car and therefore is very costly not only because of the gas it uses but also the maintenance the family car needs to undergo

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since it is not designed for this job. However, deliveries can only be made once a week due to the availability of the driver.

2. The company may also try to outsource the delivery since the CEO of PVI is a close friend of the owner of a local courier that is willing to provide his services at a fixed cost per year.

3. Lastly, the company may consider having the customers pick up their own orders at either of the warehouses for a reasonable discount on the price of the said products.

E. Objective/s of the study

The main objective of this study is to inform the management of PVI of the most logical and cost friendly alternatives that they can employ to meet with their criteria of quality products at cheap prices. The study will also consider the delivery times of the alternatives and give merits and demerits accordingly since the best alternative isn’t only the one that minimizes cost but also maximizes customer satisfaction.

However, this study also has the following limitations:

1. The warehouses and the destinations will be measured using tools that may reduce the accuracy of the measurements thereby rendering some uncertainties in terms of possible results.

2. This study will not cover any other alternative that may be available to the company since this study focuses on the three most likely alternatives as described by the CEO of PVI.

3. Although more appropriate models may be available for this study, the data will be interpreted using models covered and contained in the syllabus of MANASCI K39 T3 SY11-12 as discussed in the framework.

4. The company sells different products at different prices hence; this study will not consider the price of the products but rather the cost of delivery to remove any bias.

5. The estimates that were retrieved hold with them a risk that said estimates may not be as accurate.

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II. Review of Literature

A. Gathering of relevant articles, journals, lecture or book materials that must be sequenced to serve as a prelude to the conduct of the study.

1. Much of the analysis dealt were techniques coming from the book, “Quantitative Analysis for Management” both from it 10th and 11th edition. The main topics that have been filtered were of the transportation model under linear programming by means of using the simplex method in order to reach the expected values for the nodes, which will be covered by another topic from the book under the decision analysis.

2. The 10th edition provided more insightful information on the transportation model, specifically the methods used, which are the Vogel’s approximation method in order to find an alternative initial solution and the MODI method in finding the optimal solution. The 11th edition graces with detailed information on the decision trees as displayed in the appendix that will allow the authors to weigh the pertinent roads at hand

B. Synthesis

1. Before tackling the methods used in the transportation model, it is important to point the reasons why such were used in comparison to the others displayed on the 11th edition from our source. The process of iteration in the transportation algorithm is a repetitive trek so before such procedure can begin, an initial solution should be set up. The first method displayed in the 11 th

edition was that of the northwest corner rule where supply was exhausted starting from the northwest-most box in the table then moving down until all have been consumed. After assessing this method, it is notable that after iterations to find an optimal solution, it has been very time consuming and time is something that managers would have to consider especially when faced with much needed useful quantitative information for immediate decision-making. In response to this, the authors have decided to approach this situation using the Vogel’s approximation method. It is much more complicated method than that of the northwest corner rule, yet it has the potential to immediately produce the optimal solution as it takes into consideration the costs associated. It dwells more

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on calculating the opportunity costs on each column/row then supply on the row/column with the highest opportunity cost.

2. In finding the optimal solution, the initial solution was the stepping stone method where empty squares were manipulated by travelling around those of the squares that have been supplied. By subtracting, adding alternately on the supplied squares, indices for each empty square can be found and should there be a negative result, the optimal solution has not yet been found. This is time consuming so the group used another method though the initial vogel method was inaugurated. The modified distribution method or MODI was used. Though in essence, it goes the same with the stepping stone in terms of using indices, it primarily uses algebra to compute indices for each empty square. The specifics no longer need to be discuss and such optimal solutions for transportation algorithm has been handled easily as the vogel has simplified matters for iterations.

3. Since this case outlines multiple effects, a more convenient manner to present and weigh the alternatives is through the use of decision trees. With the optimal solutions taken, the nodes for a decision tree are plotted. These nodes are classified into two: the decision nodes and the state of nature node. The former are nodes where such decisions can be made while the latter merely branches out possible outcomes due to uncertainties with the venture. Along with these states of nature nodes come the probabilities as taken from the information gathered by authors. Such will affect the expected monetary value which will become the basis of the decision.

4. The concept of utility theory is also integrated in this case wherein expected monetary values are not the mere indicators that such decision should be made. It is vital that as managers be aware that there are factors more than the monetary values calculated that are more necessary and at times it would be up to one’s discretion on how to act upon such a scenario.

Sources: “Quantitative Analysis for Management” 10th edition and 11th edition by Barry Render

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III. Methodology

A. Data gathering (source of information such as files, reports, surveys)

This study requires the following data:1. The distance of the destination from both sources

2. The current cost of diesel gas which will be used to run the van

3. The reaction of each customer group to each alternative

4. The cost of the courier alternative

5. The arbitrary discount which will be given to customers who pick up their orders

In lieu of the above, the following tools will be used to provide the data required above:

1. Surveys will be given to each company to determine their eagerness toward each alternative. This survey will also help determine the impact on the sales of the company to aid the decision making.

2. Estimates provided by the executive officers of the company will also be used despite their inherent risk of being inaccurate.

B. Data analysis (description of tools and how it will be used for the study)

The tools which will be used in analysing the above data are the decision tree for (1) calculating the EMV for each alternative and (2) providing a good estimate on the time it takes to deliver. The transportation model will also be used to help calculate the monetary effect of the van alternative on the cost of the delivery that is this model will be used to compute the cost that will be placed on certain nodes in the decision tree.

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C. Framework used

The alternative that will be deemed the best should be the one that minimizes delivery cost AND maximizes customer satisfaction. In this paper, customer satisfaction is defined as a product of the time it takes to deliver; the shorter the time, the more satisfied a customer. Because of this, the best alternative will be decided by giving each alternative merits and demerits according to their rank in (1) the decision tree showing EMV and (2) the decision tree showing expected time of delivery. The merits and demerits will be as follows:

Point system*Rank (EMV) Points Rank (Time) Points1st 8 1st 32nd 6 2nd 23rd 4 3rd 1

*these are arbitrary numbers used only for the purpose of giving weight to each alternative with the purpose of finding the alternative that is best for both EMV and time, so this test is judgemental based on the assessments made on the calculated yields.

The points will be added for both decision trees and the best decision will be the one with the most points. If there be a tie, the alternative with the lower cost will be chosen.

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IV. Results and Discussion

A. Problem Definition

The problem stated above is that currently the company is sure that there will be a change in the scheme of the delivery. The only thing that’s left to decide is which of the alternatives PVI will choose.

The problem contains three alternatives which are to purchase a van, to outsource the delivery or to give discounts so that customers will pick up their own orders.

The problem also makes mention of 5 different places which demand the product and 2 which supply it. Due to confidentiality issues, the addresses will not be completed to the fullest extent however, they will still be identified with certainty as to distinguish one site from another.

B. Modelling (bases & assumptions)

Assumptions (estimated and derived from survey results):1. According to the CEO, the company’s proportion of sales to each

destination is as follows

City ProportionCainta 3Manila 3Pasig 1Pasay 1

Quezon 2

2. According to the CEO, the annual sales amount to around 300 1-gal bottles of product averaging a price of P120 per 1-gal container. These are delivered on the average, 10 1-gal containers per week.

3. The discount will be treated as a cost rather than a deduction to income in order to be consistent with the other alternatives. By the same token, decreases/ increases in sales will be translated into costs or costs savings. The CEO wants to give an arbitrary discount of 12% if that alternative is chosen.

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4. The price of diesel used in this analysis will be P50/L and the van will run an estimated 5 km/L of diesel fuel on bad weeks, 8 km/L on good weeks. There is an equal possibility of this happening.

5. The distances measured are as follows:

City Km(from Cainta)

Km(from Pasig)

Cainta 2 14Manila 38 24Pasig 17 6Pasay 37 21

Quezon 30 23

6. The capacity of the administrative building is estimated to be only 100 1-gal containers.

7. The courier service, which costs P8000 per year for unlimited deliveries, will take 4 days to deliver on good weeks and 8 days to deliver on bad weeks. The CEO estimates that the better will happen 30% more than the worse.

8. If the discount alternative was chosen, the survey indicates that Pasay will be lost as a customer and the rest will remain. There is an 80% chance of this happening according to the CEO of PVI.

9. Our assumption is that if the discount alternative were chosen, the goods could be at the pick-up point 2 days after ordering at the earliest and 4 days at the latest, after which the customers may pick-it up the next day. The CEO believes that 70% of the time, he will be early.

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C. Result of applying the tools

Alternative Cost TimePurchase a van 5735.2

57.0

Courier 8000.00

5.4

Discount 6854.40

3.6

Alternative Cost Rank Time Rank TotalPurchase a van 1st 8 3rd 1 9Courier 3rd 4 2nd 2 6Discount 2nd 6 1st 3 9

D. Interpretation of the results

Under the criteria provided in this study, the management’s optimal alternative (minimize cost & maximize customer satisfaction) is to purchase a van for company use. Although the alternative of offering a discount also yields the same points, this study considers that the company focuses a little bit more on costs, which is something that can be measured accurately, rather than on customer satisfaction, which is subjective.

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V. Conclusion and Recommendation

A. Epilogue

This study achieved its objective of providing the management of Pasay Venture Incorporated with a systematic way of decision making in which not only costs are considered but customers as well. The study also provided its authors with a reasonable real-life situation in which they were able to apply the lectures and lessons learned in class. Overall, the study was successful in helping not only Pasay Ventures Incorporated but also its authors.

The authors of the study also found the models taught in class were very helpful in enabling the researcher a better understanding of the task at hand. The decision tree model provided a concrete visual representation of the problem. It was also a useful tool in computing not only the expected costs of each alternative but also the expected time of delivery for each alternative.

The authors of this study recommend the usage of better models which consider time and cost without the need to solve separately. They also recommend that future studies employ more strenuous criteria and gather more accurate data in order to give an unbiased and objective decision.

B. Acknowledgement

The authors of this study would like to thank the following:

1. Mr.Enofreo Villena, the CEO of Pasay Ventures Incorporated, who so graciously accepted our proposal to help in the decision making of his firm.

2. Mr. Marvin Norona, professor of MANASCI K39, who made the models and techniques used in this study available to the authors of this study.

3. Everyone who helped formulate and compute the models used in this study.

4. The Lord for guiding the authors in using the intelligence granted to them for a purpose larger than themselves.

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VI. Appendix

Appendix A - SURVEY Questions:

1. Would you pick up your own order if were given a discount of 12% on each purchase?

Y N

2. Would you still buy if the products were delivered by a local courier to the place agreed upon?

Y N

3. Would you still purchase the products if they were delivered 7 days after you place your order?

Y N

Appendix B – Computation of per unit cost of delivery

City Km(from Cainta)

Km(from Pasig)

Cainta 2 14Manila 38 24Pasig 17 6Pasay 37 21

Quezon 30 23

Cost perUnit=Distance∗Price per kmNumber of units

Bad weeks:

City Price/Unit(from Cainta)

Price/Unit (from Pasig)

Cainta 0.21 14.05 Manila 4.23 2.66 Pasig 5.66 2.00 Pasay 12.34 7.00

Quezon 5.00 3.84

Good weeks:

City Price/Unit(from Cainta)

Price/Unit (from Pasig)

Cainta 0.14 8.79 Manila 2.64 1.66 Pasig 3.54 1.25 Pasay 7.71 4.38

Quezon 3.13 2.40

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Appendix C – Decision tree (Cost)

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Start

Van

Good Milage

Bad Milage

Courier

Fixed Cost

Discount

Lose a contract

No effect on sales

Appendix D – Decision Tree (Time)

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Start

Van

7 Days

Courier

4 Days 8 Days

Discount

3 Days 5 Days

Appendix E – Cost of the van per year

Cost of the van per year= Purchase priceno .of years of estimated use

Costyear

=P150,00030

=P5,000

Appendix F – Transportation Model (5 km/L)

Using VAM,

0.14 2.64 3.54 7.71 3.13

8.79 1.66 1.25 4.38 2.40

300.00 Demand 90.00 90.00 30.00 30.00 60.00

Pasig 100.00 40.00 30.00 30.00

Supply

Cainta 200.00 90.00 50.00 60.00

Cainta Manila Pasig Pasay Quezon

(Optimal)

The minimized cost of transportation if the fuel economy of the van will be bad is P906.80/year. This value will be used to fill the decision tree.

Appendix G – Transportation Model (5 km/L)

0.21 4.23 5.66 12.34 5.00

14.05 2.66 2.00 7.00 3.84 40.00 30.00 30.00

30.00 30.00 60.00

50.00 60.00

Demand

Pasay Quezon Supply

Cainta

Pasig

200.00

100.00

90.00

Cainta Manila Pasig

300.00 90.00 90.00

(Optimal)

When the fuel economy of the van is good, the minimized cost of transportation will be P567.70/year. This value will also be used to complete the decision tree.

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Appendix H – Computation of Discount

Total cost=Discount+Decrease∈Sales

Where:

Discount=Total no .of units sold∗Price∗¿ 12%

Decrease∈Sales=No .of units lost∗Price per unit

When the company loses Pasay as a customer

Discount=(300−30 )∗P120∗12%=P3888Decrease∈Sales=30∗P120=P3600

Hence,

Total cost of this node=P3888+P3600=P7488

When there is no effect on the sales of the company

Discount=(300−0 )∗P120∗12%=P4320Decrease∈Sales=0∗P120=P0

Hence,

Total cost of this node=P 4320+P0=P4320

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Appendix I – Computation of EMV’s for each alternative (Cost)

EMV=Cost for the stateof nature∗Probability of that state of nature+Payoff of the next state of nature∗Probability+…

o Alternative 1: Purchase a second hand L300

EMV=(P5000+P906.80 )∗50%+ (P5000+P567.70 )∗50%

¿ P5735.25

o Alternative 2: Outsource to a fixed cost courier

EMV=P8000∗100%

¿ P8000

o Alternative 3: Provide discount for customers who will pick-up their own

orders

EMV=(P7488 )∗80%+(P4320 )∗20%

¿ P6854.40

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Appendix J – Computation of EMV’s for each alternative (Time)

EMV=Cost for the stateof nature∗Probability of that state of nature+Payoff of the next state of nature∗Probability+…

o Alternative 1: Purchase a second hand L300

EMV=7days∗100%

¿7days

o Alternative 2: Outsource to a fixed cost courier

EMV=4 days∗65%+8days∗35%

¿5.4days

o Alternative 3: Provide discount for customers who will pick-up their own

orders

EMV=3days∗70%+5 days∗30%

¿3.6days

Appendix K – Points of each alternative

Alternative Cost Rank Time Rank TotalPurchase a van 1st 8 3rd 1 9Courier 3rd 4 2nd 2 6Discount 2nd 6 1st 3 9

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