Network Design Assignment
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MANAGEMENT ANALYTICS 1NETWORK DESIGNProf. Ou Tang, PhDGroup 6:Dhwanit Patel Dylan Zhang Pablo Iannantuono Siddhant AgrawalMANAGEMENT ANALYTICS REPORTNETWORK DESIGNIntroductionThis report will analyze the merger between two European companies: Hot&Cold and CaldoFreddo. Both companies have several production plants and are manufacturers of home appliances that serve only the European market, which is divided into four regions: North, East, West and South. All the information regarding the cost structure and demand of each plant and market is summarized in the following table:Variable production and shipping cost (€/un)Annual Capacity (million un.)Annual Fixed Costs(million €)Profit TaxNorthEastSouthWestHot&ColdFrance10011010510050100025%Germany9510511010550100025%Finland901001151104085030%Demand (million €)30202035CaldoFreddoUK1051201109050100020%Italy1101059011560115035%Demand (million €)15203020Total Demand45405055Besides, the average selling price of each home appliance is €300 for all the European market. This report will also analyze the optimal network design for both pre and post-merger situations, considering and assuming that the costs structure of each plant remain the same, the demand is constant throughout the year and the total demand results from the sum of the demand of each company and, finally, if a plant is decided to be shut down, all of its fixed annual costs will be saved.
Network designTo effectively design the network of these two companies, the analysis will focus on maximizing the total net profit of the company/ies. Since each individual plant is treated as a profit center and taxes vary from country to country, minimizing the total cost will not take into account these differences in taxes and will not arrive to the optimal solution. However, the cost will be relevant as of considering financial cash flows. Maximizing the total profit does not imply a minimum cost, hence the company should be financially capable of bearing those costs.In consequence, the system of equations where the total net profit is going to be maximized is the following: [pic 1]Where: i: subindex related to the plant (1=France, 2=Germany, 3=Finland, 4=UK, 5=Italy), j: subindex related to the demand region (1=North, 2=East, 3=South, 4=West), kij: Variable production and shipping cost of the “i” Plant and for the “j” region, xij: demand supplied by the “i” Plant in the “j” region, Fci: Fixed cost of the “i” Plant, ti: Tax rate applicable to the “i” Plant, yi: (1/0 – binary) indicates if the “i” plant is close or open, P: Price (€300 per home appliance),Constraints Pre-merger [pic 2][pic 3][pic 4]Post-merger [pic 5][pic 6]Where: dHCj: demand in “j” region for Hot&Cold Company, dCFj: demand in “j” region for CaldoFreddo Company and, ci: Capacity of the “i” Plant.This equation with its constraints, will be solved by using Microsoft Solver in an Excel sheet. In the following sections, the results will be shown in summary tables. It is important to notice that previous to the merger, all the plants are open. Hence, all the values of “yi” will be equal to 1 and can be omitted for the calculations. Pre-merger situationTo analyze the best network design before the merger happened, Microsoft Solver was used and the results are as follows:NorthEastSouthWestRevenueVariable CostsFixed CostsGross ProfitTaxesNet Profit(million units)(million €)Hot & ColdFrance00203015,000.005,100.001,000.008,900.002,225.006,675.00Germany30150515,000.004,950.001,000.009,050.002,262.506,787.50Finland05001,500.00500.00850.00150.0045.00105.00Total3020203531,500.0010,550.002,850.0018,100.004,532.5013,567.50Caldo FreddoUK151502015,000.005,175.001,000.008,825.001,765.007,060.00Italy0530010,500.003,225.001,150.006,125.002,143.753,981.25Total1520302025,500.008,400.002,150.0014,950.003,908.7511,041.25Total Profit (million €)24,608.75