According to a recent Wall Street Journal article, Sky-high gasoline prices, new commuting habits and a tough
Question:
According to a recent Wall Street Journal article, “Sky-high gasoline prices, new commuting habits and a tough car-buying market are sending more people shopping for electric scooters.” FlowRide produces advanced commuter scooters designed for the urban rider looking for a high- performance long-range scooter which is still compact and portable. For the past ten years, FlowRide outsourced their manufacturing process to a manufacturer in Hong Kong. Despite the global supply chain that FlowRide has developed, they are considering if they should vertically integrate into manufacturing and produce the scooters themselves. In the electric scooter industry, the majority of manufacturing facilities have been located in low wage countries where there is significant labor available to produce the products. As a result, FlowRide is considering setting up their own in-house production facility in Malaysia. However, they are not ruling out the option to continue to outsource manufacturing (in Hong Kong). Given their current supplier in Hong Kong, they would not need to pay any fixed cost but would have to guarantee to purchase 45K units for $875 each. If they decided to produce the scooters themselves in Malaysia, they would have an estimated fixed cost of approximately $14 million dollars including mortgage, machinery, overhead and fixed labor costs. The unit cost to manufacture each scooter would be $685. The selling price of the FlowRide scooters would be $1395 each. One of their main concerns is regarding demand. If demand is strong, the number of scooters they can sell is uniformly distributed between 35K and 65K. If demand is weak, the number of scooters they can sell is uniformly distributed between 10K and 40K. There is a 60% chance that demand will be strong. If FlowRide chooses to continue to outsource and the demand is greater than the 45K, they can only sell the 45K scooters that they purchased. If demand is less than the 45K scooters, they will only earn revenue on the amount demanded even though they must purchase the full 45K scooters from their vendor. If FlowRide chooses to manufacture the scooters themselves, they can produce an initial 25K scooters and then will have the option to run a second production run of anywhere between 0 and 40K additional exercise scooters in response to market conditions. The timing of the second production run would be shortly after FlowRide learns if the market will be weak or strong. Thus, the total quantity that FlowRide can produce will vary between 25K and 65K scooters – that’s a 25K minimum from the first production run plus anywhere from 0 to 40K units for the second run. Once again, given that demand varies, if FlowRide produces more scooters than the demand, it will only be able to collect revenue from the scooters sold and if the demand is greater than the number of scooters produced (after the second production run), FlowRide can only sell the number of scooters produced.
Use this information, to advise FlowRide on their decision.
Prepare an Executive Summary report (approximately 1 to 2 pages (plus appendices) and include the following sections) that summarizes your findings and recommendations. Be sure to include the following in your report:
1. Case Synopsis (include a brief summary of the case and the business issue(s)being studied)
2. Methodology (including a discussion of what information was provided and how you used this information to analyze the problem)
(a) Organize the available data on cost, revenue, and probability estimates in a table.
(b) Set up a decision tree to model the scenario presented to FlowRide.
I want to see two versions of your decision tree.
i. First, show the tree with the algebraic formulations as your payoffs before you run the simulations – see the examples in the lecture notes (eg. from FOOZ lecture example = $250*MIN(D, Q) - $150000 - $130Q)
ii. Second (completed after step (c)), after running simulations and optimization, show the decision tree with your payoffs (average profit calculated from the four simulations). Show your solved decision tree. (c) Use simulation to estimate the expected profit generated for each option under both weak and strong demand scenarios. HINT: for the simulations, use 500 samples each. You will have four worksheets with simulations – OUTSOURCE-WEAK; OUTSOURCE-STRONG; MANUFACTURE-WEAK; MANUFACTURE-STRONG) For the manufacturing option, use Optimization to calculate the optimal number of electric scooters to produce for both the weak and strong demand scenarios.
IMPORTANT NOTES:
(1) You may either draw out the decision trees using the drawing tools in Word/PPT or you may use TreePlan to enter the problem into Excel. Be sure to differentiate between Decision Nodes and Chance (event) nodes and label all branches.
(2) Each of your simulations should be on separate Excel worksheets. All worksheets should be in one Excel file with clearly labeled tabs. To generate your simulations, use the Random Number Generator (instead of the RAND() function). Please use the last four numbers of one of the team members CWID as your random seed. Please indicate the random seed and which team member CWID was used in both the comments for submission and in your write-up.
3. Findings and Conclusions (include summary of analysis results) Based on your analysis, respond to the following: (a) Provide a recommendation for FlowRide including their decision to continue to outsource or vertically integrate the manufacturing. Included the expected return/cost for the decision based on your decision tree (and simulation and optimization values). (b) SENSITIVITY ANALYSIS (Note: for each of these scenarios, you only need to show your revised solved decision trees – see (ii) above – or summarize the revised expected values in a Payoff Table.
a. Scenario 1: As cities and states are developing more legislation regarding the use of electric scooters, the demand for electric scooters may decrease and the likelihood of a strong market may be reduced to 25%, would this change your decision to OUTSOURCE or MANUFACTURE? If so, how?
b. Scenario 2: On the other hand, with continued increases in car prices, gasoline, and an overall return to the office, the demand for electric scooters may continue to soar despite and regulations making the likelihood of a strong market 90%. Would this change your decision to OUTSOURCE or MANUFACTURE? If so, how?
4. Recommendations. For your management perspective, what other factors (not included in the model) need to be considered in making the recommendations? Do you agree with the decisions from your quantitative analysis? Why or why not? You could include a concise summary based on research on current trends with demand for electronic scooters.
Managing Human Resources
ISBN: 978-0132729826
7th Edition
Authors: Luis Gomez-Mejia, David Balkin, Robert Cardy