Assignment – I

Industrial and Systems Engineering (ISE)

Indian Institute of Technology, Kharagpur

Course Code : IM60052/ IM31008 Semester : Autumn, 2019

Course Title : Logistics Supply Chain Management Session : 2019 - 2020
L-T-P : 3-1-0 Students : IE&M/ others
Credit Hours :4 Section : 01

1. Sleekfon and Sturdyfon are two major cell phone manufacturers that have recently merged. Their
current market sizes are as shown in Table 1. All demand is in millions of unitsSleekfon has three
production facilities in Europe (EU), North America, and South America. Sturdyfon also has three
production facilities in Europe (EU), North America, and Rest of Asia/Australia. The capacity (in
millions of units), annual fixed cost (in millions of $), and variable production costs ($ per unit) for
each plant are as shown in Table 2.
Transportation costs between regions are as shown in Table 3. All transportation costs are shown
in $ per unit. Duties are applied on each unit based on the fixed cost per unit capacity, variable cost
per unit, and transportation cost. Thus, a unit currently shipped from North America to Africa has
a fixed cost per unit of capacity of $5.00, a variable production cost of $5.50, and a transportation
cost of $2.20. The 25 percent import duty is thus applied on $12.70 (5.00 + 5.50 + 2.20) to give a
total cost on import of $15.88. For the questions below, assume that market demand is as in Table
1. The merged company has estimated that scaling back a 20-million-unit plant to 10 million units
saves 30 percent in fixed costs. Variable costs at a scaled-back plant are unaffected. Shutting a
plant down (either 10 million or 20 million units) saves 80 percent in fixed costs. Fixed costs are
only partially recovered because of severance and other costs associated with a shutdown
a) What is the lowest cost achievable for the production and distribution network prior to the
merger? Which plants serve which markets?
b) What is the lowest cost achievable for the production and distribution network after the
merger if none of the plants is shut down? Which plants serve which markets?
c) What is the lowest cost achievable for the production anddistribution network after the
merger if plants can be scaled back or shut down in batches of 10 million units of capacity?
Which plants serve which markets?
d) How is the optimal network configuration affected if all duties are reduced to 0?
e) How should the merged network be configured?

Europe Europe Rest of Asia

Market N. America S. America Japan Africa
(EU) (Non EU) / Australia
Sleekfon demand 10 4 20 3 2 2 1
Sturdyfon demand 12 1 4 8 7 3 1
Import Duties (%) 3 20 4 15 4 22
Table 1, Global Demand and Duties for Sleekfon and Sturdyfon
 Fixed Cost/ Variable Cost/
Capacity
Year Unit
Sleekfon Europe (EU) 20 100 6.0
N. America 20 100 5.5
S. America 10 60 5.3
Sturdyfon Europe (EU) 20 100 6.0
N. America 20 100 5.5
S. America 10 50 5.0
Table 2, Plant Capacities and Costs for Sleekfon and Sturdyfon

N. S. Europe Europe Rest of Asia/

Japan Africa
America America (EU) (Non EU) Australia
N. America 1 1.5 1.5 1.8 1.7 2 2.2

S. America 1.5 1 1.7 2 1.9 2.2 2.2

Europe (EU) 1.5 1.7 1 1.2 1.8 1.7 1.4

Europe (Non
1.8 2 1.2 1 1.8 1.6 1.5
EU)
Japan 1.7 1.9 1.8 1.8 1 1.2 1.9
Rest of Asia/
2 2.2 1.7 1.6 1.2 1 1.8
Australia
Africa 2.2 2.2 1.4 1.5 1.9 1.8 1
Table 3, Transportation Costs Between Regions ($ per unit)

2. DryIce, Inc., is a manufacturer of air conditioners that has seen its demand grow significantly. The
company anticipates nationwide demand for the next year to be 180,000 units in the South, 120,000
units in the Midwest, 110,000 units in the East, and 100,000 units in the West. Managers at DryIce
are designing the manufacturing network and have selected four potential sites—New York,
Atlanta, Chicago, and San Diego. Plants could have a capacity of either 200,000 or 400,000 units.
The annual fixed costs at the four locations are shown in Table 4, along with the cost of producing
and shipping an air conditioner to each of the four markets. Where should DryIce build its factories
and how large should they be?
In Dollars New York Atlanta Chicago San Diego
Annual fixed cost
6 million 5.5 million 5.6 million 6.1 million
of 200,000 plant
Annual fixed cost
10 million 9.2 million 9.3 million 10.2 million
of 400,000 plant
East 211 232 238 299

South 232 212 230 280

Midwest 240 230 215 270

West 300 280 270 225

Table 4, Production and Transport Costs for DryIce, Inc.
3. Return to the Sleekfon and Sturdyfon data in Question 1. Management has estimated that demand
in global markets is likely to grow. North America, Japan, and Europe (EU) are relatively saturated
and expect no growth. South America, Africa, and Europe (Non EU) markets expect a growth of
20 percent. The Rest of Asia/Australia anticipates a growth of 200 percent.
a) How should the merged company configure its network to accommodate the anticipated
growth? What is the annual cost of operating the network?
b) There is an option of adding capacity at the plant in Rest of Asia/Australia. Adding 10
million units of capacity incurs an additional fixed cost of $40 million per year. Adding 20
million units of additional capacity incurs an additional fixed cost of $70 million per year.
If shutdown costs and duties are as in Exercise 4, how should the merged company
configure its network to accommodate anticipated growth? What is the annual cost of
operating the new network?
c) If all duties are reduced to 0, how does your answer to Exercise 5(b) change? d. How
should the merged network be configured given the option of adding to the plant in Rest
of Asia/Australia?