Case Study:
Southwestern University: F The recent success of Southwestern University’s football program is causing SWU’s president, Joel Wisner, more problems than he faced during the team’s losing era in the early 1990s. For one thing, increasing game-day attendance is squeezing the town of Stephenville, Texas and the campus. Complaints are arising over parking, seating, concession prices, and even a shortage of programs at some games. Dr. Wisner, once again, turns to his stadium manager, Hank Maddux. This time, he needs a guaranteed revenue stream to help fuel the stadium expansion. One source of income could easily be the high-profit game programs. Selling for $6 each, programs are a tricky business. Under substantial pressure from Wisner, Maddux knows he has to ensure that costs are held to a minimum and contribution to the new expansion maximized. As a result, Maddux wants the programs for each game to be purchased economically. His inquiries have yielded two options. A local Stephenville printer, Sam Taylor of Quality Printing, has offered the following discount schedule for the programs and game inserts: Programs Weekly Game Detail Inserts 10,000 to 30,000 $2.00 each 10,000 to 30,000 $1.00 30,000 to 60,000 $1.90 each 30,000 to 60,000 $0.95 60,000 to 250,000 $1.80 each 60,000 to 250,000 $0.90 250,000 and up $1.50 each 250,000 and up $0.85 As a second option, however, First Printing, owned by Michael Shader, an S.W.U. alumnus in Ft. Worth, will do the job for 10% less as a favor to help the athletic department. This option will mean sending a truck to Ft. Worth to pick up each order. Maddux estimates that the cost of each trip to Ft. Worth will be $250. Maddux’s other major problem is he is never sure what the demand for programs will be. Sales vary from opponent to opponent and how well the team is doing that year. However, he does know that running out is a very bad idea. This football team is not only expected to make money for SWU, but it is also entertainment. This means programs for all who want them. With the new facility, attendance could be 60,000 for each of the five home games. And two of every three people buy a program. In addition to the programs, Maddux must purchase the inserts for each game. The inserts have information about the opposing team, photos of the expected starters, and recent game statistics. The purchasing issue is the same for inserts, except inserts will be purchased separately for each game and are a total loss after the game. The carrying cost, because inserts are to be delivered just as they are needed, should be nominal; he estimates 5%. The other costs and the same discount schedule apply, but the inserts only cost half as much because they are much smaller. First Printing will give the same 10% discount on the inserts. Givens: Annual demand is 300,000 (60,000 per game times 5 games) Set-up cost for programs is $1,000.00 Holding cost is 40%
DISCUSSION QUESTIONS 1. With whom should Maddux place the order for the programs, and how many should he order each time? 2. With whom should Maddux place the order for the inserts, and how many should he order each time? 3. What is Maddux’s total cost for programs with inserts for the season? 4. What other program management opportunities might Maddux pursue?
Solution:
1. With whom should Maddux place the order for the programs and how many should he order each time?
Answer:
D = 60000 * 5 * 2/3= 200000
H = 0.5 * unit price
S quality printing = 100
S first printing = 100 + .9*(200) = 280
For quality printing
Q = √2DS / IP
Q1 = √2(200000)(100) / 0.5*5 = 4000
Q 2 = √2(200000)(100) / 0.5*1.80 = 6667
Q3 = √2(200000)(100) / 0.5*1.70 = 6860
Q4 = √2(200000)(100) / 0.5*1.60 = 7071
Q4 = √2(200000)(100) / 0.5*1.40 = 7559
Q1 = 6928
Q2 = 11547
Q3 = 30000
Q4 = 60000
Q5 = 250000
Annual Product cost = Demand * unit price
Annual order cost = Demand* setup cost/order quantity
Annual holding cost = Order quantity * holding cost / 2
Number Unit Price Order quantity Annual Product cost Annual order cost Annual holding cost Total
1 5.00 4000 1000000 5000 5000 5000
2 1.80 10000 360000 2000 4500 366500
3 1.70 30000 340000 666.67 12750 353416.67
4 1.60 60000 320000 333.33 24000 344333.33
5 1.40 250000 280000 80 875000 367580
Order quantity of 60000 will minimize total cost to 344333.33
For first printing, Q = √2(200000)(280) / 0.5*5 = 6693
Total cost = Setup cost + holding cost + product cost
= 200000/6693 * 280 + 6693 / 2 * (0.5*5.00) + 6693*5
= 50198.20
So the order for the programs should be placed at quality printing as ordering quantity of 60000 each time
2. With whom should Maddux place the order for the inserts and how many should he order each time?
D = 60000
H = 0.5 * unit price
S quality printing = .5*100 = 50
S first printing = 0.5(100 + .9(200)) = 140
For quality printing
Q = √2DS / IP
Q1 = √2(60000)(50) / 0.5*2.5 = 12649
Q 2 = √2(60000)(50) / 0.5*.90 = 21082
Q3 = √2(60000)(500) / 0.5*.85 = 21693
Q4 = √2(60000)(50) / 0.5*.80 = 22361
Q4 = √2(60000)(50) / 0.5*.70 = 23905
Q1 = 6928
Q2 = 11547
Q3 = 30000
Q4 = 60000
Q5 = 250000
Annual Product cost = Demand * unit price
Annual order cost = Demand* setup cost/order quantity
Annual holding cost = Order quantity * holding cost / 2
Number Unit Price Order quantity Annual Product cost Annual order cost Annual holding cost Total
1 2.50 6928 150000 433.03 433 150866.03
2 0.90 11547 54000 259.81 259.81 54519.62
3 0.85 30000 51000 100 637.50 51737.50
4 0.80 60000 48000 50.00 1200.00 49250
5 0.70 250000 42000 12.00 4357 46387
Order quantity of 250000 will minimize total cost to 46387
For first printing, Q = √2(60000)(140) / 0.5*2.50 = 11593
Total cost = Setup cost + holding cost + product cost
= 60000/11593 * 140 + 11593 / 2 * (.05*2.50) + (11593 * 2.50)
= 30431.64
3.What is Maddux’s total cost for programs with inserts for the season?
The total cost for the program for the inserts for this season will be about $ 374764.97
4. What other program management opportunities might Maddux pursue?
Answer:
Maddux focuses on purchasing the game economically with a strong focus on quality printing, there are different program that maddux can pursue different programs, 10000 to 30000, 30000 to 60000, withna strong focus on first printing, Maddux. Muddux has high carrying cost because he lacks a good place to store the programs. He can’t put them in the office, or store them down in the maintenance department, where they may get dirty and damaged. So, the compnay needs to focus on reducing the carrying cost so as to have profits. Maddux needs to focus on inserts as well for the programs, so as to increase its revenue and sales.
