Part 1 – Splitting Decisions (10 points)
In lecture 14, we discussed how Costume Gallery “split” their manufacturing between China and New Jersey to change their relationship with demand risk
and obtain both build-to-stock and build-to-order benefits. Then, in Lecture 16, we discussed how splitting business-model-design decisions is key in
managing risk in new ventures.
The concept of “splitting a big bet into a sequence of smaller, less consequential bets” is instrumental in management. In this part of the exam, you will have
to identify a case where “splitting decisions” was useful or could be useful. To do so, complete the following steps:
Describe a management decision and the information risks associated with this decision. This decision can be from an internship you have done, from a job
you worked at, that you observed in practice, or from your personal life. (2 points)
What are the consequences and/or costs of getting this decision wrong? (2 points)
Describe how this decision can be “split” (2 points).
How does splitting this decision change the relationship with the risks you described in point 1? (2 points)
What are the costs associated with splitting this decision? (2 points)
Note: Please be succinct. A few sentences for each point suffices. Answers in bullet-point format are fine too.
Part 2 – Stanplus (15 points)
Across Asia, ambulance fleets are fragmented and uncoordinated. Ambulances struggle to respond to patients and suffer from low utilization rates. In India,
the status of emergency response is particularly dire. Unlike other countries, there is no single emergency dispatch number in India. Every hospital, clinic, and
nursing home has its own emergency number. This leads to confusion in case of an emergency. The caller has no idea of how far the ambulance is or what
the response time will be.
Stanplus, a fast-growing startup, is attempting to address these problems. StanPlus is a platform that allows for efficient and central dispatching of
ambulances and emergency care. Below is a slide from their pitch deck.
Here is a part of a news article about StanPlus:
StanPlus: The Uber for ambulances does much more than mere aggregation
Chhavi Tyagi, Economic Times, 2016/12/13
StanPlus-1.png
According to StanPlus, cofounder and CEO Prabhdeep Singh, 75% of the patients who need an ambulance use their own personal vehicle to reach a hospital
and 30% of those brought in by an ambulance arrive dead. It is to change these horrific statistics that Singh started his ambulance aggregation and
standardisation startup, StanPlus, along with two co-founders – Antoine Poirson and Jose Leon.
“We are building India’s largest private medical helpline and consolidating private ambulances to service this helpline. The objective is to reduce the time it
takes for an ambulance to reach a patient from the current average time of 40 minutes to less than 15 minutes. These ambulances are optimised according
to patients’ needs and use the power of network to match the patient with closest hospital that has facilities to take care of them. We are also standardizing
the fare, care, and equipment,” explains Singh. “Customers can trust that, by calling our helpline in an emergency, they will have a high-quality ambulance
readily available at a standardized and fair price”.
After months of detailed research and planning the company launched its commercial operations last month in Hyderabad. “Hyderabad is a very important
medical market and we want to focus on it for the time being. We want to have the quality and the confidence of Hyderabad’s patients and ambulance
providers before we engage other markets. We do not wish to grow too fast and then fail,” says Singh. The startup claims to have 50 ambulances on its
network already and the ability to service 50% of Hyderabad’s population within 15 minutes and 85% of the population under 30 minutes.
The startup does not simply aggregate the available ambulances, but also standardizes, trains drivers on CPR and first aid, quality checks the inside of the
ambulances, among other things. It also provides a live tracking feature to the patients through SMS.
“Ambulance market in India is fragmented and suffers from low asset utilization. The owners of the fleets are unable to upgrade the ambulances because of
demand spreading very thin. By focusing the demand on standardized ambulances, we are increasing the asset utilisation and thereby incentivising the
owners to improve the quality – both of hardware, and what we call ‘care-ware’,” says Singh. “We also give the option to ambulance providers to use our
platform or their own dispatch system” he adds.
The company is in the process of partnering with corporates and hospitals to expand its reach and plans to engage patients directly through advertising once
it finalizes its seed funding.
“We are already in talks with multiple players and expect to close the funding by February. We plan to raise anywhere between $600,000-1 million in the
round,” Singh divulges. The next step for the startup is to provide a team of well-trained care staff including paramedics and nurses for the patients.
The company charges users a fair share per ride but plans to increase collaboration with insurance companies and hospitals to decrease the burden on the
patients. It also offers fleet management to ambulance owners as a source of revenue.
Based on the information above, please answer the following questions. Short and objective explanations suffice.
Question 1 (10 points)
What are the benefits StanPlus (the intermediary) is bringing to this environment? How are they operationalizing these benefits? Structure your response
using the marketplaces discussion from class. (Only limited information has been provided in the question statement, so answer as best as you can with the
information available).
Question 2 (5 points)
List two other concepts from class that StanPlus is using (besides intermediation/marketplaces/platforms from Lecture 11), describe how they are using
them and what are the advantages of these tools. If you can’t think of two, describe one concept from class that they are using, and describe another
concept that they could benefit from and how it could be used.
Part 3 – Forecasting at Pear (10 points)
After graduating from Georgia Tech, you accept a job at the top analytics consulting firm Buzzlytics. Your first client is Pear, one of the largest manufacturers
and distributors of medical devices in the USA. Their CEO has hired Buzzlytics to revamp their demand forecasting methodology. As you ride your taxi back
to your hotel after a day of extensive interviews with Pear’s leadership at the company’s headquarters, you look at your notes where three quotes are
highlighted:
“We do the best we can in our forecasts – it is not our fault that our operations team ignores our demand estimates and does whatever comes to their
minds” – Pear’s Head of Sales;
“These salespeople ALWAYS inflate their demand estimates – look at the past accuracy of their forecasts. These guys are clearly sending us garbage data” –
Pear’s Head of Operations;
“We should create an independent data analytics team – machine learning and big data are the future. This analytics team should be solely responsible for
creating forecasts.” – Pear’s CTO.
You look out the window of the car and remember your MGT 3501 course at Georgia Tech. Describe three things you can suggest to Pear’s CEO to improve
their demand forecasting process.
Part 4 – Multiple Choice Questions (10 points)
Question 1 (2 points)
In a particular setting where the newsvendor model applies, demand is Normally distributed, and the critical ratio is known to be 0.8. Then, if you ordered the
profit-maximizing ordering quantity,
The expected sales are less than expected demand;
The expected sales are greater than expected demand;
The expected sales are exactly equal to expected demand;
The expected sales could be less than, equal to, or greater than expected demand.
The recent Covid-19 lockdown in China has affected shipping container prices, and the cost of a shipping container has risen from $6000 to $12,000 per
container. Hence, the variable shipping cost increased to $15 per panel from $7.5 per panel. All other costs remain the same. How does this cost increase
affect your economic ordering quantity?
Question 4 (3 points)
The company is investing in a new blockchain-based traceability technology to track shipments in real-time. The new technology will increase the shipping
cost by 10% – the fixed shipping costs rise from $10,000 to $11,000. How does this technology change your economic ordering quantity and frequency?
Compared to your answer in Question 1, what percentage do the total ordering costs change if the company adopts this technology?
Part 6: Becoming CO2 neutral (20 points)
Georgina Burdell has recently become the CEO of Buzz Airlines, a major American airline. One of her first projects as a CEO is ordering a report of the
company’s environmental performance. She is surprised to find the company is very far from being green. Furthermore, customers and shareholders are
pressuring Georgina to reduce the company’s carbon footprint. Drastic times call for drastic measures, so Georgina decides to make the company CO2
neutral.
To enact her plan, she commissions a team of scientists to understand the necessary steps to become CO2 neutral. The yearly CO2 of emissions of Buzz
Airlines depend on the total passenger demand. The current demand forecast for fiscal year 2023 has some uncertainty due to the pandemic. Nevertheless,
the scientist teams estimate that the Buzz Airlines CO2 emissions for 2023 follows a normal distribution with mean 1.5 million metric tons of CO2 and a
standard deviation of 300,000 metric tons of CO2.
Georgina then asks you – a newly hired operations analyst -to find the most economical way to proceed. She is considering two options:
A) The company can buy deforested land in Brazil and pay an NGO to reforest the land. Purchasing and reforesting one acre of land in Brazil costs about
$20,000. Furthermore, one acre of land offsets 1000 metric tons of CO2.The process of buying land and reforesting as a foreign company is complex. As a
result, to claim CO2 offsets next fiscal year, you need to decide how much land to buy this year. Thus, the land purchasing decision is made before you
observe your emissions.
B) The company can buy CO2 offsets in a carbon market. High-quality offsets are expensive, and the market price of offsets is $30 per metric ton of CO2 to
offset your emissions. In this case, you can buy offsets after observing your emissions.
Question 1 (5 points)
Formulate the problem of deciding how many acres of land to buy in Brazil as a newsvendor problem. What is the “order quantity” in this case? What are the
underage and overage costs?
Question 2 (10 points)
What is the optimal amount of land to purchase in Brazil to become carbon neutral? How much offsets will you buy in the carbon market in this case? What
is the total cost to become carbon neutral?
Question 3 (5points)
A new government program to incentivize decarbonization has emerged. Through a series of tax incentives and investments in carbon markets, you can now
buy CO2 offsets in a carbon market for $18 per metric ton. How much land should you purchase in Brazil in this case? Why?
Part 7: Web Services at Techify (20 points)
You graduate and join Techify, a startup that launched a “Spotify-like” platform for educational videos and for streaming tutoring sessions aimed at college
students. Your first decision is to decide how much server capacity Techify should contract to run the platform for the next year.
Given your growth forecasts, you estimate that the platform will have about 500,000 active users during the next year. The total number of hours of content
streamed in the next year is uncertain and using multiple forecasting methods you model the total number of hours of content streamed as a Normal random
variable with mean 20 million streamed hours and standard deviation of 3 million streamed hours.
Techify’s revenue model is a mix of subscriiption and advertisement, and you estimate that Techify makes $0.25 per streamed hour of content.
You currently are in discussions with Amazon Web Services (AWS) and with Alphabet (with its Google Cloud service) for video storing and streaming
solutions. The current offers from Amazon and Alphabet are:
AWS’s offer: You can advance-purchase server and storage capacity for the next year at a cost of $0.05 per streamed hour of content. If the purchased server
capacity is insufficient to meet demand, you can purchase additional “flexible” server capacity on-demand as needed for $0.08 per streamed hour.
Alphabet’s Cloud’s offer: You can advance-purchase server and storage capacity for the next year at a cost of $0.04 per streamed hour. If the capacity is
Question 2 (3 points)
Which of the following principles are important to keep in mind when establishing a forecasting process within your organization:
Convergence: Allowing individuals within your organization to discuss and brainstorm together as a group before submitting their forecasts to ensure that
they have as much relevant information as possible.
Incentives: Ensuring that individuals are incentivized to report their forecast accurately.
Diversity: Invite a diverse set of individuals from across the company to participate in the forecasting process.
A only.
B only.
C only
A and B only.
A and C only
B and C only
A, B, and C (i.e., all of them)
None of the above (i.e., none of them).
Question 3 (2 points)