After impressing Pear’s management with your forecasting advice (and beautiful PowerPoint slides), you are promoted to Associate at Buzzlytics. Your first project as an Associate Consultant is to assist a major solar panel company with their inventory management strategy for their flagship 350-Watt solar panel.

The solar panel company manufactures its panels in China and sells them in the USA. Given the Covid-19 crisis, they forecast that their demand will be constant for the foreseeable future. They expect install 70MW (70,000,000 Watts) of solar panels per year, i.e., their demand will be of 200,000 units of their 350-Watt solar panel per year.

The solar panels are shipped from China to the USA by ocean in a cargo ship. Specifically, the solar panel are packed onto shipping pallets and put on a 40-foot shipping container. Each container can fit up to 800 solar panels.

Pandemic-related supply chain disruptions have dramatically increased the cost of renting and shipping a container from China to the USA (see https://www.statista.com/statistics/1250636/global-container-freight-index/ (Links to an external site.) for reference). The cost of a shipping container is $6,000. Thus, the variable shipping cost   is about $6000/800 = $7.5 per solar panel (it might be a bit more if containers are not completely full – for the purpose of this question, assume the variable shipping cost is $7.5 per panel independent of shipment size).

You estimate that the fixed cost of executing a shipment from China to the company’s warehouse in the USA is $10,000 per shipment (this is the cost of packing, handling customs, hiring a shipping company, buying shipping insurance, and coordinating shipping and delivery). You also estimate that the holding cost of a solar panel in the company’s warehouse in the USA is $10 per panel per year.

Question 1 (7 points)

What is the economic ordering quantity and order frequency (in months) of solar panels from the factory in China? How many containers will you need for each order?

Question 2 (2 points)

It takes 30 days between the moment the company places an order to the factory in China until the order arrives in your warehouse. Thus, the company must order 30 days in advance. What is the inventory level at the warehouse when an order is placed (i.e., what’s the reorder point)? 

Question 3 (3 points)

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 CO2neutral.

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 subscription 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 insufficient to meet demand, you can purchase additional “flexible” server capacity on-demand as needed for $0.1 per streamed hour.

You must decide which offer Techify should choose and how much server and storage capacity to advance-purchase under each option.

Question 1 (5 points)

Formulate the decision of how much server and storage capacity to advance-purchase under each offer as a Newsvendor problem. How many streaming hours of capacity would you advance purchase under AWS’s and under Alphabet’s offers? How many do you expect to purchase on-demand under each offer? Which offer is most profitable?

Question 2 (8 points)

After chatting with Techify’s COO, you come up with a third option for managing server and storage capacity. In this option, you would advance-purchase capacity from Alphabet (at $0.04 per streamed hour). Then, if needed, you purchase additional flexible capacity from Amazon (at $0.08 per streamed hour). However, this option would require an investment of $50k per year to adapt Techify’s technology stack to run on both AWS and Alphabet. Should Techify pursue this option?

Question 3 (7 points)

The sales team from Microsoft Azure (Microsoft’s cloud service) contacts you with an alternative offer. In this offer, Techify can advance-purchase server and storage capacity for the next year at a cost of $0.0425 per streamed hour of content. Furthermore, if the advanced-purchase capacity is insufficient to meet demand, Techify can purchase additional “flexible” server capacity on-demand as needed for $0.09 per streamed hour.

However, unlike Amazon’s and Alphabet’s offers, in this new offer, any leftover capacity of the advance-purchase order is credited back to Techify for $s per hour (i.e., Microsoft “buys back” the streaming hours for $s per hour). What is the minimum value of $s for this offer to be better than the ones from Alphabet and Amazon? Note: if solving for s exactly is too complex, feel free to try s = 0.01, 0.02, 0.03, etc, and give your answer in cents.