OPIM 5894 Advanced project management

1. OPIM 5894Advanced project management SURESH NAIR, Ph.D. Professor, School of Business University of Connecticut, Storrs, USA http://users.business.uconn.edu/snair/opim5894.html

2. Using Excel for Project Simulations • For many real life projects, simple Monte Carlo simulation using Excel suffices. • When the project gets more complex, @Risk (or Crystal Ball) can be used for Monte Carlo simulations. • For process simulations (inventory, traffic, drug development, etc.), it is best to use a package such as Arena. Prof. Suresh Nair, University of Connecticut

3. Charles River Jazz Festival Sally Ward wants to press CDs immediately after the Friday performance of the Festival in Cambridge, and sell CDs on Saturday and Sunday performances. Costs for manufacture of CDs and revenues are as follows: Fixed costs $15,000 Unit manufacturing costs $4.50 Revenue/unit sold $15.00 Sales depend on attendance on Friday, Saturday and Sunday. From past years she obtains the following equation for attendance Att(Sat+Sun)= 36,578+ 0.7091 Att(Friday) (1) Which has a residual error of 5952 (more on this later). She figures 4-12% of people who attend the Saturday and Sunday performances will make CD purchases. The attendance of this Friday was 21,500. How many CDs should she press that night for sale on Saturday and Sunday? Solution: Plugging 21,500 into (1) we get an expected attendance on Sat and Sun of 51, 823. Therefore the attendance is going to follow a Normal distribution with mean of 51,823 and standard deviation of 5952 (the residual error stated above). Prof. Suresh Nair 3

4. Example: Consulting Projects • A soon-to-graduate MBA student is considering starting her own manufacturing consulting business. In assessing the market, she has categorized potential projects into five groups, with expected frequencies and time durations shown below. • She estimates that the total number of projects per week, based on surveying similar firms in comparable cities, has the following distribution: • Monthly expenses are estimated to be $3500, and she would like to have an annual income that compares with her graduating classmates; that is, at least $65,000. Determine the potential profitability of this business if the hourly consulting rates charged are $50, $65, or $80. Assume she can work a maximum of 60 hours a week. Prof. Suresh Nair, University of Connecticut

5. Example: Overbooking Aircraft Project • Midwest Express is headquartered in Milwaukee, Wisconsin, and was started by the large consumer products company Kimberly Clark, which has large operations in nearby Appleton, Wisconsin. Laura Sorensen is the manager of Revenue (or Yield) Management. She has been reviewing the historical data on the percentage of no-shows for many of Midwest Express' flights. She is particularly interested in Flight 227 from Milwaukee to San Francisco. She has found that the average no-show rate on this flight is 15% (Binomial, use p=0.15, number of trials = reservations accepted). The aircraft (MD88) has a capacity of 112 seats in a single cabin. There is no First Class/Coach cabin distinction at Midwest Express. All service is considered to be premium service. You would believe that if you could smell the chocolate chip cookies baking as you fly along. •  The question Laura wants to answer is to what level should she overbook the aircraft. Demand is strong on this primarily business route. The actual demand distribution is as follows: Prof. Suresh Nair, University of Connecticut

6. Example: Overbooking Aircraft Project • The average fare charged on this flight is $400. If Laura accepts only 112 reservations on this flight, it is almost certain to go out with empty seats because of the no-shows that represent an opportunity cost for Midwest Express as it could have filled each seat with another customer and made an additional $400. On the other hand, if she accepts more reservations than seats, she runs the risk that even after accounting for the no-shows, more customers will show up than she has seats available. The normal procedure in the event that a customer must be denied boarding is to put the "extra" customers on the next available flight, provide them some compensation toward a flight in the future and possibly a voucher for a free meal and a hotel. This is all done to mitigate the potential ill will of the "bumped" customer. Laura figures this compensation usually costs Midwest Express around $600 on average. •  How many reservations should Laura accept? What is the profit for this policy? Prof. Suresh Nair, University of Connecticut