Profitability Worksheet

A profitability worksheet is a simple economic evaluation intended to calculate rough estimates of projected costs, savings, and payback periods associated with each waste reduction option. These worksheets do not take into account amortization, depreciation, or tax factors. 

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OSHA s Safety Pays Program Background of the Cost Estimates. Available at http //www.osha.gov/dcsp/smaUbusiness/safetypays/background.html. OSHA s Safety Pays Program Estimated Costs of Occupational Injuries and Illnesses and Estimated Impact on a Company s Profitability Worksheet. Available at http //osha.gov/dcsp/smallbusiness/safetypays/estimator.html. 

Your preparation should also include following a realistic simulation of a process through a complete phase of eight to ten cycles. Realistic simulation implies that measurements of the response to be optimized (e.g., yield, profit, etc.) include some error, or noise, t)-pical of that caused by such factors as raw-material variations, equipment fluctuations and instrument deviations. Because of the conservative nature of EVOP, the response changes and the noise may occasionally have comparable values however, as the number of cycles increases, the simulation will show that even though the best run may vary from cycle to cycle, the effects of the noise will eventually average out so that the true responses and variable effects can be determined. At the completion of a phase, the worksheet calculations... 

Observe that if DO orders a lot size of 9,165 units, the supply chain cost decreases to 9,165 (from 9,803 when DO ordered its own optimal lot size of 6,325). There is thus an opportunity for the supply chain to save 638. The challenge, however, is that ordering in lots of 9,165 bottles raises the cost for DO by 264 per year from 3,795 to 4,059 (even though it reduces overall supply chain costs). The manufacturer s costs, in contrast, go down by 902 from 6,008 to 5,106 per year. Thus, the manufacturer must offer DO a suitable incentive for DO to raise its lot size. A lot-size-based quantity discount is an appropriate incentive in this case. Example 11-10 (see worksheet Example 11-10) provides details of how the manufacturer can design a suitable quantity discount that gets DO to order in lots of 9,165 units even though DO is optimizing its own profits (and not total supply chain profits). 

Several such pricing schemes can be designed. One such schane is for the manufacturer to charge a wholesale price of Q = 4 per bottle (this is the same wholesale price that is optimal when the two stages are not coordinated) for annual sales below =120,000 units, and to charge Cr = 3.50 (any value between 3.00 and 3.50 will work) if sales reach 120,(X)0 or more (see worksheet Volume Discount). It is then optimal for DO to order 120,000 units in the year and price them at p = 4 per bottle to the customers (to ensure that they are all sold). The total profit earned by DO (360,000 — 60,000p) X (p — Cg) = 60,000. The total profit earned by the manufacturer is 120,000 "X (Cr — 2) = 180,000 when Cr = 3.50. The total supply chain profit is 240,000, which is higher than the 180,000 that the supply chain earned when actions were not coordinated. 

The total expected profit from ordering 1,100 parkas is thus 52,340, which is almost 5 percent higher than the expected profit from ordering 1,000 parkas. Using the same approach, we evaluate the marginal contribution of each additional 100 parkas as in Table 13-2 (see worksheet Table 13-1, 2 in spreadsheet ChapterlS-examples). Note that the expected marginal contribution is positive up to 1,300 parkas, but it is negative from that point on. Thus, the optimal order size is... 

Companies have tried to better understand their customers and coordinate actions within the supply chain to improve forecast accuracy. The use of demand planning information systems has also helped in this regard. We show that improved forecast accuracy can help a firm significantly increase its profitability while decreasing the excess inventory overstocked as well as the sales lost because of understocking. We illustrate the impact of improving forecast accuracy in Example 13-6 (see worksheet Example 13-6). 

The order quantities under capacity constraints can also be obtained by solving an optimization problem (see worksheet Optimization). Let I1,(G ) be the expected profit obtained using Equation 13.3 from ordering Qt units of product i. The appropriate order quantities can be obtained by solving the following optimization problem ... 

We illustrate the impact of buybacks on supply chain profits in Example 15-2 (see worksheet Example 15-2). 

Table 15-3 (which can be constructed using worksheet Example 15-2) shows supply chain profits for different values of wholesale and buyback prices. Observe that the use of buyback contracts increases total supply chain profits by about 20 percent when the wholesale price is 7 per disc. For a fixed wholesale price, increasing the buyback price always increases retailer profits. In general, there exists a positive buyback price that is a fraction of the wholesale price, at which the manufacturer makes a higher profit compared to offering no buyback. Also observe that buybacks increase profits for the manufacturer more as the mauufacturer s margin increases. In Table 15-3, buybacks are found to be more helpful to the manufacturer when the wholesale... 

Table 15-4 (constructed using worksheet Examplel5-3 in spreadsheet Chapter 15-examples) provides the outcome in terms of order sizes and profits for different wholesale prices and revenue-sharing fractions/ From Tables 15-3 and 15-4, observe that revenue sharing allows both the manufacturer and retailer to increase their profits in the absence of buybacks compared with the case in which the wholesaler sells for a fixed price of 5 without buybacks. Recall that when charging a wholesale price of 5, the supplier makes profit of 4,000 and the music store makes a profit of 3,803 (see Table 15-3). 

We illustrate the impact of quantity flexibility on supply chain profits using Example 15-4 (see worksheet Examplel5-4). 

In Table 15-5, we show the impact of different quantity flexibility contracts on profitability for the music supply chain when demand is normally distributed, with a mean of jx = 1,000 and a standard deviation of a- = 300 (see worksheet Examplel5-4 in spreadsheet Chapterl5-examples). We assume a wholesale price of c = 5 and a retail price of p = 10. All contracts considered are such that a = (3. The results in Table 15-5 are built in two steps. We first fix a and j8 (say a = j8 = 0.2). The next step is to identify the optimal order size for the retailer. This is done using Excel by selecting an order size that maximizes expected retailer profits given a and j8. For example, when a = j8 = 0.05 and c = 5, retailer profits are maximized for an order size of 0 = 1,017. For this order size, we obtain a supplier commitment to deliver up to g = (1 + 0 05) X 1,017 = 1,068 and a retailer commitment to buy at least q = ( - 0.05) X 1,017 = 966 discs. In our analysis, we assume that the supplier produces Q = 1,068 discs and sends the precise number (between 966 and 1,068) demanded by the retailer. Such a policy results in retailer profits of 4,038 and supplier profits of 4,006. 

Once we have understood how to price the product dynamically over the season, we can go back and ask how many units the retailer should purchase at the beginning of the season to maximize profits, as described in Example 16-4 (see worksheet Examplel6-4). 

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