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KCL Optimization Problem

  • From Business, Finance
  • Due on 16 Feb, 2017 12:00:00
  • Asked On 16 Feb, 2017 02:22:15
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KENDALL CRAB AND LOBSTER, INC.

It was shortly before noon. Jeff Daniels, director of Overnight Delivery Operations at

Kendall Crab and Lobster, Inc. (KCL) in Kendall Square, Cambridge, Mass., anxiously

watched the Weather Channel on his office television. A fall storm wa rapidly moving

along the Atlantic coast towal'd noston. U the storm front continued to move north at

its current speed, the storm would hit Boston at aroW1d 5 P.M. However, many such

storms change direction and move out to sea before th y reach Boston/ leav.ing Boston

with only minor precipitation. The weather forecaster predicted a 50% chance that the

storm would hit Boston (at aroW1d 5 P.M.), and a 50% chance that the storm would

move out to sea and miss Boston and the rest of the northern Atlantic states. Jeff

Daniels was not the only employee in Kendall Square watching the Weather Channel

so attentively. Because there was a chance that Boston's Logan International Airport

might have to shut down operations if the storm hit, many business travelers were nervously

awaiting further weather information as well. Historically, when storms of this

magnirude hit Boston, one in £ive are accompanied by severely strong wind that force

Logan to dose dmvn its operations almost immediately.

Kendall Crab and Lobster, Inc.

Kendall Crab and Lobster, Inc. (KCL) was founded in Cambridge, Massachusetts, in

1962, as a crab and lobster wholesale and delivery company for the Boston area. By

1985, KCLhad largely eliminated its crab business and had expanded its operations

to include on-demand overnight delivery of lobsters to restaurants, caterers, and consumers

in the Northeastern United States, with customers from Washington, D.C. to

Presque Isle, Maine. By 1998, KCL's annual sales had reached $22 million. KCL attributed

its success to great customer service, focused direct-mail marketing and advertising

of its product, and the enormous popularity of lobster as a menu item for

special occasions. KCL knew that customer service was critical for the success of any

business in the food service sector of the economy, and maintaining an excellent reputation

for customer service has always been a very high priority.

Jeff Daniels had worked for KCL part-time while a srudent at the Sloan School of

Management at MIT, and had joined KeL's staff full-time after graduation. He rose

quickly through the organization to his current position as director of Overnight Delivery

Operations, which has been the company's most profitable department. He

knew that the senior management were keeping an eye on him, and he had his mind

set on becoming a senior vice-president in the next year.

Lobster

Lobster is a very popular menu item. This popularity stems from its exquisitely rich

taste as well as its striking appearance, which decorates any dining table beautifully.

People typically dine on lobster to celebrate a special occasion, and the experience of

eating lobster is fun and exciting. Furthermore, lobster is extremely Simple to cook:

One simply places the live lobster in a pot of boiling water for 15 minutes, and it is

ready to eat!

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36 CHAPTER 1 Decision Analysis

However, lobster is so perishable that it must be cooked live. After death, an uncooked

lobster's meat rapidly deteriorates. For this reason, lobsters must always be

transported live, and this adds significantly to their cost. A lobster is prepared for

transport by packing the lobster in a corrugated box with an insulating foam insert,

and covering the lobster with frozen non-toxic gel packs inside the insulating foam.

A lobster can live in this special box for 36 to 48 hours. It is always necessary to transport

lobster by overnight air or truck delivery to ensure that it is delivered live to its

recipient.

Overnight Delivery Operations

Customers can order lobsters for next-day delivery any time prior to 5 P.M. on the day

before delivery. A typical day's orders amount to approximately 3,000 lobsters that

need to be delivered to customers. The staff of the KCL Overnight Delivery Operations

spend most of their workday processing orders in their ordering and accounting

computer systems and packing the lobsters for shipment. At 5:30 P.M., trucks from

United Express Overnight Delivery (a prominent overnight package delivery company)

pick up the packed lobsters and truck them to their Logan Airport facility. A

United Express plane normally takes off from Logan Airport with the lobsters (and

other packages from other Boston clientele) at 6:30 P.M. and flies the packages to

United Express' central processing and sorting facility near Washington, D.C. At this

facility, all packages (including the lobsters) are sorted and classified by their final

destinations, and transported by air and then local trucks during the night, typically

arriving at their destination by 10:30 A.M. the next day. The price that KCL charges its

customers for delivered lobsters depends on the lobster's size, but typically this price

is $30 per lobster, which includes all transportation costs. When KCL ships a lobster

via United Express, its unit contribution to earnings is close to $10 per lobster.

If, for any reason due to weather, KCL is not able to deliver a customer's lobster

order, it is KCL's policy to notify the customer by telephone (or FAX), to refund the

purchase price of the lobster, and to give the customer a $20 discount coupon per lobster,

which can be used towards the purchase of lobster from KCL at any time in the

next twelve months. When this happens, customers are typically disappointed that

they will not receive their lobster order, but they usually understand the relationship

between delivery and weather conditions, and they appreciate the discount coupon.

Marketing data has shown that approximately 70% of customers who receive such

coupons eventually redeem them.

Changes in Operations Due to Weather Activity

Serious coastal storms that have the potential to close down Logan International Airport

hit Boston about ten times per year. However, these storms virtually never

threaten inland transportation operations on the grolU1d 01' in the air. For this reason,

KCL has often in the past relied on the services of Massachusetts Air Freight (MAF),

which operates out of Worcester, Massachusetts (approximately 50 miles west and inland

from Boston) for assistance in the transport of lobsters when adverse weather

closes down Logan InternationalAirport. If contacted before 5:30 P.M., MAF will pick

up the packaged lobsters from KCL in Kendall Square, deliver them by truck to their

airport in Worcester, Mass., and then fly them to United Expres Overnight Delivery's

sorting facility in Washington, D.C., whereupon United Expres will take over

the further routing and eventual delivery of the lobsters to customers. The costs associated

with using MAP to transport lobsters to United Express' orting facility in

Washington, D.C. are typically quite high. According to Jeff's spreadsheet records,

2

1.6 Case Modules 37

the additional transportation cost of using MAF was $13 per lobster in roughly 67%

of the times that MAF was used, and was $19 per lobster in the rema.i.nffig 33% of the

times that MAF was used.

The other option that KCL would have if the storm were to force Logan Airport

to close would be to simply cancel all orders for delivery to customers for the next

day. This option involves notifying customers by telephone and informing them that

they will be receiving a coupon in the mail for each lobster ordered. Also, if the lobsters

have already been packed for transport, they would have to be unpacked and

returned to their holding tanks for processing the following day. If the lobsters were

not already packed, the incremental cost of canceling the orders is approximately

$1.00 per lobster. If the lobsters were already packed, the cost is instead $1.25 per lobster,

since most of the packaging materials are reusable.

With the storm approaching, Jeff faced one other immediate option: He could

use a truck delivery company to deliver the lobsters. 1£ Jeff were to make arrangements

with Eastern Parcel Delivery (EPD), a regional truck package delivery company,

by noon, they would hold trucks for KCL, and pick up the lobsters at 5:30 P.M.

for delivery to all customers by late the next morning. EPD was very reliable as a

tnlcking package delivery service, but there were two problems with using EPD.

First, KCL would need to commit to using trucks by noon, well before they would

know additional information about the storm. Second, truck delivery via EPD was

more costly than delivery via air from United Express. EPD's delivery fees typically

depended on the total distance that their trucks have to travel. However, because

KCL would still be accepting orders from new customers until 5 P.M., the costs of using

EPD could not be known at noon with any certainty. Depending on the distance

th trucks had to travel, the cost of truck delivery could range from $2 to $4 higher

than normal air delivery per lobster. A quick scan of the data in his spreadsheet on

previous instances when KCL arranged transportation from EPD showed that in 50%

of the times EPD was used, the average additional transportation cost was around $4

per lobster (above the normal cost of delivery by air). In another 25% of the cases, the

average additional transportation cost was around $3 per lobster. In the remaining

25% of the cases, the average additional transportation cost waS only $2 per lobster;

Many Options to Choose From

If Jeff were to choose to transport the lobsters by truck using EPD, he would have to

make the arrangements almost immediately. If he chose not to use EPD, he could

wait and see if the storm hit Boston and if the storm forced Logan to close down. If

the storm were to hit Boston, it would do so at around 5 P.M. and Logan Airport

would either close immedia.tely or not at all, depending on the severity of accompanying

winds. If the storm were not to hit Boston and/or the storm were not strong

enough to force Logan to close, Jeff would presumably know this by 5:30 P.M., and he

could then go ahead with KCL's regular plan of having United Express Overnight

Delivery pick up the lobsters for air transport out of Logan Airport. If the storm were

to hit Boston and close down Logan Airport, Jeff would also know this by 5:30 P.M.,

and he would then face the decision of whether to cancel the customers' deliveries altogether,

or to transport the lobsters via MAF to Worcester and on to United Express'

sorting faciHty in Washington, D.C, where the lobsters would then be incorporated

into United Express' delivery operations.

Regardless of which options Jeff chose, he knew that on Friday he would have to

explain his decision to senior management at their weekly operations review meeting.

As he sat down to do a decision tree analysis, he also thought it would be an excellent

idea to standardize the decision tree methodology so that it could be used

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38 CHAPTER 1 Decision Analysis

semi-automatically in the future. Standardizing the methodology made good sense

as a means of keeping KCL's operations consistently efficient. As a side benefit, Jeff

hoped that this would also impress the senior managers at the meeting.

Assignment:

(a) Structure the delivery operations decision problem as a decision tree.

(b) Solve for Jeff Daniels' optimal decision strategy.

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[Solved] Use as guide please

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[Solved] KCL Optimization Problem

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  • Submitted On 23 Feb, 2017 09:06:06
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