Bidwiser Case Study

7/29/2019 Bidwiser Case Study

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BIDWISER Preliminary Round

Contents

Getting Started ....................................................................................................................................................................... 1

Stage 1: Procure Land & Machinery ............................................................................................................................ 1

Stage 2: Make your Production Plan ........................................................................................................................... 2

Judging Criteria ..................................................................................................................................................................... 2

Relevant Data ......................................................................................................................................................................... 3

Illustration ............................................................................................................................................................................... 4

Getting Started

Youre an entrepreneur and are setting up your companys first manufacturing plant. First of

all, you need to bid for land and machinery (mandatory inputs).

Once you get the land and machinery you wanted (or got stuck with), you ll need to buy trucks

to transport your output to the market (revenue will be realized only if your output reaches

the market). Additionally, you can go for technology upgrades, labor training sessions (non-

mandatory inputs) with the remaining capital to reduce your marginal cost of production.

Your initial capital is Rs. 5 crore. If you still want more, you can take a debt at any time @15%p.a. Price for your product is determined by a predetermined demand function.

Youre a true capitalist and your only aim is to maximize profits. Good luck!

Stage 1: Procure Land & Machinery

You have an initial capital of Rs. 5 crore (Rs. 5,00,00,000). You need to bid formandatory factors of production land and machinery. There are 4 types of land (L1,

L2, L3 and L4) and 4 types of machines (M1, M2, M3, M4) on sale.

This would be a closed bidding process.You need to mention your bid amount of eachland and each machine and respective preference orders.

Each team will eventually get only 1 type of land and 1 type of machine. Bids will becleared such that 25% of the participating teams get L1, 25% get L2 and so on.

If more than 1 team is at the 25% cut-off, the team that bid earlier will be givenpreference

Please use the Relevant Data to make your bidding decision. Just in case you do notnotice, the optimal decision for Stage 1 is likely to also depend on your choices in Stage

2

The bids need to be placed by 13.09.2013, 11.59.59 PM and the land & machinery youwon will be put up on the website and intimated to you via email by 14.09.2013.


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Stage 2: Make your Production Plan

Now that you have your land and machinery, you need to decide your production plan. You

need to run your firm for 365 days and produce the same output each day. Your decision

problem consists of the following:

1. Output to be produced per day. It can be anywhere between 0 units and MaximumOutput of Machine

2. Investment in add-ons: You may invest in Technology Upgrades or Labor Training toreduce your marginal cost of production

3. Number of trucks & delivery schedule: You must buy trucks to transport your output.Revenue is realized only after the output has been delivered to the market. The

roundtrip time for a truck is 2 days. A truck can leave at the end of Day 1 with your

output and will return to your premises only at the end of Day 3 and so on. Outputproduced and not transported will be stored in the inventory and will cost an amount

equal to the inventory holding cost of Rs. 1/- per kg per day. You need to submit the

first 2 day schedule for the truck mentioning the amount transported (less than or equal

to the truck carrying capacity) on each day. This will be repeated for the entire year.

4. Financing: If you exhaust your capital, you may take debtat a fixed interest rate of 15%p.a.

Please use the Relevant Data in the next sheet to make the above decisions. The final

operation cost can be computed from the formula given in payoff matrix. The final decisions

need to be confirmed by 17.09.2013, 11.59.59 PM

Judging Criteria

Teams with maximum profitin the first year will win.

The Relevant Data and Illustration is given on the following pages.


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Relevant Data

Average Cost (operational):

where values of A and B for different combinations of land and machinery are given as follows:

Base Price for Mandatory items (in Rs.)

L1 80,00,000

L2 80,00,000

L3 60,00,000

L4 1,00,00,000

M1 60,00,000

M2 40,00,000

M3 60,00,000

M4 80,00,000

Maximum Output of Machine (in kgs per day)

M1 18,000

M2 14,000

M3 12,000

M4 10,000

Fixed Costs of upgrades (in Rs):

Technology (U1*) 10,00,000 per unit

Labor Training (U2) 5,00,000 per unit

Truck (T) 10,00,000 per unit

*U1 is capped at 8 units

Truck carrying capacity: 8,000 kg

Inventory holding cost: Rs 1/- per kg/day

Interest Rate: 15% p.a.

Demand Function: Q (in thousands) = 24-P

Payoff Matrix:

Average cost for producing one unit of product with each land machine combination can be

calculated by substituting the values of A and B given in the payoff matrix into the formula for

AC(Q).

L1 L2 L3 L4

A B A B A B A B

M1 9 2 12 15 10 60 11 60

M2 11 15 9 60 12 2 10 15

M3 12 60 10 2 11 8 9 20

M4 10 30 11 30 9 30 12 30


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Net profit can be calculated as follows:

Net Profit = Total revenue (p*q) - Cost of mandatory inputs (land + Machinery) Cost of

Trucks - Cost of Technology Upgrade- Cost of Labor Training - Cost of debt if taken Inventory

holding cost - Operational cost (AC*q)

Illustration

Stage 1:

Team X bid for Land and machinery in the following preference order:

Land Type Preference Order Bid Amount

L2 3 2,10,00,000

L1 1 2,50,00,000

L3 2 1,10,00,000L4 4 80,00,000

Machine Type Preference Order Bid Amount

M1 1 1,25,00,000

M2 2 1,10,00,000

M3 3 90,00,000

M4 4 30,00,000

Lets assume Team Xs bids for L3 and M3 got cleared. Therefore, Team X will be allotted L3

and M3 at Rs. 1.10 cr and Rs. 90 lac respectively.

So after bidding, Team X is left with L3 and M3 and cash of 3 cr (= 5 1.1 0.9).

Stage 2:

M3 can produce maximum 12,000 units per day. Now Team X has to decide what amount of

U1 and U2 to buy, how many trucks to buy and the quantity of output to be produced.

Team X decides to buy 8 units of U1 and 2 units of U2 and 2 trucks to transport its products to

market. So basically team 1 is spending 110,00,000 more on these inputs and is finally left

with 1,90,00,000 rupees (= 3 1.10).

If team X decides to produce 8000 units per day, average operating cost is basically Rs 3.8 per

kg per day.

Using the inverse demand function we can see that the price of its product will be P = 24-8 = Rs

16 per unit.

Therefore the annual cost of producing 8000 units per day is = 8000*365*3.8 = 1,10,96,000.

Since the amount left with Team X was Rs. 1.90 cr, it will not have to take debt in order to

operate at this capacity.

Hence the net profit for firm can be calculated as

= Total Revenue Operational cost Cost of add ons Cost of bidded inputs Interest on Debt

= 16*8000*365 3.8*8000*365 1,10,00,000 2,00,00,000 - 0

= 46,24,000

Net profit =46,24,000


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Hence company makes a profit ofRs 46.24 lakhs and its ranking will be based on this value.

Examples of truck schedule:

Case 1:

If I produce 16,000 kg/day and have 4 trucks, and I decide to send 2 trucks daily carrying

8000/- kg each then,

Day 1:

Production = 16,000 kgs

Transported = 16,000 kgs (2 trucks sent)

Remaining = 0 kgs

Inventory holding cost = 0

Day 2:Production = 16,000 kgs

Transported = 16,000 kgs (2 remaining trucks sent)

Remaining = 0 kgs

Inventory holding cost = 0

Hence, I will be able to transport the entire production of 16,000 kgs to the market.

Case 2:

If I produce 10,000 kg/day and have 2 trucks, and I decide to send 0 trucks on first day and 2

trucks carrying 16kg (max possible) total on the second day then,

Day 1:


Transported = 0 kgs (No truck is sent)

Remaining = 10,000 kgs

Inventory holding cost = 10,000/-

Day 2:


Transported = 16,000 kgs (2 trucks are sent)

Remaining = 4,000 kgsInventory holding cost = 4,000/-

Hence for every 2 day cycle, 16,000 kgs will be transported and inventory holding cost of

14,000 (10,000 + 4,000) is charged. This is repeated for the entire year (182 cycles).

In the above example, if I have 4 trucks, I can use 2 every day and avoid any wastage or

inventory holding cost.

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Bidwiser Case Study