Use excel template to complete Linear Programming problem (Solver)

Include Answer and Sensitivity Reports

Answer the following questions:

1.What is the objective of the Viktor Lenac case? Is the objective to maximize or minimize?

2.Based on the sensitivity report, which constraint(s) has(ve) a shadow price and what is it, if so?

3.Explain what the shadow price(s) mean(s) from question #2. Explain how the Viktor Lenac objective changes based on the shadow price(s) of the constraint(s)?

Answer questions 1-3 in the excel file with final Solver solution

PRODUCTION PLANNING AT VIKTOR LENAC SHIPYARD Professor Giorgio Sinkovi and Professor David M. Currie prepared this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. As the late afternoon sun descended over Mount Uka, Ivana Bori sat down to prepare the production plan for the coming year at Viktor Lenac Shipyard. It was late May 2017, and the choppy seas caused by the yugo wind from the south reminded her of the turbulent times facing Viktor Lenac. Recent expansion had increased fixed costs beyond the level that could be supported by the current volume of sales, jeopardizing Viktor Lenacs future. The shipyard had gone through bankruptcy and several owners over the past decade, so managers needed to discover ways to increase profits from current operations. Boris supervisor, the manager of production for the shipyard, suggested that she explore ways to improve Viktor Lenacs profitability by changing the mix of products. From her training as an engineer, Bori realized that there were several alternatives for improving profitability: training employees, using more modern technology and changing production processes. However, some of these methods required a long time to implement and show results, while others involved significant expenditures of funds at a time when cash was tight. She hoped that by changing the mix of products it would be possible to realize a quick improvement in profits without incurring a large outlay of funds. MODERNIZATION AT VIKTOR LENAC Viktor Lenac (pronounced LEN-atz) was one of two shipyards in Rijeka, a city of 200,000 located on the north coast of Kvarner Bay, between the Istrian Peninsula and the eastern Adriatic coast of Croatia. Opened originally in 1896 as Lazarus Shipyard, Viktor Lenac was renamed for a Croatian hero of the Second World War and became one of Yugoslavias important shipyards in the four decades of the Yugoslav Federal Republic. Croatia became an independent country in 1991 when it and Slovenia seceded from the Yugoslav Federal Republic. Serbia opposed the secession, which led to brief military confrontations in 1991 and 1995 and caused a crisis in the Croatian shipbuilding industry. Foreign companies, who were major purchasers from Croatian shipyards, hesitated to spend millions of dollars to purchase a new ship that might require two years to complete, with hostilities threatening the project. Because Viktor Lenac specialized in repairs, it survived the crisis better than most of its sister yards. Repairs took weeks rather than years and did not require the Following independence, Croatia began an effort to modernize and move toward a market economy. The effort included privatizing firms previously owned by the government. Attracted by the shipyards profitability, a consortium of investors from Italy and the United States purchased a 65 per cent stake in Viktor Lenac in 1993. The remaining 35 per cent was distributed to current and former employees. In 1996, the new owners decided to modernize the shipyard to improve productivity and expand product offerings. When these efforts failed, Viktor Lenac entered bankruptcy in the early 2000s and a new set of owners replaced the previous ones. By 2017, the yard continued to operate while in bankruptcy but required cash infusions. Modernization was financed by an $80 million1 loan package from the International Finance Corporation (part of the World Bank Group) and several private banks. The first phase of expansion began in 2000, but immediately experienced delays and cost overruns. Because of the delays, the shipyard did not yet have the cranes, steel workshops, and other equipment appropriate for newbuilding. High fixed costs caused the yard to lose its competitive advantage in repairs, which were the heart of Viktor Lenacs business. Neither of these situations would improve until productivity increased, which would result from the second phase of the modernization program. THE SHIPBUILDING INDUSTRY The manufacturing facility in which a ship is built is called a shipyard, and shipyards around the world specialized in various aspects of shipbuilding: newbuilding (building a ship from the beginning), repair (overhauling a ship), conversion (converting a ship of one type into another), and drilling platforms (facilities for offshore exploration). Viktor Lenac traditionally emphasized repairs, but one of the justifications for the recent expansion was to enable the company to become a full-service shipyard with capabilities in multiple areas. Each activity had a different impact on Viktor Lenacs operating income, which management termed contribution and defined as revenues less direct production expenses. Repairs Ships need repair for a variety of reasons. First, insurance policies, international safety regulations, and port regulations require regular maintenance, including check-ups of the ships important functions vessel integrity, the propulsion system, environmental protection, and safety. Second, the natural effect of salt water is that animal and vegetable matter accumulate on a ships hull, which can reduce the ships speed and lead to deterioration of the hull. Painting the hull with anticorrosive, antivegetative paint requires that the ship be docked out of the water. Third, repairs may be necessary on an emergency basis if the engine fails, if there is a fire on board, if the hull is damaged, or if some other event renders the ship unsafe or unable to operate. Ship owners estimate the yearly cost of maintenance at approximately 1 per cent of the purchase price of the vessel. Because the average life of a ship is 25 years, the worldwide market for repairs is about 25 per cent of the market for new construction. Because of the size of the market and Viktor Lenacs history as a repair yard, many executives (particularly those with long experience with the company) favored emphasizing repairs as part of the companys strategy. Viktor Lenac had spent many years earning the trust of clients 1All currency amounts are in US$ unless otherwise specified. because of its expertise in bidding contracts. It was impossible to know beforehand the total cost of repairs because the true extent of damage may not be discovered until repairs are begun. Some shipyards purposely bid low prices to lure clients, then changed work orders to secure higher prices. Viktor Lenacs reputation for quality work and honest negotiations had secured the trust of numerous clients. The marketing department told Bori that it had received a variety of contracts from regular customers to repair up to 40 ships this year. If approved by management, each contract would contribute approximately a half million dollars to Viktor Lenacs operating income (see Exhibit 1). Conversions Conversion is an alternative to constructing a new ship. A frequent method is to convert a passenger ship into a transport. For example, if the demand for livestock increases while passenger travel declines, owners will need more transports and fewer passenger vessels. In other situations, a transport of one type is converted to a different type. Owners may have to wait two years or more for a new ship, but often it is possible to convert an existing ship to one purpose from another in half the time. The saving in delivery time helps offset the cost of converting because it returns a ship to active service when it might otherwise be idle. Several of the newer executives at Viktor Lenac proposed entering the market for conversions as part of the companys strategy. They pointed out that each conversion would help the company diversify its product offerings and provide a much higher contribution to profits than repairs (see Exhibit 1). The marketing department had contracts for up to four conversions over the coming year, but Viktor Lenac management had not yet approved the contracts. Newbuilding Construction of a new ship is called newbuilding and can require two years or more to complete. Newbuilding consisted of: Bidding, including the preliminary design that becomes part of the contract Detailed design, including material specification for the 25,000 items that are part of the ship Production, composed of two stages vessel production and outfitting the vessel Trial and delivery Because of the high cost and the need to meet complex contract specifications, both the purchaser and the shipyard appoint one or more persons each to represent their interests. These representatives observe the production process from beginning to end and verify compliance with the contract to the satisfaction of both parties. Unlike repairs, the client and the shipyard agree on the price and exactly what work is to be accomplished before signing the contract. In almost all cases, the client wants a turnkey ship that is ready for immediate use upon delivery. The new owners of Viktor Lenac were particularly keen to enter the newbuilding market. The managing director stressed the importance of newbuilding if Viktor Lenac wanted to be a player in the global market. The director of finance pointed out the lower contribution of only $1.6 million for each new ship (see Exhibit 1), but the engineers responded that the expertise gained from newbuilding would benefit the company in the long run. The marketing department thought that it could secure contracts for no more than two ships for the coming year. Both contracts would be for tugboats rather than for transports because Viktor Lenac did not yet possess the expertise to compete in the transport market. Offshore jackets Oil and gas reserves frequently are located on the ocean floor rather than on dry land. Exploring and extracting oil or gas must be done from a platform that provides housing for the crew as well as allowing drilling at depths of several hundred meters. Platforms in shallow water have a component called an offshore jacket, which is the superstructure of the platform. The jacket is constructed using technology and resources similar to those of shipbuilding. Viktor Lenac produced offshore jackets in the 1980s but left the market to focus on repairs. It would be possible to reenter the market by partnering with an Italian firm that had expertise in constructing the platforms production module. Each jacket would provide a contribution of $3.1 million (see Exhibit 1). Because Viktor Lenac was new to the market, it could reasonably expect to produce only two offshore jackets in the next year. RESOURCES FOR PRODUCTION Bori had anticipated questions involving production, so she had asked the production manager to identify which stages in the production process or which resources used were likely to limit production. The production manager identified four possible tight spots: steel, corrosion protection, dock capacity, and labor hours (see Exhibit 2). Steel The basic raw material in all shipyard activities is steel, which must be cut into correct shapes, then welded to other components. Viktor Lenac purchased steel from the Czech Republic, one of the few countries in Eastern Europe producing steel of sufficiently high quality for shipbuilding. Because it was necessary to order and ship steel in advance of the years production, the amount of steel available this year was limited to 5,500 tons. Corrosion Protection A ships components must be protected against corrosion and the accumulation of vegetative matter. Recent modernization included constructing an enclosed building in which anticorrosive, antivegetative paint could be applied to components. Because of the paints potentially harmful effect on the environment, the circulation system in the building prevents vapors and wastage from being released into the atmosphere or the harbor. The building had a capacity of 500,000 square meters of anticorrosion paint annually and could not be expanded without a significant investment of money and time. Dock Days Any of the procedures involving a ships hull must be completed in a dry dock so laborers have external and internal access to the complete hull. Viktor Lenac had two docks that could accommodate ships of the size in which Viktor Lenac specialized. Because national holidays limit operation of the yard, the docks could be open no more than 350 days during the year, so total dock capacity was 700 days. The second dock was part of the recent modernization program, and there were no plans for erecting a third dock during the second phase THE DECISION It was apparent to Bori that strategic as well as financial considerations would influence the decision about what to produce over the coming year. Although the production managers instructions did not include consideration of strategy, Bori realized that the most important concern was keeping the firm in business. The existing production plan, which continued Viktor Lenacs traditional emphasis on repairs, would lead to a contribution of approximately $16.6 million. A contribution of approximately $30 million was necessary to cover fixed expenses such as administration, marketing, and debt service. Bori wondered if changing the mix of contracts would improve the contribution sufficiently to cover fixed expenses.

F G H Repair R Conversion C OS Jacket New Build N 1 Contract Types: Variable cells Contribution ($ amount) 5 Resources (aka Constraints): 14 Additional constraint - Viktor Lenac must produce at least zero of each of the contract types. 16 Answer the following Questions: (no more than a couple of sentences for each): 17 1) What is the objective of the Viktor Lenac case? Is the objective to maximize or minimize? 18 2) Based on the sensitivity report, which constraint(s) has(ve) a shadow price and what is it, if so? 21 NOTE: Do not force answers to be integers F G H Repair R Conversion C OS Jacket New Build N 1 Contract Types: Variable cells Contribution ($ amount) 5 Resources (aka Constraints): 14 Additional constraint - Viktor Lenac must produce at least zero of each of the contract types. 16 Answer the following Questions: (no more than a couple of sentences for each): 17 1) What is the objective of the Viktor Lenac case? Is the objective to maximize or minimize? 18 2) Based on the sensitivity report, which constraint(s) has(ve) a shadow price and what is it, if so? 21 NOTE: Do not force answers to be integers