Swiss Milk Memo

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A third option to increase profits is using a new type of truck to ship units from Farm A to Geneva. The trucks would reduce the unit variable transportation costs by CHF 0.1. Currently the transportation cost is 0.2 CHF/kg. A decrease in transportation costs could increase profits if daily transportation cost is more than the maintenance cost. The new truck would reduce costs by CHF 80. Therefore, profits would increase CHF 30 when you subtract the increase in fixed costs. This can be seen in Table 3: New Transportation System from Farm A to Geneva.

Closing:

This analysis highlighted two main options that could be used to maximize profit of Swiss Milk. Excel Solver has provided accurate figures on how to model shipments from the three dairy farms to the three towns Swiss Milk serves. It needs to be emphasized that mathematical tools such as linear programming does have its drawbacks. Specific assumptions need to be met, as previously discussed, and business decisions need to be made evaluating all possible benefits and risks. Linear programming can help analyze complex business data, but it is only effective if the model you use reflects the real world.

After careful calculations my recommendation would be to use the coupons to increase the demand in Geneva. Coupons are a great solution for increasing demand and would show a total daily profit of 1085. The new type of transportation system which would reduce costs from Farm A to Geneva by CHF 0.1 is also recommended. It would increase profits by CHF 30 per day thus making the total daily profit CHF 1110. When using both of these recommendations together the maximized profit of Swiss Milk’s total daily profit would be CHF 1115.

Appendix:

Table 1. Current Total Profit

Town

Profit (CHF/day)

Demand (kg)

Supply (kg)

Demand Unmet (kg)

Lausanne

400

800

700

100

Geneva

560

800

800

0

Nyon

120

350

300

50

Total

1080

Table 2: Farm A Milk Transfer from Lausanne to Geneva

Increase Farm A to Supply to Geneva by 100 kg/day

Decrease Farm A supply to Lausanne by 100 kg/day

Coupons at Geneva

Profit Gain (per day)

100 kg/day X 0.7 CHF/kg = CHF 70

Profit Loss (per day)

100 kg/day X 0.5 CHF/kg = CHF 50

CHF 15

Net Profit Gain

70 – (50 + 15) = CHF 5

Table 3: New Transportation System from Farm A to Geneva

Cost (CHF)

New Transportation

800 kg/day X 0.1 CHF/kg = 160

Old Transportation

800 kg/day x 0.2 CHF/kg = 80

Profit (day)

160 - 80 = 80

Truck Maintenance (fixed)

50

Net Profit

80 - 50 = 30