PROJECT 1: REVENUE MANAGEMENT THROUGH DYNAMIC PRICING AND YIELD MANAGEMENT "THE COMPANY": Based in Vancouver, The Canuck Container Shipping Company (CCSC") owns and operates the HMS Northern Exposure, a Maersk Triple-E

Class Ultra Large Container Vessel (pictured below): 8'6" MAERSK LINE CCSC's Maersk Triple-E Class Ultra Large Container Vessel, HMS Northern Exposure In line with standard industry practice, the CCSC ferries cargo in 20' and 40' containers: A 20' Container: Known as a Twenty-foot Equivalency Unit ("TEU") with a maximum load of 24 tons/container. A 40' Container: Equal to two TEUS (by volume) with a maximum load of 30 tons/container¹. 8' 40' 8'6" 8' Left: a 40' Container (two TEUs); Right: a 20' Container (one TEU) 20¹ 1 In case analysis, it's a good idea to "cross-check" case figures. For example, you should confirm that a 40 container is in fact twice as voluminous as a 20" container. 1/nTwice a year - once during the "low" season and again during the "high" season - the HMS Northern Exposure embarks on a voyage from Vancouver (sans cargo), with "stopovers" at the following 10 "port-of-calls" to pick up cargo for final delivery to Dubai, following which, the vessel returnins to Vancouver (sans cargo): Port: Origin (Depart empty) Vancouver Japan Part: TEUs picked up at Port-of-Call: For example, during the "High Season" in FY2022-2023, the HMS Northern Exposure sailed from Vancouver (without cargo) → travelled to the 1st port of call, Japan, and loaded 320 TEUs destined for Dubai → travelled to the 2nd port of call, China, and loaded 68 TEUs destined for Dubai →... → travelled to the 10th port of call, Thailand, and loaded 9 TEUs destined for Dubai → travelled to the final destination Dubai to deliver 1,799 TEUs of cargo (the combined TEUs picked up from the 10 port-of-calls) → sailed back to Vancouver (without cargo): "Cumulative" TEUs on ship Origin (Depart empty) Pick up Cargo at each of the following 10 "Port-of-Calls for Final Delivery to Dubai China HK Indonesia India Korca Malaysia Singapore Taiwan Thailand Vancouver Malaysia Singapore Taiwan Thailand Japan 320 Amount of Cargo (in TEUs) picked up from each 10 "Pom-of-Calls" for Final Delivery to Dubai during the High Season FY2022-2023 Indonesia China 6K HK $940 $878 $766 1,125 $840 $790 $710 $643 1,193 India $649 $702 $663 Total TEUs delivered to Dubai: 340 1,533 Kona 35 320 68 Malaysia 737 68 340 35 138 138 43 41 9 1,799 1,706 Destination (Unload Total Cargo picked up at port-of-calls) Dubai 43 1,749 Taiwan The amount of cargo ("demand") [TEUs] loaded at a port-of-call depends on CCSC's "price" ($/TEU) and the "season". For example, the following table contains CCSC's FY2022-2023 "price" and "seasonal demands" for the 10 port-of-calls: Thailand FY2022-2023 Price ($/TEU) and "Total Seasonal Demand” (TEUs) for Loading/Transporting Cargo to Dubai Port of Call Price ($/TEU) High Season Total Demand (TEUS) Low Season Total Demand (TEUS) Japan China HK Indonesia India Korea 9 1,799 Destination 286 61 660 61 304 31 Dubai 123 38 37 8 1,609 Unload Total Cargo picked up from the 10 part-of-calls Dekend: 1,799 Notice that for any given port-of-call, CCSC charges a uniform "price" across both seasons (i.e. CCSC is not managing revenues through dynamic pricing). This is where you come in -- you have been hired as a consultant to advise CCSC on (if feasible) boosting revenues through dynamic pricing subject to newly imposed "yield management" constraints specified next². (Going Forward) Dynamic Price Mechanisms & Operational Plus Yield Management Specs: CCSC's managements wants you to explore the feasibility of boosting revenues through dynamic pricing (charging separate prices in the Low vs. High Seasons) subject to the following "newly imposed" operational and yield management "constraints": [See the following tablel For each-port-of-call, a pre-specified percentage of its total cargo destined for Dubai must be in/nPort of Call Japan China HK Indonesia India Korea Malaysia Singapore Taiwan Thailand Containers (see example below) 30 40 42 40 40 46 54 Container (tons) 20 18 19 21 22 39 41 20 21 20 19 19 23 "Japan Example": 30% of the total cargo demand (TEUs) picked up in Japan will be transported in 20' containers and the remaining 70% of total cargo demand (TEUs) will be transported in 40' containers where each 20' container must weigh 20 tons and each 40 container must weigh 24 tons. Reminder: one 40' container = two 20' containers by volume. Container (tons) 24 23 22 C. 25 22 Total Number of 20' containers on the ship in Dubai 1.2 S Total Number of 40' containers on the ship in Dubai ≤2 25 22 25 19 26 Since 20' containers are "denser" than 40' containers, to thwart the ship from "becoming unbalanced and tipping over, as well as to expedite the loading/unloading process, management stipulates that when the HMS Northern Exposure reaches its final destination Dubai: In order to accommodate "last minute orders from premium customers", CCSC's "yield-management-managers" insist on having a "buffer" (no different from airlines and hotels setting aside seats and rooms for "premium" customers) such that when the HMS Northern Exposure reaches its final destination Dubai: Total TEUs on the ship in Dubai < (Seasonal Peak Load Factor) x 2,000 TEUS Total weight of the ship (tons) in Dubai ≤ (Seasonal Peak Load Factor) x 24,000 tons Seasonal Peak Load Factor (High Season: 97% Low Season: 92% The Mechanics of "Micro-Optimization": Do the following for the Low and High Seasons separately: 1. Use the FY2022-2023 info to calculate, for each port-of-call as well as the "grand total": TEUs, Revenue, Ratio of 20:40' containers, Total weight, etc. You may want to comment on whether some "proposed" constraints are violated at the port/total level. 2. For dynamic pricing, you are going to "simulate-estimate", the "demand-curve" at each port-of-call as follows: a. Use the Excel command = rand() to generate a number between 0 and 1 → multiply this number by -1 → "label" it "Price Elasticity" E. b. Assume that in FY2022-2023, each port-of-call's "price" and "demand" resulted in every port-of-call having the price elasticity equal to E. For example, given Japan's price and output in season X, its price elasticity was E, identical to the price elasticity of the other nine port-of-calls. Assume each port-of-call has a linear demand curve. For example, the ith port-of-call demand curve is: P₁ = a₁ - biqi/nUniversity of Toronto, Department of Economics, ECO204, 2023-2024 Now, since every port of call has the same value of E, and you know each port's FY2022-2023 P, q figures → you can figure out each port-of-call's linear demand curve parameters a, and b. 3. Watch some (all?) ECO204 Excel Solver YouTube videos (see online math chapter). "Observe" how Solver requires a formula for the "objective" (in this case the grand total revenues across all 10 port-of-calls); in turn that requires you to pick - in this case - either price or quantity as the "decision variable". What did you do in ECO101? Ever notice how in that course you always "solved" for the "optimal quantity" (never the price) to maximize "profits/revenues" or minimize "cost per unit"? Why didn't you "select" price as the decision variable in ECO101? 4. In Excel, create a table with the demand curve parameters for each port-of-call and make up a "trial" output value (TEU)→ feed into the port-of-call demand curve to generate the corresponding price ($/TEU) and revenue → perform any additional calculations such as, for example, that 30% of Japanese total TEUs must be in 20' containers; the overall ratio of 20':40' containers must be between 1.2 and 2; etc. → Bring up Solver →Your "objective" is to maximize total revenues from all 10 port-of-calls → your "decision variables" are the ten port-of-call "demands" (TEUS) → enter all constraints → "Solve" and request the "sensitivity report". For your convenience, here is the complete problem stated in maths: 10 10 10 max Total Revenue from all ten port-of-calls = [R₁ = P₁q₁ = [(a₁ - biqi)qi 91-92-910 i=1 i=1 Subject to: Total Number of 20' containers on the ship in Dubai 1.2 S Total Number of 40' containers on the ship in Dubai ≤2 Total TEUs on the ship in Dubai ≤ (Seasonal Peak Load Factor) x 2,000 TEUS Total weight of the ship (tons) in Dubai ≤ (Seasonal Peak Load Factor) x 24,000 tons Seasonal Peak Load Factor (High Season: 97% Low Season: 92% 5. In your report and Excel model, be sure to compare your solution with the "status quo" and don't forget to interpret and "utilize" the Lagrange multipliers in the sensitivity report. It's possible that the "Total Revenues from Solver" may be lower than the status quo Total Revenues. If so, you should be able to use ECO101 logic to explain why (in any case, you should provide insights and intuitive explanations for why your Solver model revenues are higher/lower than the status quo./nMake judicious use of graphs, tables, Excel screenshots, and pictures in the business report - don't be that "scribe" who crams reports with "filler/decorative" graphs, tables, etc. Do you have a "technical" graph which doesn't "fit" in the Business Report? Put it in the technical appendix (which has "no page limit" within common reason). The Excel file should be properly formatted and labelled. For example: are the top rows "frozen"? Did you adjust column widths to auto-fit data? Are the numbers formatted to the same number of decimal places? Are the axes labelled? "Set up" the Excel file to make it easy for your "client/audience" to use your model with different input/parameter values (why not shade the "input/parameters" yellow and the Solver cells green etc.?). We highly recommend "soft coding" formulas and "naming variables" making it easier for your client/audience to change the parameters, re-solve the problem, and view the "analysis" and "recommendations". "Submitting Project 1" The business-report must be submitted in pdf format titled "LastName_FirstName_Last-5-Digits-Student ID.pdf" and the Excel file must be in either "xlsx" or "xslm" format titled "LastName_FirstName_Last-5-Digits-Student ID.xlsx/xlsm" Please submit the business-report and Excel file through the Quercus Project 1 Tabs (one for Excel and another for the Business Report) by Penalty for submitting any component of Project 1 past the deadline: 50% of maximum project score per day that any project component is overdue. Please review the policy on using Quercus to submit, grade, and detect plagiarism in course assessments: Normally, students will be required to submit their course essays to the University's plagiarism detection tool for a review of textual similarity and detection of possible plagiarism. In doing so, students will allow their essays to be included as source documents in the tool's reference database, where they will be used solely for the purpose of detecting plagiarism. The terms that apply to the University's use of this tool are described on the Centre for Teaching Support & Innovation web site https://uoft.me/pdt-faq" "Academic Code of Conduct" It is your responsibility to read and abide by the Student Academic Code of Conduct. Please note that any attempt to "collaborate", "receive/provide help" to any other individual/organization is a serious violation of the academic code of conduct. Score: Economic Argument, Concepts & Evidence Organization & Flow Writing: Clarity, Conciseness, Sentence Excellent 3 (TENTATIVE) BUSINESS REPORT GRADING RUBRIC Good 2 Fair 1 Clearly stated argument & concepts. Economic reasoning is sound and indicates thorough understanding of concepts discussed in class. Each main point is written in a separate paragraph, in a logical order. Paper closes with a clear and convincing call to action. Easy to read, even for a non-specialist. Writing enhances understanding and interest. Short, clear, Fairly clear and convincing argument. Adequate use of economic concepts. Demonstrates understanding of topics discussed in class. Each reason is written in paragraphs, but not necessarily separate. Closing gives a fairly clear and convincing call to action. Mostly easy to read. Mostly short, clear, correctly structured Argument is confusing or contradictory. Weak definition/application of economic concepts. Demonstrates some understanding of topics discussed in class. Reasons are not written in distinct paragraphs. Closing gives a call to action, although not well supported. Sentence/word level problems get in the way of understanding, Problematic 0 No clear argument. Confused or no use of economic concepts. Poor quality and little if any displayed evidence of understanding of topics discussed in class. Reasons are not written in good paragraphs and have questionable order. No clear or convincing call to action at close. Significant sentence/word level problems make it difficult for reader to