PROFIT MAXIMIZATION & APPROIATE SELECTION USING SIMULATION

MODELLING

The newly appointed Decision Scientist had just arrived. He was appointed as an

intern by the famous “Decision Analytics 3.0 Ltd” and after completing the joining

formalities, he sat down eagerly looking forward to his first real-time assignment

and the demands of such a real-time project. Just then, the manager arrived and

called him over to a room to meet him.

It was the intern’s first stint at real-time decision making and he was looking forward

to a challenging project that will help him bring to the table all the skills he acquired

to be applied in a real-life scenario.

He was waiting for the manager to call him for discussing about the projects.

He entered the room and his mentor cleared his throat and said: “Welcome to

Decision Analytics Inc. You must be excited to know what you are here for. Ours is

a first of a kind analytics company that provides real-time decisions particularly in

the domains of revenue and profit maximization. Currently, two projects have been

assigned to us: One, a software company is trying to select which are the best out of

20 projects to undertake and how much budget is to be allocated to each of the best

projects in such the way that the Net Present Value(NPV) is maximized for the

projects. Further, how to identify the projects is the crux of the problem.
The second project was assigned by a book publishing company to choose the best

out of 36 books based on some criteria like: revenue and development costs, number

of pages and whether the book is useful for the niche group of software developers.

Both the projects are revenue analytics based and needs sharp acumen and data

crunching skills which we feel you possess to accomplish them.

Both the projects are due by the end of your internship duration of 2 months.

This task is to be completed to enable real-time decision-making. So, fire away!”

Thus, in the light of the above situation, the decision scientist was hired because of

his number-crunching and analytical abilities and he had demonstrated working

experience in similar revenue analytics projects.

The analyst who was a specialist in Management Information Systems was also a

reasonably good data cruncher and he understood that this revenue analytics problem

can be solved only using simulating optimization models that provide the optimal

solution under some constraints by changing the appropriate parameters and

determining the best scenario that can maximize the profit and in turn boost the

revenue for both the software company and for the book publishing store.
Further, he investigated and based on his experience in previous revenue analytics

projects which needed the use of simulation, he decided to adopt an optimization

method but for that first the target variable, the constraints and variable parameters

were to be determined.

He opened his mail inbox to find two starter data files for the projects. He first

opened up the file named Capbudget.xlsx and found the following snippet data:

Exhibit 1. Data for the Software project selection assignment

The available capital and labor resources are given as constraints for each project

year for instance, for implementing Project 1, 2500 units of capital and 900 units of

labor are provided and Project1 is found to utilize 398, 180 and 368 units of capital

and 111, 198 and 123 units of labor (programmers) in Years 1,2 and 3 respectively
and incur a value of $ 928 million which is the Net Present Value(target variable

for the study). The Do It? Decision variable has been randomly allocated as either

1 or 0(do or not do) which is the variable cell to be changed in such a way that

Total Revenue is to be maximized.

He then opened up the Pressdata.xlsx data file, a sample of which is as follows:

Exhibit 2. Data for the book selection assignment

The above snippet contains data pertaining to the number of pages, cost and

whether or not it is useful for Developers (1or 0 for useful or not useful).

For instance, for Book 1, it has 911 pages, cost of $177.90 and it is useful for

Developers. Further, a total of 8500 pages can only be published per year and at

least 4 books should be targeted towards software developers.

The “selected” column indicates a randomly assigned number 1 or 0 which is to be

varied in such a way that the revenue is maximized.

So by developing different cases or scenarios, the optimal solution can be arrived at

for a particular mix.

How the optimization model is adopted and the scientist is able to identify the perfect

mix to provide the best profitable solution and in turn, accomplish the tasks is to be

witnessed!

Case questions:

Q1. Which tool can be used to perform the optimization based analysis?

Q2. What is the optimal total NPV and which projects are selected in the first

project?

Q3. What is the optimal total revenue and which books are selected in the second

project?