Jim Huang and Roderick Wheeler were sales representatives in a computer store at a shopping mall in Arlington, Virginia, when they got the idea of going into business in the burgeoning and highly competitive microcomputer market. Jim went to Taiwan over the summer to visit relatives and made a contact with a new firm producing display monitors for microcomputers, which was looking for an East Coast distributor in America. Jim made a tentative deal with the firm to supply a maximum of 500 monitors per month and called Rod to see if he could find a building they could operate out of and some potential customers.

Rod went to work. The first thing he did was send bids to several universities in Maryland, Virginia, and Pennsylvania for contracts as an authorized vendor for monitors at the schools. Next, he started looking for a facility to operate from. Jim and his operation would provide minor physical modifications to the monitors, including some labeling, testing, packaging, and then storage in preparation for shipping. He knew he needed a building with good security, air-conditioning, and a loading dock. However, his search proved to be more difficult than he anticipated. Building space of the type and size he needed was very limited in the area and very expensive. Rod began to worry that he would not be able to find a suitable facility at all. He decided to look for space in the Virginia and Maryland suburbs and countryside; and although he found some good locations, the shipping costs out to those locations were extremely high.

Disheartened by his lack of success, Rod sought help from his sister-in-law Miriam, a local real estate agent. Rod poured out the details of his plight to Miriam over dinner at Rod's mother's house, and she was sympathetic. She told Rod that she owned a building in Arlington that might be just what he was looking for, and she would show it to him the next day. As promised, she showed him the ground floor of the building, and it was perfect. It had plenty of space, good security, and a nice office; furthermore, it was in an upscale shopping area with lots of good restaurants. Rod was elated; it was just the type of environment he had envisioned for them to set up their business in. However, his joy soured when he asked Miriam what the rent was. She said she had not worked out the details, but the rent would be around $100,000 per year. Rod was shocked, so Miriam said she would offer him an alternative: a storage fee of $10 per monitor for every monitor purchased and in stock the first month of operation, with an increase of $2 per month per unit for the remainder of the year. Miriam explained that based on what he told her about the business, they would not have any sales until the universities opened around the end of August or the first of September, and that their sales would fall off to nothing in May or June. She said her offer meant that she would share in their success or failure. If they ended up with some university contracts, she would reap a reward along with them; if they did not sell many monitors, she would lose on the deal. But in the summer months after school ended, if they had no monitors in stock, they would pay her nothing.

Rod mulled this over, and it sounded fair. He loved the building. Also, he liked the idea that they would not be indebted for a flat lease payment and that the rent was essentially on a per-unit basis. If they failed, at least they would not be stuck with a huge lease. So he agreed to Miriam's offer.

When Jim returned from Taiwan, he was skeptical about Rod's lease arrangement with Miriam. He was chagrined that Rod hadn't performed a more thorough analysis of the costs, but Rod explained that it was pretty hard to do an analysis when he did not know their costs, potential sales, or selling price. Jim said he had a point, and his concern was somewhat offset by the fact that Rod had gotten contracts with five universities as an authorized vendor for monitors at a selling price of $180 per unit. So the two sat down to begin planning their operation.
First, Jim said he had thought of a name for their enterprise, Hawk Systems, Inc., which he said stood for Huang and Wheeler Computers. When Rod asked how Jim got a k out of computers, Jim cited poetic license.

Jim said that he had figured that the total cost of the units for themincluding the purchase of the units, shipping, and their own material, labor, and administrative costswould be $100 per unit during the first 4 months but would then drop to $90 per month for the following 4 months and, finally, to $85 per month for the remainder of the year. Jim said that the Taiwan firm was anticipating being able to lower the purchase price because its production costs would go down as it gained experience.

Jim thought their own costs would go down, too. He also explained that they would not be able to return any items, so it was important that they develop a good order plan that would minimize costs. This was now much more important than Jim had originally thought because of their peculiar lease arrangement based on their inventory level. Rod said that he had done some research on past computer sales at the universities they had contracted with and had come up with the following sales forecast for the next 9 months of the academic year (from September through May):

Rod explained to Jim that computer equipment purchases at universities go up in the fall, then drop until January, and then peak again in April, just before university budgets are exhausted at the end of the academic year.

Jim then asked Rod what kind of monthly ordering schedule from Taiwan they should develop to meet demand while minimizing their costs. Rod said that it was a difficult question, but he remembered that when he was in college in a management science course, he had seen a production schedule developed using a transportation model. Jim suggested he get out his old textbook and get busy, or they would be turning over all their profits to Miriam.

However, before Rod was able to develop a schedule, Jim got a call from the Taiwan firm, saying that it had gotten some more business later in the year and it could no longer supply up to 500 units per month. Instead, it could supply 700 monitors for the first 4 months and 300 for the next 5. Jim and Rod worried about what this would do to their inventory costs.

A. Formulate and solve a transportation model to determine an optimal monthly ordering and distribution schedule for Hawk Systems that will minimize costs.

B. If Hawk Systems has to borrow approximately $200,000 to start up the business, will it end up making anything the first year?

C. What will the change in the supply pattern from the Taiwan firm cost Hawk Systems?

D. How did Miriam fare with her alternative lease arrangement? Would she have been better off with a flat $100,000 lease payment?