Dr.

Khang - Project Management

Case study

CASE STUDY1

BUSINESS SIMULATION AT VIETNAM AIR CARGO

Mr. Toan, the deputy head of the business development unit of the Vietnam Air Cargo, comes to his office early Monday quite excited. Last week, he just attended a training program on Project Management where he was introduced to various techniques of risk analysis used in projects. There he got a strong impression that the simulation approach would be useful for analyzing the project he just worked on before attending the training. Now he wants to see if he can get any immediate benefit from the training. Sitting at the desk, Toan tries to retrieve the proposal for the project of launching a new leased cargo route to exploit a seasonal market opportunity recently discovered. In short, his unit plans to wet lease2 a cargo plane to transport a special seasonal merchandise from Bangkok to Hanoi, twice a week over a period of three months. If successful, the business can be repeated every year. To exploit fully the plane, Toan proposes to fly it two round trips a week with multiple legs: Hanoi Ho Chi Minh City Rangoon Bangkok Hanoi. This is the route except for the leg between Rangoon and Bangkok where Vietnam Airline has regular passenger flights, and Vietnam Cargo usually purchases the extra space and weights on these flights for their cargo business. In the proposal prepared before the training, Toan had come to a conclusion that the business may be expected to generate a net operating profit of over USD 30,000 over three months. The data used to support this conclusion are given in Exhibit 1. However, Toan was always concerned with the many uncertain factors and possible inaccuracies in the estimates used in his calculations that may have impact on the bottom line. Now, equipped with the concept of business simulation, and a trial version of the Crystal Ball software he just downloaded from the internet over the weekend, he feels that he can have a much better understanding of what would be the outcome of such project. If he can be convinced about the profitability of, and the risks involved in the project, the tool will give him a much better argument to get the approval from top management, too. Reviewing the data in Exhibit 1, Toan tries to list all those data he cannot be absolutely confident. He then checks with Huong, a colleague from the accountant department, to have a good idea of the possible error margin based on available past data. The results are summarized in Exhibit 2. Now, let me see if I can get any paybacks from my - and my units - investment in the last week training Toan said to himself. Smiling, he added, if this works, Ill have no problem convincing my boss buying a full package of the simulation software for future projects.

This case was prepared by Dr. Do Ba Khang, School of Management, Asian Institute of Technology, Bangkok, Thailand, as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Names and figures have been disguised to protect confidentiality. 2 To wet lease a plane means to lease it together with all crew.

Dr. Khang - Project Management

Case study

EXHIBIT 1 BASE LINE CASE: THE BASIC DATA Routing and operations: Plane: AN12, with capacity of 18 metric ton Route: Hanoi (HAN) Ho Chi Minh City (SGN) Rangoon (RGN) Bangkok (BKK) Hanoi (HAN) Two trip per week, over 3 months (or totally 24 trips) Expenses: Plane lease: $58,000 (including crew) for the whole period of 3 months Airport landing fees: Bangkok and Rangoon airports: $800 (each), Hanoi and Ho Chi Minh City airports: $300 (each) Fuel: $7,500 ; navigation: $2,000; cargo handling: $500 (per trip) Expected loading and fares
Route HAN-SGN SGN-RGN RGN-HAN4 BKK-HAN HAN-RGN5 Expected Load3 12.0 1.5 0.5 14.0 0.5 Fares ($/ton) 200 2050 900 650 2000

EXHIBIT 2 RISK ASSUMPTIONS Fuel cost: can be anything between $7,000 and $8,000 (Hint: assume uniform distribution) Loads: may spread evenly between the two extreme cases as follows
Route HAN-SGN SGN-RGN RGN-HAN BKK-HAN HAN-RGN Min. load 9.0 1.0 0.0 12.0 0.0 Max. load 15.0 2.0 1.0 16.0 1.0

Fare: only for the route BKK-HAN, the fare is subject to uncertainty, and is assumed to average at $650 with a standard error $50 (Hint: assume normal distribution).

3 4

In metric ton With transit in Bangkok. Note that Vietnam Air Cargo does not commercial right for the route between Rangoon and Bangkok, but can transport goods from Rangoon to Hanoi via Bangkok. 5 With transit in Ho Chi Minh City.

Dr. Khang - Project Management

Case study

CASE QUESTIONS
(Group report due: September 13)

1. Prepare a spreadsheet with data and calculate the expected income from the project. 2. Help Mr. Toan run the simulation using Crystal Ball, @RISK or any other spreadsheetbased simulation software available using the basic data given in the case. 3. Based on the results, evaluate the profitability and risks of the project. Make and justify your recommendations to management of Vietnam Air Cargo.