Eco 333/402 Penske Logistics Case Memo Assignment

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Penske Logistics Case Memo Assignment

Eco 333/402 – Todd A. Watkins

Due 9/13 (Use Turnitin on Coursesite, and bring copy to class)

In August 2021 Hurricane Ida damaged a significant portion of petroleum production capacity on the US Gulf Coast. Buyers of petroleum-related products feared costs would spike up for many companies,

particularly gasoline and diesel fuel for transportation. The Senior VP of Finance for Penske Logistics, Paul   Ott, asks you for economic modeling to help develop a corporate strategy for dealing with the expected cost increases.

Ott (who Penske Logistics employees know as a bit of a quant nerd with a background in finance and

economics), would like a brief memo with summary graphs and/or tables to address the following issues:

.    Predict the price of diesel in the near and longer term.

.    What are your key assumptions? How sure are you of this prediction? If actual supply and demand price elasticities differ, how much might your prediction change?

.    How sensitive are your predictions to your assumptions? Explore this to develop a plus-or-minus error range.

.    What are key strategic implications for the division, i.e. what plans or actions or changes in strategy or operations might Ott consider? [You know enough about trucks & deliveries to discuss]

Suggested steps in the analysis (note: you won’t want to include all this in your memo; the boss is busy, so include only key illustrative or summary materials).

.     Find the A and C coefficients in the supply and demand equations.

.    Use a spreadsheet and the equations to prepare a spreadsheet table with prices, demand quantities and  both the old and new supply quantities (example below, but feel free to design your own). Also use the spreadsheet to construct a supply-demand diagram (more accurate than Robinson’s) showing the daily  demand and (both old and new) supply functions for diesel. Also from the equations, graph and tables, predict the price and quantity of diesel. How do the new values compare to the old?

Anne Robinson’s Estimates of          Diesel             & Demand

.    To explore sensitivity to Robinson’s assumptions, Ott wants you to also suppose supply was more

elastic and also less elastic than Robinson initially assumed.  How much might price change under what assumptions? What assumptions might be more realistic for what circumstances? Briefly explain.

.    Alternatively, assume demand was more elastic and also less elastic that her initial assumption.

Determine the price changes under various assumptions (do not change supply as you did above).  Under what conditions might these be relatively realistic?

.     Reflecting on your findings in the two above analyses of sensitivity to assumptions about supply and   demand elasticities, what comments or suggestions might you make with respect to the price forecasts that used Robinson’s original assumptions, particularly over time? Do you feel you should revise the forecasts up or down as time moves on or stick with the original figures? If you differ from Robinson, be sure to explain and justify for the boss.

. Most importantly (not as an afterthought), Ott wants your analysis of strategic implications for the  division. How should he react? What plans or actions or changes in strategy or operations might he consider? You don’t have much info on the details of the division, but use what you intuitively

understand about trucking operations.

You should also come prepared to discuss your analysis at Ott’s staff meeting in class.

To Prepare, Please Read

.     The Penske Logistics case (available on the course webpage)

.    Textbook Chapter 4.

Prepare by Next Week

.    By next week, you should also be able to do the textbook questions and problems in Chapter 4. (We will not cover the Chapter 4 Appendix). Again, I will not collect homework, but you will be responsible for   and examined on the topics covered. Exam problems will be similar to those in the chapters.