Viktor Lenac Case

What was once a successful shipyard, the Viktor Lenac Shipyard in Croatia is facing the possibility of bankruptcy if a contribution of $30 million cannot be earned in the coming year. In the 1990’s Viktor Lenac was enjoying the profitability of repairing ships. Their expertise and proven quality in repairing ships, as well as their honest business practices solidified their name in the shipyard industry and quickly attracted investors. However, the investors’ plans to expand Viktor Lenac brought about very high fixed costs that caused Viktor Lenac to be in its compromised situation today.

In order to prevent bankruptcy, Ivana Boric and her Supervisor are looking at different ways to increase profitability. The goal is to earn a contribution of at least $30 million to cover the fixed costs of the shipyard. And there are several possibilities of how to diversify the services Viktor Lenac offers. First, repairs are a stronghold of Viktor Lenac, so the repairs must continue to be improved and maintained. Throughout the history of the shipyard, repairs have proven to be a consistent provider of profits and they are a basis upon which the shipyard was built upon. Secondly, another possibility is to perform conversions of ships. Converting passenger ships into transport ships would take much less time than building new ships and would also provide a higher contribution to profit than ship repairs. Thirdly, Viktor Lenac could develop Newbuilding, the construction of new ships. However, Newbuilding takes at least two years to complete and both the profitability and projected contracts were not substantial. Lastly, Viktor Lenac could revitalize its previous production of offshore jackets, which are the main structures of drilling platforms.

With all of these possibilities to increase profitability, each also requires a certain amount of various resources, ranging from the raw material of steel and anti-corrosive paint protection, to logistics such as the capacity of the docks and labor availability. Taking these resource limitations into consideration along with the each type of contract’s contribution toward overall profitability, Ivana Boric and her manager must decide the optimal combination of contracts to take on in order to meet its fixed cost obligations.

Methodology:

A resource usage table grid should be used to find out how many of each particular contract Lenac should take to maximize its profits while the resource restrictions are met.

The article provides the contribution of each type of project, the resources needed for each project and the restrictions of all the resources; with these data we are able to create a table grid:

The “Contribution & Requirements” table shows the Total Contribution of each project category and the Total of all the contributions (shown in yellow), which is the factor that Viktor Lenac wants to maximize.

The “Resources” table shows the amount of material that it will be use depending on how many projects Lenac chooses to do. The table is a simple multiplication of the amount of contracts for each type of project times their corresponding usage of resources.

The “Restrictions” table shows the limits for the two above mentioned tables. If the actual surpasses the restriction the table will turn Red to warn the company that the chosen option of contracts is not feasible.

The assumption here is that the “Contribution” for each project is the profit obtained for that specific project. Therefore all the cost from labor, materials and dock days has been covered. After we obtained the total contribution of all the projects, Viktor Lenac still has to pay the $30mill fixed cost to obtain the profit.

Optimal solution:

To maximize Lenac’s profits we used Excel Solver.

The objective is to maximize the Total of all the contributions (shown in yellow) by changing the amount of contracts of each project type (shown in a blue square) while the restrictions table is being respected.

Excel solver is showing that the max profit that Viktor Lenac could get for this year is $26.776mill which is not enough to cover the $30mill fix cost.

The steel resource is what is restricting Viktor Lenac to attain more projects.

Based on this scenario and restrictions, Viktor Lenac will have to file for bankruptcy.

Increase steel by 20%:

When running the Solver after increasing the steel by 20 %  5500*1.2 = 6,600 tons

This is the new output:

Excel solver is showing that the max profit that Viktor Lenac could get for this new scenario

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