AgrEvo International, Inc.
Develop a Portfolio of R&D Projects
Calvin Sonntag, the manager of strategic planning for AgrEvo international, Inc. is leaving the headquarters of the parent company of AgrEvo in FrankfurtGermany. As he settles in to his airplane seat, he reflects on the series of meetings he had attended, learning thatglobal competitive pressures are increasing.
AgrEvo is a crop protection and biotechnology firm that manufactures and sells crop protection products and has a rapidly growing business in the development and sale of the products of plant biotechnology. Over the past two decades, AgrEvo has introduced several innovative technologies that have allowed farmers to produce crops in a more sustainable manner. This commitment to develop and marketing environmentally responsible crop protection technologies has formed an important component of the company’s competitive advantage.
Calvinwonders what he is going to recommend to senior management regarding AgrEvo R&D projects. AgrEvo has recognized a need to more thoughtfully manage their portfolio of R&D projects. In particular, the highest net present value is sought from better refunding the R&D projects, which may result in deselecting some of them! As Calvin had explained in his presentation in Frankfurt, different R&D projects require different amounts of departmental resources over time (each department has its own budget, as summarized in exhibit 3). AgrEvo has instituted a strategic project management system that has been correctly determined the necessary resources and net present value for each of the twelve projects of interest (see exhibits 1 and 2).
Calvin is aware of management wish to maximize the portfolio net present value while selecting as many projects as possible. He therefore wonders whether his recommended portfolio will include all the projects. If not, he makes up his mind, he needs to come up with some reasonable suggestion concerning the resource allocation among the various departments in the years 2008, 2009 that will make it possible to increase the number of projects selected. This being a radical and possibly unpopular suggestionhe decides to separate this issue from the rest of the report and deal with it at the very end. Just before landing, he remembers one other issue which needs to be taken care of. Three projects belonged to group ‘A’. If either project from this group is selected, then the entire group needs to be selected!
Calvin wonders what he should recommend to the firm’s senior management. Which projects should be funded, and which should be canceled? Some senior managers have expressed the opinion that R&D is underfunded, and Calvin is wondering if this opinion is correct.
Assignment
- Set up an integer programming model to select the best set of projects. For the Group ‘A’ “all or none” condition use a single constraint. Indicate which projects should be selected, the NPV and the amount of resources used in 2008 and 2009 in each department.
- Is there a good case to be made for additional funding?
- Calvin has just got off the phone with the vice president of operations. “I can’t believe it”, he thought to himself. “They will never let me finish”. Now they want the entire group ‘B’ selected if group ‘A’ is selected. Add this constraint to the first model (use a single constraint to express this condition), and re-run. Note the result.
- Looking at the results obtained from the model that includes the additional condition of part 3, Calvin is quite convinced management needs to see some input regarding the original resource allocation to the different departments. Calvin now is thinking of showing senior management that while keeping the total budget for each year the same, a better budget allocation plan to the years 2008 and 2009 is possible.He wants to make it even more striking by eliminating the contingencies between the different projects (such as the connection between the projects of group ’A’ and the condition stated in part 3). He will show management how, by rearranging the departmental R&D budgets all these conditions could be satisfied, and achieve even better results! Determine the best budget allocations to departments for the years 2008 and 2009 by adding constraints and some new variables to the model (do not include the two contingency constraints you used in part 1 and part 3). How does the projects’ selection plan be affected? What happens to the total net present value? What happens to the budget allocated for the years 2008 and 2009?
Exhibit 1: Projects’ resource requirements ($1000)
Project Identification
DepartmentA1A3A4B2B17B18B19B21D11D12EF
20082662391196151432124150624 Research
2009681322000324507500
200881239551517572310171
Scientific Affairs
20096856500059321100
200814512642163471028151851
Field Development
200960822300064121800
200881561123123173111
Regulatory Affairs
20091548190003246400
Exhibit 2: Project net present value ($ 100,000)
A1A3A4B2B17B18B19B21D11D12EF
25332.35106.13.50.58.49.43.411
Exhibit 3: Department Budget ($1000)
Department20082009
Research600240
Scientific Affairs760250
Field development340250
Regulatory Affairs292220