Low Demand Medium High Medium-Scale Large-Scale Expansion Profits Expansion Profits Annual Annual Profit Profit ($1000s) ($1000s) P(x) P(x) 50 20% 0 20% 150 50% 100 50% 200 30% 300 30% Expected Profit ($1000s) Risk Analysis for Medium-Scale Expansion Annual Profit (x) Probability P(x) (x - µ)2 (x - µ)2 * P(x) Demand $1000s (x - µ) Low 50 20% Medium 150 50% High 200 30% σ2 = σ= Risk Analysis for Large-Scale Expansion Annual Profit (x) Probability P(x) (x - µ)2 (x - µ)2 * P(x) Demand $1000s (x - µ) Low 0 20% Medium 100 50% High 300 30% σ2 = σ= Week 3 Individual Assignment Assignment Title: Expansion Strategy and Establishing a Re-order Point Assignment Points: 50 Purpose of Assignment: This assignment has two cases. The first case is on expansion strategy. Managers constantly have to make decisions under uncertainty. This assignment gives students an opportunity to use the mean and standard deviation of probability distributions to make a decision on expansion strategy. The second case is on determining at which point a manager should re-order a printer so that he or she doesn’t run out-of-stock. The second case uses normal distribution. The first case demonstrates application of statistics in finance and the second case demonstrates application of statistics in operations management. Assignment text: (25 points) Case 1 – Decision-Making Under Uncertainty – Expansion Strategy The Bell Computer Company is considering a plant expansion that will enable the company to begin production of a new computer product. You have obtained your MBA from the University of Phoenix and as a vice-president you must determine whether to make the expansion a medium- or large- scale project. The demand for the new product involves an uncertainty, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for the demands are 0.20, 0.50, and 0.30, respectively. The firm’s planners developed profit forecasts for the medium- and large- scale expansion projects as given on the Excel file spreadsheet named Case 1. 1. Compute the expected value for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of maximizing the expected profit? 2. Compute the variation for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of minimizing the risk or uncertainty? (25 points) Case 2 – Establishing a Reorder Point In this case, Kyle Bits and Bytes, a retailer of computing products sells a variety of computerrelated products. One of Kyle’s most popular products is an HP laser printer. The average weekly demand is 200. Lead time (Lead time is defined as the amount of time between when the order is placed and when it is delivered.) for a new order from the manufacturer to arrive is 1 week. If the demand for printers were constant, the retailer would reorder when there were exactly 200 printers in inventory. However, Kyle learned in his Operations Management class that the demand is a random variable. An analysis of previous weeks reveals that the weekly demand standard deviation is 30. Kyle knows that if a customer wants to buy an HP laser printer but he has none available, he will lose that sale plus possibly additional sales. He wants the probability of running short (stock-out) in any week to be no more than 6%. What should be the reorder point set at? In other words, how many HP laser printers should he have in stock when he reorders from the manufacturer? Page 1 of 1
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