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A Decision Making Case Sam is the purchasing manager of Custo Mart, a major retail chain selling customs for different occasions. It is the first
A Decision Making Case Sam is the purchasing manager of Custo Mart, a major retail chain selling customs for different occasions. It is the first week of June and Sam wants to place an order for 200,000 Halloween customs with a supplier in an Asian country who has offered a very good price, $4 million, and a guaranteed quality. The revenue of CustoMart from these Halloween customs is expected to be around $10 million. If CustoMart fails to distribute these customs to its stores in time for the shopping season, the loss is expected to be as high as $5 million Doing business with this Asian supplier for many years, Sam knows there is a 20% chance that the supplier does not deliver the customs to the CustoMart distribution center before the contract deadline, September in which case the order is cancelled. The supplier claims that it has improved its processes and therefore is more reliable now. Sam, however, is not going to change his estimates about the reliability of the supplier unless he can see some solid evidence. Sam has also started talking with a local (reliable) supplier to provide the customs if the Asian supplier fails to deliver on time. If the local supplier is asked to deliver the price for the expedited delivery of these customs will be $6 million. In addition, the local supplier asks for $1 million to keep a portion of its capacity reserved for this purpose. Signing a contract with this local supplier means this 15 million should be paid even if the supplier is not asked to provide the customs. Draw a decision tree to answer these questions: What is the expected profit for the best set of decisions? Should CustoMart sign a contingency contract with the local supplier! What is the risk profile? What is the expected value of perfect information (EVPI)
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