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Strategic Supply Chain Management, LSM 428 Homework 3 1. ABC company has to decide whether to build a new plant. ABC is contemplating whether to build the plant at a full scale or first build a pilot plant and based on the performance of the pilot plant, then build the full-scale plant. An estimated cost to build the full-scale plant is $200,000. If the new plant works, ABC could realize a profit of $500,000. If it fails due to a downturn of economy, ABC could realize a profit of only $60,000. You as a consultant estimates 60 percent chance the new plant would fail. The other option is to build a pilot plant first and based on its success, then build a larger plant. The pilot plant would cost $30,000 to build. There is 30% chance the plant will not work. If pilot plant works, there is a 20 percent that the larger plant, if it is built, will not work. If the pilot plant does not work, there is a still 25 percent chance that the larger plant, if built, will work. You, as a consultant, know how to make a decision tree. Analyze this problem by making a decision tree diagram and decide for ABC what decisions ABC should make. Write all payoffs and expected values. Write your decision clearly or a sequence of decisions in your words. (40) 2. You are a logistics manager for Alphasmart, a smartphone manufacturer. You are trying to select a single supplier for the raw materials for your product. Two companies can provide the necessary materials - Hunts and Madis. Hunts has sufficient capacity to meet your demand and charges $3.00 per unit. Madis is a small supplier with a limited capacity, can supply up to 60,000 units per year, and charges $2.50 per unit of the raw material . If you do not get raw material from your supplier, you buy from the spot market at $5 per unit, Alphasmart sold 40,000 smartphones last year and estimates demand for smartphones to go up by 30% with a probability of 60 percent and to remain the same as last year with a probability of 40% for the first year and the second year as well. Alphasmart uses a discount 1 rate of 8 percent. Assume all costs are incurred at the end of the year and only one supplier needs to be selected Which supplier will you select based on the present value of your annual cost? (60) Note: you need to discount the first year as well the secondycat payoffs Strategic Supply Chain Management, LSM 428 Homework 3 1. ABC company has to decide whether to build a new plant. ABC is contemplating whether to build the plant at a full scale or first build a pilot plant and based on the performance of the pilot plant, then build the full-scale plant. An estimated cost to build the full-scale plant is $200,000. If the new plant works, ABC could realize a profit of $500,000. If it fails due to a downturn of economy, ABC could realize a profit of only $60,000. You as a consultant estimates 60 percent chance the new plant would fail. The other option is to build a pilot plant first and based on its success, then build a larger plant. The pilot plant would cost $30,000 to build. There is 30% chance the plant will not work. If pilot plant works, there is a 20 percent that the larger plant, if it is built, will not work. If the pilot plant does not work, there is a still 25 percent chance that the larger plant, if built, will work. You, as a consultant, know how to make a decision tree. Analyze this problem by making a decision tree diagram and decide for ABC what decisions ABC should make. Write all payoffs and expected values. Write your decision clearly or a sequence of decisions in your words. (40) 2. You are a logistics manager for Alphasmart, a smartphone manufacturer. You are trying to select a single supplier for the raw materials for your product. Two companies can provide the necessary materials - Hunts and Madis. Hunts has sufficient capacity to meet your demand and charges $3.00 per unit. Madis is a small supplier with a limited capacity, can supply up to 60,000 units per year, and charges $2.50 per unit of the raw material . If you do not get raw material from your supplier, you buy from the spot market at $5 per unit, Alphasmart sold 40,000 smartphones last year and estimates demand for smartphones to go up by 30% with a probability of 60 percent and to remain the same as last year with a probability of 40% for the first year and the second year as well. Alphasmart uses a discount 1 rate of 8 percent. Assume all costs are incurred at the end of the year and only one supplier needs to be selected Which supplier will you select based on the present value of your annual cost? (60) Note: you need to discount the first year as well the secondycat payoffs