Question 1

Moon Micro is a small manufacturer of servers that currently builds its entire product in Santa Clara, California. As the market for servers has grown dramatically, the Santa Clara plant has reached capacity of 10,000 servers per year. Moon is considering two options to increase its capacity. The first option is to add 10,000 units of capacity to the Santa Clara plant at an annualized fixed cost of $10 million plus $500 labor per server. The second option is to have Molectron, an independent assembler, manufacture servers for Moon at a cost of $2,000 for each server (excluding raw materials cost). Raw materials cost $8,000 per server, and Moon sells each server for $15,000.

Moon must make this decision for a two-year time horizon. During each year, demand for Moon servers has an 80 percent chance of increasing 50 percent from the year before and a 20 percent chance of remaining the same as the year before. Molectron's prices may change as well. They are fixed for the first year, but have a 50 percent chance of increasing 20 percent in the second year and a 50 percent chance of remaining where they are.

Use a decision tree to determine whether Moon should add capacity to its Santa Clara plant or if it should outsource to Molectron. What are some other factors that we have not discussed that would affect this decision?

Question 2

Unipart, a manufacturer of auto parts, is considering two Business to Business (B2B) marketplaces to purchase its Maintenance, Repair, and Operating Supplies (MRO) supplies. Both marketplaces offer a full line of supplies at very similar prices for products and shipping. Both provide similar service levels and lead times.

However, their fee structures are quite different. The first marketplace, Parts4u.com, sells all of its products with a 5 percent commission tacked on top of the price of the product (not including shipping). MRO.com's pricing is based on a subscription fee of $10 million that must be paid up front for a two-year period and a commission of 1 percent on each transaction's product price.

Unipart spends about $150 million on MRO supplies each year, although this varies with their utilization. Next year will likely be a strong year, in which high utilization will keep MRO spending at $150 million. However, there is a 25 percent chance that spending will drop by 10 percent. The second year, there is a 50 percent chance that the spending level will stay where it was in the first year and a 50 percent chance that it will drop by another 10 percent. Unipart uses a discount rate of 20 percent. Assume all costs are incurred at the beginning of each year (so Year 1 costs are incurred now and Year 2 costs are incurred in a year).

From which B2B marketplace should Unipart buy its parts?