Quantitative Management Practice - Sharp Outfits - Assignment Example

QUANTITATIVE MANAGEMENT PRACTICE NAME: UNIT CODE: LECTURER: DATE OF SUBMISSION: Table of Contents Table of Contents ii Introduction 1 Question a 2 Question B 3 Probability Tree 3 Sensitivity Analysis 4 Question C 5 Conclusion 6 Reference: 8 Introduction The Sharp Outfits deals with the international manufacturer and makes the orders on behave of the customers. The international businesses are exposed to various risks which include strikes, lateness, political instability, exchange rate volatility and international relationship of between the countries. Therefore, Sharp Outfits requires in-depth analysis on the above factors to reduce exposure of the company to foreign risks. The probability tree plays a major role in optimisation of strategies to ensure that the company reduces costs and risk. The report provides a recommendation on whether the company should make the order for the customer over UPS or wait until the threat is over. The decisions have different costs involved. When the UPS strikes the company incurs delay and shipping cost of $60,000 and if the Sharp Outfits imports via UPS and they do not strike the company incurs the cost of $4,000 and the postponement will increase the cost of $10,000 from the normal cost of $4,000. Therefore, the total postponement will incur a total cost of $14,000. The best decision for the company cannot be decided theoretical and thus requires mathematical analysis to decided optimal shipping cost and expected value of information (Peterson, 2010). The expected value of information depends on the prior distribution used to represent current information. The preciseness of the information determines the outcome of risk-analysis of the shipping cost. The expected value of information entails the test for bias in estimating the value, role of surprise and procedures to regulate underestimation, overconfidence and potential surprises (Cavana, Delahaye & Sekaran, 2001).The analysis below provides a recommendation of the best strategy to minimise shipping cost and maximise the profits for the imports. Question a The value of P for expected total cost for choosing postponement of shipping compared to ordering now via UPS; The company requires t establishment of the probability that ensures Sharp Outfits minimises the expected total cost by ordering now instead of postponement of the shipping of the customer’s orders. The following probability tree elaborates how the company will make order despite the strike and achieve minimum shipping cost that would have been incurred if it was postponed;; The probability tree above shows the decision based on two decisions either ship or postpone. The postponement is used as the benchmark for determining the optimum cost that the company should consider before making the decision to ship now. The company should make customers’ order now if the probability (P) is less than 0.1786. When the probability is more than the stated, the postponement will prove to be cheap since the amount is constant ($14,000) while shipping now fluctuates depending on whether the strike occurs or not. Question B Given Sharp Outfits can purchase information at $1,000 regarding the occurrence of UPS strike. The information predicts the probability of a strike is 0.75 and no strike probability is 0.85. The company assumes that P=0.15 Therefore, the company wishes to determine the strategy that minimise its expected total cost. The decision establishes the circumstances the Sharp Outfits would prefer not ship customer orders and take the chance despite the threat of the strike. The analysis should perform sensitivity analysis to compare maximum loss expected if the company postpones the shipping with the maximum cost incurred if the company decides to ship despite the UPS strike. The probability tree below provides the in-depth analysis of the strategy; Probability Tree The Sharp Outfits should purchase the information regarding the probability of UPS strike to minimise the expected total cost. The probability tree above shows that if the company predict strike without information, it should postpone the shipping since it incurs additional $2400 if the order and strike occurs. Also, the company should go ahead and order via UPS if they purchase information and it predicts the occurrence of the strike since it will incur $1000 more it chooses to postpone the order. The best decision provides expected monetary value (EMV) of -$8,540. Sensitivity Analysis The sensitivity analysis determines the extent to which different independent variables affects the dependent variable considering certain assumptions i.e. the change of dependent variables follows a predetermined pattern (Winston & Albright, 2015). The analysis is used in prediction of the likelihood of occurrence if the decision outcome differs from the predictions. The graphs above shows that expected value of information reduces with the increase probability (p). Therefore, Sharps Outfit can opt not to purchase the information if they predict that the strike will occur. Question C Calculation and interpretation of EVPI when P=0.15; The expected value of the perfect information shows the sacrifice an individual is willing to pay to get access to perfect information (Anderson et al., 2015). The probability of 0.15 determines the expected cost of uncertainty that the information will be complete. The assessment below determines the expected value of the perfect information that Sharp Outfits to determine whether to purchase the information or not. The allocation of cost to perfectness of the information is not possible, but it can be estimated as shown in the probability tree below; The company requires to purchase the information not exceed the lower of the two calculated EVPI i.e. $6,900 [(-5,500) - (-12,400)] or $8,400 (-4000+12400). Therefore, it is visible for the company to purchase information on the likelihood of occurrence of UPS strike with price not higher than $6,900. Conclusion In a conclusion, we can note and recommend that the Sharp Outfits should; Scenario A: The Company should not postpone customers’ order now if the probability (P) is less than 0.1786 since the cost is low, but becomes expensive with a higher probability than the one stated. Scenario B: The sensitivity analysis provides that expected value of perfect information decreases with increase in the likelihood of occurrence of a strike, but increases the expected monetary value of the shipping cost. Scenario C: The Sharp Outfits should purchase the information at a price not more than $6,900 to minimise cost. The valuation of the exact cost of perfect information is not possible, but the stated value is a close estimated that the company can use to optimise the benefit of information. Reference: Anderson, D.R., Sweeney, D.J., Williams, T.A., Camm, J.D. and Cochran, J.J., 2015. An introduction to management science: quantitative approaches to decision making. Cengage learning. Peterson, M. (2010). An Introduction to Decision Theory (Cambridge Introductions to Philosophy). Cambridge: Cambridge University Press. Winston, W.L. and Albright, S.C., 2015. Practical management science. Nelson Education. Winston, W.L. and Goldberg, J.B., 2004. Operations research: applications and algorithms (Vol. 3). Boston: Duxbury press. Cavana, R.Y., Delahaye, B.L. and Sekaran, U., 2001. Applied business research: Qualitative and quantitative methods. John Wiley & Sons Australia. Read More