IES 303

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IES 303
Supplement A Decision making Week 3 Nov 24,
2005

• Objective
• Amazon.com Case discussion competitive
  advantage
• - Understand practical techniques in making
  operational decisions

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Case Discussion Amazon.com

• Discussion Question 1 (pg 79)
• The onset of exponential growth in the
  development of information technologies has
  encouraged the birth of many dot-com companies.
  The Internet has enabled these companies to reach
  customers in very effective ways. Consider
  Amazon.com, whose web site enjoys millions of
  hits each day and put customers in touch with
  more that 18 million services and products. What
  are Amazon.coms competitive priorities and what
  should its operations strategy focus on?
• In addition to Amazon.com, suggest one other
  dot-com company or website and discuss about its
  competitive priorities.

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Break-Even Analysis

• Break-even point
• The volume at which total revenue total cost
• Break-even analysis can be used to compare
  processes by finding the volume at which two
  different processes has equal total costs
• Variable costs Total cost varies directly with
  volume of output
• Fixed costs Total cost remains constant
  regardless of changes in levels of output

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Ex 1 Break-even analysisBreak even volume

• The owner of a small manufacturing business has
  patented a new device for washing dishes and
  cleaning dirty kitchen sinks. Before trying to
  commercialize the device and add it to her
  existing product line, she wants reasonable
  assurance of success. Variable costs are
  estimated at 7 per unit produced and sold.
  Fixed costs are about 56,000 per year.
• If the unit selling price is set at 25, how many
  units must be produced and sold to break even?
• Forecasted sales for the first year are 10,000
  units if the price is reduced to 15. With this
  pricing strategy, what would be the profit in the
  first year?

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Ex 2 Break-even analysis Process
selection(Midterm exam 04)

• The bakery owner is now deciding on replacing the
  current oven. There are 2 oven systems from 2
  companies in consideration. The first company
  proposes Oven A in which can bake two 8-inch
  pies simultaneously. In other words, there are 2
  pies can be processed in a baking batch. On the
  other hand, Oven B can bake four 8-inch pies
  simultaneously. The details of relevant costs and
  oven capacities are as follows

Determine the break-even point for the two oven
alternatives. Which oven should the owner select
and why?
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Ex 3 Break-even analysisMultiple process
selection

• Nano Tech is ready to begin production of its
  exciting new technology. The company is
  evaluating three methods of productions
• A a small production facility with older
  equipment
• B a larger production facility that is more
  automated, and
• C subcontracting to an electronics manufacturer
  in Singapore

Determine for what level of demand each
production process should be chosen.
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Group Discussion Real life example of
break-even analysis

• Suggest the scenario
• What information do you need to perform this
  analysis correctly?
• How can you obtain those information

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Decision Theory

• General approach to decision making when the
  outcomes associated with alternatives are often
  in doubt by following these processes
• List the feasible alternatives
• List the events (chance events or state of
  nature)
• Calculate the payoff for each alternative in each
  event
• Estimate the likelihood or probability of each
  events, using past data, executive opinion, or
  forecasting method
• Selective a decision rule to evaluate the
  alternatives

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Decisions Under Certainty
If future demand will be low Choose the small
facility.
Example A.5
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Decision Under Risk

• Lists of events with estimated probability
• Use expected value decision rule

Example A.7
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Decision Trees

• A schematic model of alternatives available to
  the decision maker, along with their possible
  consequences
• Used in product planning, process analysis,
  process capacity, and location
• Square nodes decision points
• Circle nodes state of nature (event)
• Branch events

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Decision Trees
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Example Southern Textile Companyadapted from
Russell Taylor III (2003)See detail in
additional handout
2,000,000
0.60
Market growth
2
0.40
No market growth
225,000
Market growth
3,000,000
Expand (-800,000)
Expand (-800,000)
0.80
6
700,000
0.20
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1
No market growth
Market growth (3 years, 0 payoff)
Sell land
Purchase Land (-200,000)
0.60
2,300,000
Market growth
3
0.40
Warehouse (-600,000)
0.30
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1,000,000
0.70
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No market growth (3 years, 0 payoff)
No market growth
Sell land
210,000
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Next week

• Read Case Jose's Authentic Mexican Restaurant
  pg166
• And prepare to discuss the posted questions
• Read chapter 4-5