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OM5 C5 IM
11.* In Problem 10, assume the cost factors given have not changed. A marketing
representative of NEW-SPEC, a firm that specializes in providing manual
inspection processes for other firms, approached Paris Manufacturing and offered
to inspect parts for $19 each with no fixed cost. They assured Paris Manufacturing
the accuracy and quality of their manual inspections would equal the automated
inspection system. Demand for the upcoming year is forecast to be 8,000 units.
Should the manufacturer accept the offer?
If NEW-SPEC, a third party firm, does the inspections the total cost is
Since D = 8,000 is less than 8,75000, the manufacturer should accept the offer
The Excel template Break-Even may be used to solve this problem:
12.* Edwards Machine Tools needs to purchase a new machine. The basic model is
slower but costs less, while the advanced model is faster but costs more.
Profitability will depend on future demand. The following table presents an
estimate of profits over the next three years.
Demand Volume
Decision Low Medium High
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OM5 C5 IM
Given the uncertainty associated with the demand volume, and no other
This is a difficult decision because of the uncertainty in the volume. The wrong
decision can lead to significant lost profit opportunity. For example, if the basic
model is chosen and demand turns out to be high, only $150,000 will be realized
as opposed to $220,000 with an advanced model. With absolutely no other
This question ties into formal decision analysis and the instructor might want to
cover decision analysis if students have not studied this topic in other courses (see
13.* Suppose that in Problem 12, a forecasting study determines that he probabilities
of demand volume are Low = 0.4, Medium = 0.1, and High = 0.5. Using the
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OM5 C5 IM
techniques in Supplementary Chapter SC E, determine the expected value
decision. How appropriate is it to use this criterion?
The expected value can be computed using the Excel template Decision Analysis.
We see that the expected profit for the advanced machine is $137,000 while it is
14. For the information provided in Problem 13, compute the expected value of
perfect information (EVPI) as discussed in Supplementary Chapter SC E. Clearly
explain how to interpret EVPI for Edwards Machine Tools.
With perfect information, we would make the following decisions:
If the future event (demand volume) will be low, then choose the basic model; if
0.4(80,000) + 0.1(110,000) + 0.5(220,000) = $153,000
Thus, with perfect information, we improve the expected profit by $153,000 -
15.* A company is considering three vendors for purchasing a CRM system, Delphi
Inc., CRM International, and Murray Analytics. The costs of the system are
expected to depend on the length of time required to implement the system, which
depends on such factors as the amount of customization required, integration with
legacy systems, resistance to change, and so on. Each vendor has different
expertise in handling these things, which affect the cost. The costs (in millions of
$) are shown below for short, medium, and long implementation durations.
Conduct a decision analysis using the techniques in Supplementary Chapter SC E
to evaluate the choice of a vendor. Clearly explain your recommendation.
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OM5 C5 IM
The Excel template Decision Analysis may be used to evaluate this decision. As
Case Teaching Notes: Bracket International – The RFID Decision
Overview
The case introduces the student to RFID criteria and decisions as a CEO, Mr. Jack
Bracket, considers replacing the bar coding system used in three factories with a
RFID system. Some of RFID’s costs and benefits can be used to compute a payback.
Both qualitative and economic criteria are cited in the case. Less obvious case issues
include changing the workflow patterns of an already very good workforce, fast
follower or first adopter strategies for a small firm, and short- and long-term
strategies and practices for technology adoption.
The case confronts the student with “strategic versus economic” tradeoffs and
decisions.
Case Questions and Brief Answers
1. How does RFID compare to bar-coding?
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OM5 C5 IM
By searching the Internet and library, summarize the advantages and
Advantages of RFID
No line of sight required to read
Less theft and miss-placed inventory
Less accounting audits required and savings
Disadvantages of RFID
High costs of readers, tags, systems
Not so good for liquids and metals
Damage/interference from static electricity, water, heat, etc.
Unproven technology w/o a critical mass of users
How does RFID compare to bar-coding?
RFID faster and can speed up entire supply chain
Ability to update RFID information in tags and readers
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OM5 C5 IM
2. What is the economic payback in years for this possible RFID adoption?
(Hint: There are two benefits that can be quantified - labor savings due to faster
scan times and miss-read savings. Annual benefits divided by economic benefits
equals’ payback.)
Students will calculate economic paybacks from 1 to 4 years depending on their
assumptions (some of which are wrong, not needed, or beyond the case facts). If
Bracket International - The RFID Decision - Numerical Solution OM5 Example Payback Computations
No. Scan Seconds/Yr 23,010,000 [(10 sec/item)(260)(8850)]
Total Labor $ Saved Due to Scan Time Reduction = $175,771 (3.2*$55,000)
You do not have enough case information to do a
RFID Investment Costs NPV cash flow analysis over years 0 to n so a
Simple Payback (years) 3.22 (annual cost savings/benefits)
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Caution: The case provides data for a one-time payback calculation and does not
3. What are the risks of adopting a new technology too early? Too late?
You can define first adopter and fast follower and write two headings on the
board. The two key questions are: What to adopt? When to adopt? Obviously, a
first adopter benefits from an early marketplace lead, reduced costs due to beta
4. What do you recommend Mr. Bracket do in the short- and long-term?
Explain your reasoning.
Short-term Recommendations/Actions
Do not adopt RFID now (firm is too small, too big a risk, etc.)
Begin RFID awareness training program with employees
Long-term Recommendations/Actions
Watch RFID technology and supply chain players and kept track of what
competitors are doing
Teaching Plan
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OM5 C5 IM
You can begin class by asking your students if they have seen bar-coding in action,
and of course they will say yes. Ask them to describe the situation (retail, education,
warehouses, trucking, etc.) and point out possible advantages and disadvantages of
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