A Company Must Decide Whether or Not to Change Its

question 48

Essay

A company must decide whether or not to change its packaging to a more environmentally safe material. The impact of the decision on profits depends on which of the following three possible scenarios develops in the future.
Scenario 1:
The media do not focus heavily on concerns about packaging, and no new laws requiring changes in packaging are passed. Under this scenario, the company will make $35 million if they change their packaging now, but will make $75 million if they do not change their packaging now.
Scenario 2:
The media focus heavily on concerns about packaging, and no new laws requiring changes in packaging are passed. Under this scenario, the company will make $50 million if they change their packaging now, but will make $55 million if they do not change their packaging now.
Scenario 3:
The media focus heavily on concerns about packaging, and new laws requiring changes in packaging are passed. Under this scenario, the company will make $60 million if they change their packaging now, but will make only $15 million if they do not change their packaging now.
The prior probabilities of the three scenarios are 0.3, 0.5 and 0.2, respectively.
a. Develop a payoff table for this decision situation.
b. What decision will be made to maximise expected payoff?
c. What is the most the company should be willing to pay for a research study designed to reduce its uncertainty about media and legal developments concerning packaging?
d. Set up the opportunity loss table.
e. Which decision has the minimum expected opportunity loss?

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Definitions:

Fill Rate

A performance metric that measures the percentage of customer demand that is met without backorders or stockouts.

Replenishment Cycle

The process or time it takes to replenish inventory in a supply chain, from ordering to receiving goods.

Expected Shortage

The anticipated deficiency in quantity or supply of a product or resource relative to the expected demand for that product or resource.

Safety Inventory

Additional stock kept to mitigate the risk of stockouts and production halts due to fluctuations in demand and supply chain disruptions.