The board of directors of a small electrical relay manufacturing company are faced with a number of inter-related decision problems.
There is currently a labour dispute and the union has set a strike deadline of 12.00 midnight if their request for a 19% (TEXTVAR1)wage increase is not accepted. There is no doubt that the union will carry out this threat and the resulting strike would cost £32600,(VAR2) and, in addition it is certain that the ultimate agreement would result in a relay cost of £3.73(TEXTVAR3) per unit. If the company give in to their demand, the total cost per relay unit would increase to £4.05(TEXTVAR4) compared to the present cost of £3.5(TEXTVAR5) per unit.
The union problems are complicated by the fact that the Government is seeking tenders for a contract C1 for the supply of 977500(VAR6) relay units and the company would not be eligible to bid for the contract if the employees went on strike. However, even if the union demands were met and the strike averted, the company would still not be assured of getting the contract unless the competitors are underbid.
The possible bids and resulting probabilities of winning the contract are as follows;
Possible bid per unit Probability of winning contract C1
A second government contract C2 is anticipated in the latter part of the year if the company is unsuccessful in obtaining C1. Because of the production limitations, it is not possible for the company to bid for contract C2 if it is awarded contract C1. To be in a position to bid for the contract C2, it is necessary to secure adequate financial backing now, to provide a guarantee that the company could provide certain expensive test equipment if it is awarded the contract.
The larger the investment in test equipment provided, the higher the probability the company will be awarded the contract. The anticipated net profit for this second contract is £311300(VAR11) if the per unit cost is £4.05(Same as TEXTVAR4), and £500,000(VAR13) if the per unit cost is £3.73(same as TEXTVAR3). These figures do not include the large investment in special test equipment which has to be written off over the life of the contract. The possible investment and resulting probabilities of winning the contract are as follows;
Investment in test equipment Probability of winning contract C2
Draw a decision tree for the problem and assuming that a Bayesian decision is made determine;
1. whether or not the company should give in to the union’s demands
2. what bid per unit should be chosen for contract C1, and
3. how much should be invested in test equipment for contract C2
What is the optimal strategy and the expected monetary value of this strategy?
Provide a succinct statement of your primary recommendation and any others you may make as a result of subsequent chance events.
Submit your decision tree and the statement of your recommendations in hard copy to the Client Experience Office by the deadline.