Avalanche Corporation - Strategic Recommendation

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Avalanche Corporation
Decision Analysis and Strategic Recommendation

Table of Contents
Table of Contents1
Overview2
Question 1: Production Strategy2
Question 2: Sensitivity Analysis3
Question 3: Influence of Outside Vendor5
Question 4: Alternative Risk Profiles6
Question 5: Are Fantastic Forecasters Worth It?7
Conclusions7
Appendix8
Figure A: Precision Tree (Question 1)8
Figure B: Cost Calculation Table9
Figure C: Profit Calculation Table9
Figure D: Tornado Graph10
Figure E: Tornado Graph Data11
Figure F: Spider Graph12
Figure G: Decision Tree (No Outsourcing Available)13
Figure H: Sensitivity of Decision Tree (with Data)14
Figure I: Strategy Region (with Data)15
Figure J: Decision Tree (Outsource Cost = $77)16
Figure K: Risk Profiles17
Figure L: Summary of Statistics18
Figure M: Cumulative Risk Profiles19
Figure N: Baye's Rule Calculations20
Figure O: Decision Tree (Financial Forecasters)21
Figure P: Strategy Region High Demand22
Figure Q: Strategy Region Low Demand23
Figure R: Strategy Region Outsource Cost24
Figure S: Strategy Region Clearance Price25
Figure T: Strategy Region Probability of High Demand26

Overview
There are a number of inherent risks associated with any potential decision that Avalanche Corporation has to make regarding the production of the Avalanche Racer. The most inherent of all of the risks is the cost resulting from the decision between production values, since Avalanche will need to make a decision on how many to produce before they actually know how many that they are going to need. Next, Avalanche is unsure about how well the Racer will do when put on the market. This risk will be taken with a concern for two entirely external factors of uncertainty: whether or not Jones is correct about the forecast for the amount of snow  that is going to fall over the course of the season and the amount of units that potential buyers are going to want to purchase. Next, there is the risk associated with the decision of whether or not to hire Fantastic Forecasters--at some point, the cost of hiring the Forecasters will be higher than the value of their information, depending on actual demand. Finally, there is also an uncertainty in whether Avalanche is going to need to rely on Snowcap, Inc., an outside vendor, which will only be necessary if Avalanche anticipates a demand lower than the actual demand. Despite the inherent risks, there is potential for substantial award resulting from the production decision.  Finding a balance between overproducing and under-producing has the potential to pull away from the trend Avalanche has to overproduce as much as they have in the past, which could lead to improved profits. Question 1: Production Strategy

Assuming Avalanche Corporation does not hire the Fantastic Forecasters, they still need to find the most efficient manufacturing process. This can be done by simply creating a decision tree and calculating the estimated monetary value for each decision [Figure A]. First the costs for the batch and the line flow respectively are calculated by adding the fixed cost plus the product of the number of units and the variable cost [Figure B]. This is done for each option for the amount of units produced. Once the cost is calculated, the profit needs to be accounted for [Figure C]. The cost is calculated for each amount produced. The amount of units produced is multiplied by the sale price and then added to the difference of the demand and units produced multiplied by the difference of sales price and outsource cost. The profit if evaluated for both the bath and line flows and for the three options of production amount and then with high and low demand. With all this information put into a decision tree with appropriate probabilities for demand, the decision outcome is to choose the batch flow. The amount of units that should be produced is 15,000. The payoff if the demand...
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