Mick Karra is the manager of MCZ Drilling Products, which produces a variety of specialty valves for oil field equipment. Recent activity in the oil fields has caused demand to increase drastically, and a decision has been made to open a new manufacturing facility. Three locations are being considered, and the size of the facility would not be the same in each location. Thus, overtime might be necessary at times. The following table gives the total monthly cost (in $1,000s) for each possible location under each demand possibility. The possibilities for the demand levels have been determined to be 20% for low demand, 30% for medium demand, and 50% for high demand.
Ardmore, Ok (demand is low) 85 (demand is medium) 110 demand is high (150)
Sweetwater, TX (demand is low) 90 (demand is medium) 100 demand is high (120)
Lake Charles, LA (demand is low) 110 (demand is medium) 120 demand is high (130)
a) Which location would be selected based on the optimistic criterion?
b) Which location would be selected based on the pessimistic criterion?
c) Which location would be selected based on the maximum criterion?
d) Which location should be selected to minimize the expected cost of operation?
e) How much is a perfect forecast of the demand worth?
f) Which location would minimize the expected opportunity loss?
g) What is the expected value of perfect information in this situation?