1. SuperPart, an auto part distributor, has a large warehouse in Istanbul region and is deciding on a policy for the use of TL or TLT transportation for inbound shipping. TLT shipping costs $1 per unit. TL shipping costs $800 per truck plus $100 per pickup. Thus, a truck used to pickup from three suppliers costs 800 + 3 x 100 = $1100. A truck can carry up to 2000 units. SuperPart incurs a fixed cost of $100 for each order placed with a supplier. Thus, an order with three distinct suppliers incurs an ordering cost of $300. Each unit costs $50, and SuperPart uses a holding cost of a 20 percent. Assume that product from each supplier has annual demand of 3000 units.
What is the optimal order size and annual cost if LTL shipping used? What is the time between orders?
What is the optimal order size and annual cost per product if TL shipping is used with a separate truck for each supplier? What is the time between orders?
What is the shipping policy you recommend if each product has an annual demand of 3000? What is shipping policy you recommend for products with an annual demand of 1500?
2. A decision maker must decide whether or not automate a given process. Depending on the technological success of the automation project, the result will turn out to be either poor, fair, or excellent. The net payoffs for possible outcomes (expressed in the net present value) are - $90K, $40K, and $300K, respectively. The initially estimated probabilities that each outcome will occur are 0.5, 0.3, and 0.2 respectively. Suppose that it is possible for the decision maker to conduct a technology study at the PW cost of $10K. The study should disclose that the enabling technology is either “shaky”, “promising” or “solid” with the probabilities of 0.41, 0.35, and 0.24 respectively.
Draw the decision tree diagram for this problem.
Show the expected future events (outcomes), along with their respective cash flows and probabilities of occurrence.
Hint: The general approach is to find the action or alternative that will maximize the expected net present value equivalent of future cash flows at each decision point, starting with the furthest decision point(s) and then rolling back until the initial decision point is reached.