EMBA 8150 Assignment 1

Answer Q1 as a team. Q2 is individual. For Q1, it is sufficient for one person from each team to upload the answer. For Q2, each of you should upload your own to D2L’s dropbox.

1. Complete the decision tree for the decision analysis problem discussed in class (condo construction). Solve the tree and answer the following:

a. Is it worth hiring the consultant? What is the value this adds over not hiring?

b. Interpret the probability P(S1/F) = 0.122 on this tree. What is that number telling us in the context of this problem?

c. Interpret the probability P(S2/U) = 0.47 on this tree. What is that number telling us in the context of this problem?

d. Interpret the EV of 528.9. It occurs in two places on the tree. How does the interpretation change at each location?

2. Cognitive Biases Exercise

Name one cognitive bias. Write one paragraph (150 words is enough, more if you find it necessary) discussing it with an example, and how you might go about overcoming that bias.

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The following case is no longer a requirement for this assignment. However, I leave it here for anyone that wishes to think about it. It shows the kind of issues that a business faces.

3. Mini Case: The Shiny Furniture Company

Sally Wood, one of the partners of the Shiny Furniture Company, has called you in to help analyze a situation and make recommendations. She and her partner, Carl Cushion, started the company a few years ago, and it quickly started to grow and make a profit. They bought a large warehouse, and Carl went around the world, mainly China, looking for good deals on furniture that they could buy and then sell it locally in Atlanta. He relied on his intuition to buy the items he thought would be in demand. As they grew, they added several employees, and lately they noticed their profits have dwindled.

Sally tells you that right now the problem is how much furniture they should stock up on for the next quarter beginning in three months – the decision has to be made soon, since it takes about three months for the shipment to reach their warehouse. They can buy from manufacturers a “bundle” of 500 pieces of furniture (that includes a mix of different items determined by the supplier) or 1000 pieces at a discount, or they can order specific pieces to create their own mix (minimum 500 pieces overall), but that would cost more and cut down on the margin. They are not sure what exactly they have in inventory currently, since they grew quite fast and do not have an inventory management system in place. There is a possibility that they might accidentally purchase too many of items they already have in stock. She believes that the market can fluctuate based on the economy as well as people’s tastes in furniture. If the next quarter turns out as expected, they can hope to sell about 800 pieces. If the demand is good, they could sell up to 1200 pieces of furniture, and if the demand falls, they might only sell about 400. The probabilities of the low, medium and high demand levels are estimated by her to be 0.30, 0.50, and 0.20, respectively. The profit contributions (in thousands of dollars) of each scenario are shown in the table below:

	Low Demand	Medium Demand	High Demand
Buy 500 Bundle	200	300	300
Buy 1000 Bundle	-400	400	1400
Custom order 500	100	250	250
Custom order 800	-500	200	1000

With some more talking with various people, you discover that Carl wants to expand the business more, selling more items and exploring selling online, while Sally wants to focus on a smaller set of items and do well in that. The lower profits are creating tension, and Carl routinely berates his employees for anything he sees as a small mistake on their part. They are getting some customer complaints too, about not having items in stock that they had ordered and were told were available.

a) Briefly identify the key problems that this company has, and what your approach/recommendations will be to Sally.

b) Compute the expected values for the alternatives in the table, and interpret.