Business Analytics

Russo Manufacturing Report

Name

Institution

Executive summary

The make or buy decision in manufacturing is usually essential to aid the growth and maximum profits of a company. Russo is meant to decide whether to manufacture a component part or purchase the component part from a supplier. This particular decision is fully dependent upon the demand for the products in the market. Such outsourcing decisions compares the costs to the benefits associated with producing a necessary product internally to the costs. Research is also dependent on the demand. When demand is low research becomes unfavorable and when demand is high it becomes favorable. Due to this I have observed various approaches to arrive at a more profitable decision that will optimize the various advantages and still maintain a risk averse status for the business. The final decision was for Russo to conduct the research though it comes with an extra cost and adapt a minimax regret approach to reduce the possibility of risk of loss. Russo will also need to purchase in order to reduce the costs incurred in manufacturing.

Introduction

Russo is a manufacturing company with a plant in Milan. Due to the ambiguity of the demand in the market, the company has to make a decision on whether to buy or make the component part from its plant in Milan. The profits are fully dependent on the demand for the product, hence, a loss will be incurred if the manufacturing is done under low demand but relative profits if a purchase decision is made under low demand. The decision to purchase for both medium and high demand scenarios results to higher profits as compared to the decision to manufacture.

Russo Manufacturing Report

The payoff table of Russo Manufacturing;

Decision Criteria for Russo Management

Optimistic Approach

Russo manufacturing has various options on whether to manufacture the parts or purchase. To be able to make the right decision Russo can use the optimistic approach, also known as the maximax approach. This approach involves choosing the option with the maximum possible payoff or the minimum possible cost .From the payoff table, for Russo to optimize their profits they will need to compare the maximum possible outcome for each of the two options. In this case, manufacturing under high demand will result to a profit of 894777 Euros while purchasing results to a profit of 97547 Euros. During medium demand manufacturing will result to a profit of 50633 Euros and 54052 for purchase in the best case scenario. Low demand will result to a loss of 10780 euros if Russo was to manufacture and a profit of 12.05 if they were to purchase. According to the optimistic approach, Russo manufacturing should consider the best possible outcome being to purchase the parts under high demand which will result to a profit of 97547Euros

Conservative Approach

The optimistic approach may involve a lot of risk and for this reason, Russo manufacturing can opt to use the conservative approach. This approach to decision making is also referred as the maximini approach. It involves choosing the option that has the largest payoff or lowest cost among the lowest set of possibilities. From the Russo manufacturing payoff table, the option that will maximize the minimum pay-off achievable is getting to purchase the parts which will result to a profit of 12,050 Euros. This approach ensures an organization plans for the worst possible outcome.

Minimax Regret Approach

The minimax regret approach minimizes the maximum regret. It is useful in a risk-neutral decision making. Essentially, this is a technique is adapted by individuals or companies who do not wish to make wrong decision. This is arrived at by subtracting the highest demand from the lowest, leading to the maximum regret under each demand, from the below table the least maximum regret is the medium supply by 3.418. Russo manufacturing will employ the minimax regret criterion in order to minimize the maximum regret. Therefore, they will need to manufacture under medium demand which will generate a profit of 50633 Euros.

Probabilities if the Market Research is conducted

Conducting a market research will result to a cost of 14,243.71 Euro. The research is capable of indicating whether the market condition is favorable or unfavorable. The research is also fairly reliable and is more likely to obtain favorable result if the demand for the finished product is truly high, this means if the research is to be conducted during high demand possibilities there will be favorable results that will restore the Russo manufacturing confidence and further increase their profits. On the other hand, the report will generate less favorable result if the demand for the finished products is low, meaning despite Russ manufacturing having to incur a cost of 14,243.71 Euros in research, this won’t be beneficial and as a result the loss will increase to 25,023.71 Euros. Research conducted during medium demand will also generate favorable results but not greater like the one conducted during high demand.

Market research will also help in the testing of the products in one or two markets on a small scale. This will intern help Russo in finding out the consumer response to the product and develop a better decision in regards to the choice of whether to manufacture of to purchase in the long run. It reveals the specific problems of the customers regarding new products. Thus, helps in controlling the risk involved in producing more or less products.

Russo Manufacturing Decision Tree

H: High; M: Medium; L: Low

SD: Strong Demand

RUSSO

Favourable

WD: Weak Demand

No Research

Research

(vii) (viii)

Weak Demand

Strong demand

Non Favourable

WD

SD

M

L

M

L

H

H

WD

SD

H

L

L

H

L

H

H

L

M

M

M

M

Market Research

Market Research is essential and is a continuous process through which data is collected, investigated and interpreted about a particular market a company operates in or the service the company offers when selling in that market, and also on the potential and existing competitors and the past, present and potential customers who purchase and consumed the offered product. Conducting a market research is costly and for Russo it will result to a cost of 14,243.71 euro while generating the report has favorable results during higher demand than low demand. Low demand might lead to further losses of 25,023.71 euros.

Researching the market will help Russo gain valuable information that will help in identifying the success of the products, the best price they can set for the products, and the customers interested in purchasing and consuming the products. Though this is essential, I will recommend that Russo only does the research when the demand is relatively high meaning its medium or high. In medium and high demand, Russo should research markets because they will pave the way for better inventory management, business planning and time management.

Decision Strategy

Research is pivotal in the general growth of the company, it is able to indicate whether the market condition is favorable or unfavorable. In Russo’s case research only works well during high demand and is less favorable when the demand is low. To be able to optimize the merits of research and taking into attention the growth and profitability of Russo, a minimax regret approach is the best strategy to take. This approach is able to minimize the maximum regret, hence making it a risk-neutral decision making strategy.

Sensitivity Analysis

Conclusion

Decision making being a vital component in the growth of Russo, considering research is important for the profits of the organization I propose the use of a minimax regret approach to optimize demand due to the uncertainty of the market. Regret will aid the deviation of any given decision from the optimal choice based on the specified set of possible scenarios for uncertain nature of the market. This approach will not require any specification of instrumental variables to control, and also does not require specific number of possible states in advance. This means that Russo will conduct research and purchase the parts under medium demand scenario. Nowadays, markets are not localized, they have become more global. Manufactures like Russo are finding it difficult to contact customers and even control the distribution channels while the competition is equally severe. The consumer needs in recent days are more difficult to predict. The market segmentation is even more complicated in such wide markets. As a result the marketing intelligence provided through marketing research not only help in framing the process but also in implementing the market strategies. Russo will be able to optimize profits if research is conducted while the risk of loss of profits is also looked into to maintain the confidence of the company. This will help identify new market opportunities for existing products. It also provides information on market share, competition, customer satisfaction levels, sales performances and channel of distribution.