OPERATIONS MANG SLP AND CASE 3
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powerpoint_slide_2.pptApplication of Decision Trees to Product Design
- Particularly useful when there are a series of decisions and outcomes which lead to other decisions and outcomes
Application of Decision Trees to Product Design
- Include all possible alternatives and states of nature - including “doing nothing”
- Enter payoffs at end of branch
- Determine the expected value of each branch and “prune” the tree to find the alternative with the best expected value
Procedures
Decision Tree Example
Figure 5.14
(.6)
Low sales
(.4)
High sales
(.6) Low sales
(.4)
High sales
Purchase CAD
Hire and train engineers
Do nothing
Decision Tree Example
Figure 5.14
EMV (purchase CAD system) = (.4)($1,000,000) + (.6)(- $20,000)
(.6) Low sales
(.4)
High sales
Purchase CAD
(.6)
Low sales
(.4)
High sales
Hire and train engineers
Do nothing
$2,500,000 Revenue
- 1,000,000 Mfg cost ($40 x 25,000)
- 500,000 CAD cost
$1,000,000 Net
$800,000 Revenue
- 320,000 Mfg cost ($40 x 8,000)
- 500,000 CAD cost
- $20,000 Net loss
Decision Tree Example
Figure 5.14
EMV (purchase CAD system) = (.4)($1,000,000) + (.6)(- $20,000)
= $388,000
(.6) Low sales
(.4)
High sales
Purchase CAD
$388,000
(.6)
Low sales
(.4)
High sales
Hire and train engineers
Do nothing
$2,500,000 Revenue
- 1,000,000 Mfg cost ($40 x 25,000)
- 500,000 CAD cost
$1,000,000 Net
$800,000 Revenue
- 320,000 Mfg cost ($40 x 8,000)
- 500,000 CAD cost
- $20,000 Net loss
Decision Tree Example
Figure 5.14
(.6)
Low sales
(.4)
High sales
(.6) Low sales
(.4)
High sales
Purchase CAD
$388,000
Hire and train engineers
$365,000
Do nothing $0
$0 Net
$800,000 Revenue
- 400,000 Mfg cost ($50 x 8,000)
- 375,000 CAD cost
$25,000 Net
$2,500,000 Revenue
- 1,250,000 Mfg cost ($50 x 25,000)
- 375,000 CAD cost
$875,000 Net
$2,500,000 Revenue
- 1,000,000 Mfg cost ($40 x 25,000)
- 500,000 CAD cost
$1,000,000 Net
$800,000 Revenue
- 320,000 Mfg cost ($40 x 8,000)
- 500,000 CAD cost
- $20,000 Net loss
Transition to Production
Know when to move to production
Product development can be viewed as evolutionary and never complete
Product must move from design to production in a timely manner
Most products have a trial production period to insure producibility
Responsibility must also transition as the product moves through its life cycle
