Question

Question 4

Foxcomp, an electronics and computer manufacturer with a global supply chain, wants to add a new supplier for some of its component parts, and the suppliers it's considering are in Taiwan, India, Thailand, the Philippines. As part of its risk management program, Foxcomp wants to assess the possible impact of a supplier shutdown in the event of a natural disaster, such a flood, fire, tsunami, or an earthquake. The following payoff table summarizes the losses (in millions of dollars) for an extended supplier shutdown, given different levels of event severity and recovery in each country.

	Event Severity
	Low	Moderate	Normal
Taiwan	$15	$19	$23
India	7	10	20
Thailand	12	15	19
Philippines	6	9	25
probability	0.42	0.35	0.23

1. Determine the best decision using each of the following criteria.

1. Minimim
2. Minimax
3. Minimax Regret (You need to create an opportunity loss table)

2. Determine the best decision using expected value.
3. Determine the expected value of perfect information (EVPI).

Answer 1

We tabulate the data and fid values for Minimin and Minimax as shown below:

The above table in the form of formulas is shown below for better understanding and reference:

Hence, the best decision as per:

Minimin = Taiwan

Minimax = Thailand

We prepare the opportunity loss table as shown below:

The above table in the form of formulas is shown below for better understanding and reference:

As seen from above, the best decision for Minimax regret is Taiwan.

a) Best decision using expected value:

We find EMV for each alternative:

As seen from above, the minimum EMV is for India. Hence, the best decision is India with an of $11.04 million

The best outcome for the state of nature “Low” is “Philippines” with a payoff of $6. The best outcome for the state of nature “Moderate" is "Philippines” with a payoff of $9. The best outcome for the state of nature “Normal" is "Thailand" with a payoff of $19

Expected value with perfect information = (6)(0.42) + (9)(0.35) + (19)(0.23) = 10.04

Hence, expected value of perfect information EVPI = $11.04 - $10.04 = $1 million

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