Avalanche Corporation - Strategic Recommendation Essay

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Avalanche Corporation
Decision Analysis and Strategic Recommendation

Table of Contents Table of Contents 1 Overview 2 Question 1: Production Strategy 2 Question 2: Sensitivity Analysis 3 Question 3: Influence of Outside Vendor 5 Question 4: Alternative Risk Profiles 6 Question 5: Are Fantastic Forecasters Worth It? 7 Conclusions 7 Appendix 8 Figure A: Precision Tree (Question 1) 8 Figure B: Cost Calculation Table 9 Figure C: Profit Calculation Table 9 Figure D: Tornado Graph 10 Figure E: Tornado Graph Data 11 Figure F: Spider Graph 12 Figure G: Decision Tree (No Outsourcing Available) 13 Figure H: Sensitivity of Decision Tree (with Data) 14 Figure I: Strategy Region (with Data) 15 Figure J:
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Precision Tree calculated the EMV for medium and high production which resulted in an outcome of $1,025,000 and $850,000 respectively. Therefore the decision with the highest predicted payoff would be to choose the batch flow and to produce 15,000 items.
Question 2: Sensitivity Analysis In order to get a better understanding of what the key inputs or most sensitive input variables were, a sensitivity analysis was conducted on all of the inputs involved in this case. For the sensitivity analysis an arbitrary number of 25% was chosen to vary the inputs in order to analyze their effects on the EMV. For the sake of clarity and simplicity we then decided to focus on several of the main inputs (and combinations of these inputs) that had the greatest effect on the EMV or were deemed necessary for analysis. These were: * Sales Price * Quantity of High or low Demand * Probability of High Demand * Outsource Cost * Clearance Cost As we can see from the tornado graph [Figures D & E] the EMV of the decision tree was most sensitive to the variations in the sales price of the avalanche racer. An increase/decrease of 25% of the sales price of the Avalanche Racer led to an approximate increase/decrease of the EMV by 90% which is statistically significant. This was further supported by the spider graph [Figure F], in which the sales price was also shown as having the

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