Lecture 9 Notes

# Lecture 9 Notes - Space IOE 202 lecture 9 outline...

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Space IOE 202: lecture 9 outline ° Announcements ° So far in this course. .. ° E f ects of uncertainty on decision making ° Incorporating uncertainty into models ° Simulation models for decision-making under uncertainty IOE 202: Operations Modeling, Fall 2009 Page 1 Space E f ects of uncertainty on decision making In the course so far, we have considered decision problems in which the data was known with certainty, or at least, we ignored randomness if it was present. This may not be the case in many situations in practice. For example: ° In inventory models, demand and lead time are rarely known with certainty ° In sta ng problems, demand for services is not known with certainty at the time when sta ng decisions need to be made. ° When considering investments, assumed returns were entirely predictable. We all know that is not true! It is common for decision-makers to “assume away” randomness, often by replacing the random quantity by its average, or expected value. Unfortunately, assuming away randomness like this can lead to poor decisions being made. IOE 202: Operations Modeling, Fall 2009 Page 2

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Space Example: entering a new market ° Your company is introducing a new product. As marketing manager, you are trying to estimate the proft that will result From the product introduction. Proft depends on sales (in units), price per unit, unit cost (cost per unit oF production, marketing and sales), and fxed costs (overheads etc). ° ±ixed costs are calculated at \$30,000, and unit cost — at \$7.50 ea. ° ±rom the marketing department, you get the estimate oF expected sales (roughly 80000 units) and selling price (which is expected to be \$9 per unit). IOE 202: Operations Modeling, Fall 2009 Page 3 Space Estimating profts From new product introduction ° General Formula For computing proft ° Estimate oF total proft based on the estimated expected sales and selling price IOE 202: Operations Modeling, Fall 2009 Page 4
Space Average inputs vs. average outputs However, this single fgure does not give the Full picture! ±urther analysis oF marketing data identifes the Following distinct possible scenarios: ° “Typical” Market: Sales oF roughly 80,000 units at \$9 ea.

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## This note was uploaded on 03/17/2010 for the course IOE 202 taught by Professor Marinaepelman during the Fall '09 term at University of Michigan-Dearborn.

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Lecture 9 Notes - Space IOE 202 lecture 9 outline...

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