Solutions_to_Homework__1 - Management Science Engineering...

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Spring, 2008 Homework #1 Due: Beginning of class, April 17 Many homework questions in this class will be short answer. The goal of these questions is to have you think through the issues raised. To answer them, you don’t need to write a lot. Instead, distill your conclusions down and focus on a few key points. On the job, that’s all you’ll have a chance to say, and all people will listen to. A couple of sentences and a few bullet points is perfect. Also, you may discuss the assignments with other students, but the work you turn in must be your own. 1. Sourcing “portfolio management’ and performance Consider the following “toy” version of the portfolio builder game: There are four potential outcomes of demand and price uncertainty next month: Outcome Demand Price Probability #1 150 1.40 20% #2 130 1.25 30% #3 110 1.35 30% #4 85 1.05 20% Two sourcing contracts are in place for next month: 1. Fixed purchase commitment for 100 units at a price of $1.20. The company can “buy itself out” of this commitment next month for a fee of $0.12 for each unit canceled 2. Flex contract for anywhere between 0 and 40 units, priced at the market price (next month’s uncertain price, as shown above) The material being purchased is used in a product that has a gross margin of $1.30, not including the cost of the material. In other words, the company’s actual gross margin will be $1.30 minus the price paid for the material. Any leftover material remaining after satisfying demand next month must be salvaged at a value of 50% of the then prevailing market price. Questions: a) How many units of the material should the company buy from each contract under each potential outcome of demand and price uncertainty? Why?
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Outcome #1: 100 units from the fixed contract, 0 from the flex, since the flex price of $1.40 is greater than the product margin of $1.30. If a long term customer relationship or market position is at risk, however, the firm may choose to buy the maximum 40 units of material available under the flex contract and lose $0.10 on
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This note was uploaded on 06/16/2010 for the course MS&E 369 taught by Professor Blakejohnson during the Spring '08 term at Stanford.

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Solutions_to_Homework__1 - Management Science Engineering...

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