$($OMD$)$ is developing a next $$generation infusion pump for hospitals

worldwide. The design must be finalized, tested, and approved before production can begin. Because of increasing competition, OMD faces two major pressures:

$1.$ Time$$to$$Market: Each week of delay beyond the target launch date results in lost hospital contracts and lower revenue for the new device.

$2.$ Design Quality and Cost: A more thorough engineering process $($with advanced design techniques$)$ generally yields lower variable costs and fewer post$$launch defects$$but also entails higher upfront investment.

You have been asked to recommend how Oriole Medical Devices should proceed with the product design. Your task is to:

$$ Identify the decision alternatives $($and any subsequent branches in the decision tree$).$

$$ Estimate the financial outcomes $($revenues$,$ costs, and penalties$)$ associated with each possible scenario.

$$ Determine the best decision using an expected monetary value $($EMV$)$ criterion.

Decision Alternatives

OMD has three main ways to complete the design:

$1.$ Internal $$Rapid$$Fire$$ Team $($I$$Rapid$)$

o Uses only OMD$$s in$$house engineers on a crash schedule.

o Fixed Cost: $$130,000$ total $($includes overtime, crash scheduling, etc.$).$

o Weekly Penalty if Late: $$25,000/$week$.$

o Time to Completion $($probabilistic$)$:

$$ On Time $(12$ weeks$)$: $40\%$ chance

$1$ week late $(13$ weeks$)$: $35\%$ chance

$2$ weeks late $(14$ weeks$)$: $15\%$ chance

$3$ weeks late $(15$ weeks$)$: $10\%$ chance

$2.$ Premium Outsourcing $($Outsource$)$

o A specialized external design consultancy.

o Fixed Cost: $$180,000.$

o This team is larger and has sophisticated tools, so it rarely runs late.

o Weekly Penalty if Late: $$25,000/$week$.$

o Time to Completion $($probabilistic$)$:

$$ On Time $(12$ weeks$)$: $70\%$

$1$ week late $(13$ weeks$)$: $20\%$

$2$ weeks late $(14$ weeks$)$: $10\%$

$($No chance of being more than $2$ weeks late$)$

$3.$ Hybrid Approach $($Hybrid$)$

o Split the work: An external contractor handles mechanical$/$electronic subsystems; OMD$$s staff does the software portion.

o Fixed Cost: $$90,000$ external $+$ $$60,000$ internal $=$ $$150,000$ total.

o Weekly Penalty if Late: $$25,000/$week$.$

o Time to Completion $($probabilistic$)$:

$$ On Time $(12$ weeks$)$: $30\%$

$1$ week late $(13$ weeks$)$: $40\%$

$2$ weeks late $(14$ weeks$)$: $20\%$

$3$ weeks late $(15$ weeks$)$: $10\%$

Potential $$Information$$Gathering$$ Decision

Before choosing one of the three design paths, OMD could pay $$30,000$ for a thorough risk assessment $($a fast but detailed feasibility study$)$ by a consulting firm. This study would update the time$$to$$completion probabilities for each option with more accurate data:

$$ If the study$$s results indicate $$High Feasibility$(60\%$ chance$),$ then the on$$time probabilities for each design option increase by $10$ percentage points, and each late scenario$$s probability decreases proportionally.

$$ If the study$$s results indicate $$Low Feasibility$(40\%$ chance$),$ then the on$$time probabilities for each design option decrease by $10$ percentage points, and each late scenario$$s probability increases proportionally.

OMD must decide first whether to pay $$30,000$ for the study. If it does pay, it can then choose $($after learning the result$)$ which of the three design options to pursue.

Revenue Implications

$$ Full$$Price Revenue for an on$$time launch is $$1\mathrm{.}5$ million $(12$ weeks$).$

$$ If launched one week late, total revenue drops to $$1\mathrm{.}4$ million.

$$ If launched two weeks late, total revenue drops to $$1\mathrm{.}25$ million.

$$ If launched three weeks late, total revenue drops to $$1\mathrm{.}1$ million.

$$ Launches later than $3$ weeks beyond target bring in only $$1\mathrm{.}0$ million

Your Tasks

$1.$ Build the Decision Tree

$2.$ Assign Monetary Outcomes

o Account for each design option$$s fixed cost, possible late penalties, and resulting revenue.

$3.$ Calculate the EMV

o Compute the expected monetary value for each possible sequence of decisions.

o Identify which option $($or sequence of options$)$ is the best choice.

$4.$ Managerial Recommendation

o State which approach you would recommend and why.

o Comment briefly on whether OMD should purchase the feasibility study and how that changes the EMV versus skipping the study