Ritz materials manager, Mr. Bruce, must determine whether to make or buy a new semiconductor for the new technology TV that the firm is about to produce. One million units are expected to be produced over the lifecycle. If the product is made, start-up and production costs of the make decision is $1 million with a probability of 0.6 that the product is satisfactory. If the product is not satisfactory, the firm will have to reevaluate the decision. If the decision is reevaluated, the choice will be whether to spend another $1 million to redesign the semiconductor or to purchase. Likelihood of success the second time that the make decision is made is 0.8. If the second make decision also fails, the firm must purchase. Regardless of when the purchase takes place, Mr. Bruces best judgment of cost is that Ritz will pay $0.6 for each purchased semiconductor plus $1 million in vendor development cost.

Whats the best decision that Bruce has to make?Highlight any trap that he is probably falling into. What criteria did you use to make this decision?

Explain the worst and the best that can happen as a result of this particular decision?

The amount of semiconductor needed was based on exponential smoothing technique, and the alpha was chosen on market volatility and energy effect.

What do you think of this choice of technique ?