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References 177
ABC Chemicals are planning to start manufacturing a new
pharmaceutical product. Initially, they must decide whether
to go for large-scale or small-scale production. Having made
this decision, the profits that they make will also depend on
(i) the state of the economy over the next 2 years; (ii) whether
or not a rival manufacturer launches a similar product; and
(iii) the amount which ABC decides to spend on advertising
the product (this decision will itself be influenced by the scale
of production which ABC opt for, whether a rival product is
launched and the state of the economy).
(b) Use your influence diagram to derive the outline of a decision
tree which could be used to represent ABC’s problem.
(14) Draw an influence diagram for the following problem.
Hatton’s mail order company is planning to install a new computer
system next year. Two possible systems are being considered:
the Gamma II and the Elite. The Gamma II will mean that the company
incur higher initial costs than the Elite, but the total costs
associated with the chosen system over its lifetime will also depend
on whether the company decides to expand the computer system at
some future date (the Gamma II system would cost less to expand).
The expansion decision will be influenced by the level of sales
achieved by the company over the next 3 years, while the level of
sales will, in turn, be influenced by the size of the market and the
amount of competition which Hatton’s has to face. It is thought that
the size of the market will itself be influenced by the performance of
the economy (e.g. a continued recession would depress the market).
It is also thought that if the recession continues a number of rivals
will go out of business so the severity of competition will be less.
References
1. Dunning, D. J., Lockfort, S., Ross, Q. E., Beccue, P. C. and Stonebraker, J. S.
(2001) New York Power Authority used Decision Analysis to Schedule
Refueling of its Indian Point 3 Nuclear Power Plant, Interfaces, 31, 121–135.
2. Beccue, P. (2001) Choosing a Development Strategy for a New Product at
Amgen, in D. L. Keefer, Practice Abstracts, Interfaces, 31, 62–64.
3. Howard, R. A. (1988) Decision Analysis: Practice and Promise, Management
Science, 34, No. 6, 679–695.
4. Keefer, D. L. and Bodily, S. E. (1983) Three Point Approximations for Continuous
Random Variables, Management Science, 29, No. 5, 595–609.