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298 Risk and uncertainty management
rather than purchased outright, perhaps the product can be jointly
marketed in an overseas market with a local company so that risk there
is shared or perhaps the product’s design can be modified to allow
easy upgrading without the need for substantial retooling if competition
necessitates design modifications.
This chapter uses a case study to illustrate how a decision model can be
employed to provide a structured approach to uncertainty management.
In addition, we will give an outline of brainstorming to show how it
can be used to elicit creative uncertainty management solutions from
management teams.
The Two Valleys Company
The Two Valleys Company is diversifying into the production of an
electronic product and has to decide where to locate its manufacture.
Two suitable factories are available to be rented. The factory at Callum
Falls is large enough to cope with any foreseeable level of demand,
but the alternative location at Littleton would only have the capacity to
produce 5 million units of the product per year.
A value tree (see Chapter 3) was used to identify the attributes relevant
to the decision problem. These attributes included quality of local
transport infrastructure, environmental impact, availability of a skilled
labor force and financial return. It was evident that both sites performed
very similarly on nearly all of the attributes, except financial return.
There was also considerable uncertainty about the return that could be
achieved at each site.
Demand for the product could come from two sources. First, there is
the possibility of signing a contract with a major customer for the supply
of 1 million units of the product per year. This customer would receive a
discount of $0.20 on the normal price of the product, which would be set
at $5 per unit, but the customer would not be willing to sign the contract
until after the production facility had been set up. Second, the product
wouldbesoldontheopenmarket.
Exploring sources of uncertainty
As a first step to managing this uncertainty, an exploratory tree was
formulated to represent the factors that contributed to the uncertainty