The Russo Manufacturing Company Case Analysis 1
Running Head: The Russo Manufacturing Company Case Analysis 1
Need assignment help for this question?
If you need assistance with writing your essay, we are ready to help you!
OUR PROCESS
Order
Payment
Writing
Delivery
Why Choose Us: Cost-efficiency, Plagiarism free, Money Back Guarantee, On-time Delivery, Total Сonfidentiality, 24/7 Support, 100% originality
The Russo Manufacturing Company Case Analysis
Name: Yash
University: Regents
Course: Business Analytics
Date: 29/12/2020
The Russo Manufacturing Company Case Analysis 2
Executive Summary
Many organizations make decisions in their operations using different techniques to
achieve the best outcome and high-profit margins. One of the commonly used criteria is the
make or purchase criterion. In this case, the organization is tasked with the choice of whether to
tailor the product within the premise or engage another party to manufacture the same on their
behalf. To arrive at the final decision, organizations take into consideration the costs associated
with either purchasing the product or making it in-house. By making the choice, the organization
can cut down the huge costs associated with product manufacturing. The decision also helps on
the capital ventures, which the firm undertakes in the end. In this case, Ruso Manufacturing is
facing the problem whereby the management needs to decide on whether to produce the
component or buy. The proceeds on the product relies on the demand. In case of low demand, the
company will incur a loss.
If the product is outsourced, the Ruso Manufacturing Company will realize profits
despite the low demand for the product. The organization will make profits in the event the
demand for the product rises. It is upon the management to decide on whether the component
should be manufactured at the Milan firm or ordered from other vendors. This must be in a well-
structured manner to help the company earn profits and avoid any spillovers in both the long and
short run. The solution to the Ruso manufacturing Company problem can vary. The company can
analyze the expected value for the option of purchasing as well as manufacturing the product.
In this case, it is recommended that the Ruso Management should first analyze the costs
associated with the decision they have to take. It will be ideal for Ruso Manufacturing to
outsource the production of the component if it lacks the raw materials needed to make the
component and the cost of such will be higher than if the company purchases the component
The Russo Manufacturing Company Case Analysis 3
from other vendors. It will be ideal if Ruso LTD does not have the required labor to help in the
component manufacturing to outsource the component. The company should also consider the
patent as well as other laws that might hinder the firm from producing the component from
within. If the demand for the component is dependent on certain seasonal factors, the company
can consider purchasing the component. On the other hand, in the event the cost of producing the
component within is low, the company should consider in-house manufacturing as opposed to
purchasing the component. Ruso ltd should manufacture the component if it has all technological
expertise as well as acquainted labor.
Introduction
In this report, we analyze the case of Ruso Manufacturing Company. The management of
the company is facing the issue of whether they need to purchase or manufacture a component.
The company might make losses or realize profits depending on the decision, which the
administration takes regarding the component. This is pegged on the demand for the final
product. In the event of low demand, the company has a chance of making losses. On the other
hand, if the demand for the component rises, the company might end up making relatively
impressive profits. In this regard, Ruso Manufacturing Company administration has developed
some probabilities relating to the component demand. The management deems it necessary to
carry out an extra bazaar study to ascertain their estimates. This will then see the company
decide on whether to buy or produce the product depending on the resultant payoffs. In case of
high demand, the outcome of the research will then be considered favorable. On the other hand,
the result will be deemed unfavorable in case of a low demand for the product.
The objectives of this report is to analyze the decision alternative facing Ruso
Manufacturing Company. The reports look in-depth at all the possible favorable and unfavorable
The Russo Manufacturing Company Case Analysis 4
payoffs necessitating the company to make a sound decision. In the end, we will make a
recommended decision for the company to undertake to remain profitable in its operations. This
comes in as buying needs to be taken as one key area, which should be taken into account when
the company embarks on its decision-making processes. This is made on the grounds of cutting
costs by the organization.
Ruso Manufacturing Company payoff table can be displayed as following
State of nature
Low Demand Medium Demand High
Demand
Decision Alternative S1 S2 S3
Manufacture,d1 -24.89 24.89 70.81
Purchase,d2 12.25 66.82 52.48
In the case of Ruso Manufacturing Company, there are two choices, which the
management can undertake. This includes the choice to manufacture (d1) or to purchase the
component (d2). The optimistic approach uses the maximax approach to arrive at the decision. If
the management opts to use the optimistic approach, they will select the option with the largest
payoff. Based on the above payoff table, the management should manufacture the component at
a payoff of 7,081 Euros. The conservative approach is a maximin approach that entails selecting
the option, which will cost the least resources. In this case, Ruso Manufacturing will be eying on
saving on the cost of producing or buying the component. This will be based on the set of the
lowest demand for the product. Based on the above table, the company should manufacture the
component in-house. This is based on the lowest payoff of -2,489 euros. The minimax approach
The Russo Manufacturing Company Case Analysis 5
entails choosing the alternative, which has the greatest payoff among various options. In this
case, Ruso Management need to decide to manufacture the component at a payoff of 24,089
.
The Posterior probabilities in this case will help the Ruso manufacturing company
determine the possibilities of various levels of demand before the study (Milusheva, 2019). It
indicates updated prior probability. The probabilities can be computed as follows. Given that
P (F | low demand) = [0.02]
P (F | medium demand) [0.84]
P (F | high demand) = [0.04]
Generally, this is computed as Posterior probability = prior probability + new evidence
For the Weak demand: =14.66+0.02=14.68
For Medium Demand: =0.84+14.66=15.5
For the strong demand:=0.04+14.66=14.7
Ruso Manufacturing Company can use a decision tree to choose whether to purchase the
component or manufacture it within its Milan Plant. In this case, there exist two decision
alternatives. There exist three states of nature that is S1 for low demand, S2 for medium demand ,
and S3 for high demand. The expected value can be the addition of the probabilities as well as the
respective costs.
The Russo Manufacturing Company Case Analysis 6
This can be illustrated as follows;
d1
d2
Based on the above decision tree, the expected value
EV (d1) = −24.89 ∗ 0.12 + 24.89 ∗ 0.84 + 70.81 ∗ 0.04 = 20.7532
EV (d2) = 12.25 ∗ 0.12 + 66.82 ∗ 0.84 + 52.48 ∗ 0.04 = 59.698
The higher expected value is EV (d2) which is 59,698 euros as compared to EV (d1) which is
207,532 Euros. This means that the company should purchase the component from outside
vendors.
If s1 then d2
If s2 then d2
If s1 then d1
Expected value of this strategy = 12.25 ∗ 0.12 + 66.82 ∗ 0.84 + 70.81 ∗ 0.04
= 1.47 + 56.12 + 2.83 = 60.4224
𝐸𝑉𝑃𝐼 = 60.4224 − 59.698 = 0.7244
66.82
12.25
52.48
-24.89
24.89
70.81
S2 (0.84)
S2
(0.84)
The Russo Manufacturing Company Case Analysis 7
Ruso Manufacturing Company needs to gain more defined demand predictions. This info will
help generate up to 0.7244 thousand Euros. Thus, it will be ideal for the company to indulge in
market research. The research will assist the management clear the doubts on which option they
need to adopt. They can well restructure the idea. The marketing research will also help the
company retain a competitive advantage over companies within the same industry. The company
will be well acquainted with the expected payoffs on the adoption of either buying or
manufacturing the component (Baldinger, Levy, Schönsleben, & Wandfluh, 2016).
Sensitivity analysis
If the research is favorable, the company management should consider producing the component
within the premise. If the study is unfavorable, the management can consider buying the
component from other vendors. In this case, the Ruso Management Company should thus
purchase the component.
Expected payoff = 12.25*0.12 + 66.82*0.84 + 70.81*0.04=60.4224
EVSI = 60.4224 – 60.4224 = 0= 0 Euro
Conclusion
The Russo Manufacturing Company Case Analysis 8
Based on the above findings, Ruso Company Management should adopt the option of buying the
component. This will generate more returns as compared to manufacturing the component. This
will save the company on the cost in terms of finances and resources. The demand is high when
the component is purchased. The decision to purchase will result in a higher expected value. The
study will assist the company to weigh different levels of demand for the company product. The
company will be able to lower the risk of incurring losses by having well-defined market
research to determine the profitability of either option. The company will also determine the
possible perils associated with either decision and thus make the most optimal choice. The
management will be well informed thus the best decision will be made. The supporting values,
which will be derived from the research, can also be used not only for the current decision, but
also for impending decisions (Keramati, Dann, Tamkin, & Brunskill, 2020).
The Russo Manufacturing Company Case Analysis 9
References
Baldinger, M., Levy, G., Schönsleben, P., & Wandfluh, M. (2016). Additive manufacturing cost
estimation for buy scenarios. Rapid Prototyping Journal.
Keramati, R., Dann, C., Tamkin, A., & Brunskill, E. (2020). Being optimistic to be conservative:
Quickly learning a cvar policy. In Proceedings of the AAAI Conference on Artificial
Intelligence, 34(04), 4436-4443.
Milusheva, P. (2019). Some aspects of the decision to buy, not to produce parts and components.
Economics and computer science, 64-67.
.
- References