The Russo Manufacturing Company Case Analysis 1

Running Head: The Russo Manufacturing Company Case Analysis 1

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

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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.

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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

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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).

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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.

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