Sofia Romano worked as a corporate reliability engineer for Regal Electronics Inc. (REI), a global company selling hundreds of name‐brand products in more than 53 countries. Sofia was curious about a new product announcement from Molio Equipment Manufacturing Inc. (MEMI), a supplier of advanced manufacturing equipment and components. REI had a long‐standing relationship with another supplier, Decker Products Ltd. (DPL) for much of REI’s production equipment. MEMI claimed that their new equipment had undergone a complete redesign and was now capable of manufacturing product with greater speed and quality.
Sofia had done extensive testing with DPL’s equipment over the past 6 years and worked with DPL and REI staff to optimize the setup, maintenance, training, processes, etc. As a result, over the past 2 years average profit was reliably about $6,000 per production run. In translating what MEMI’s claim of improved speed and quality meant for REI’s product line, Sofia calculated there was a 10% chance of reaching a whopping $20,000 average profit per production run, 60% chance of obtaining $5,000 average per run, 20% chance of securing $10,000 average profit per run, and a 10% chance of no profit at all for a given run. Note that MEMI was willing to match DPL’s purchase price for the equipment.
According to MEMI, uncertainty was based on a combination of variables such as how the equipment was setup, operated, maintained, quality and combination of raw materials used, and many other factors. Sofia spoke at great length to MEMI about the improved potential of the new equipment, but was hesitant to take on any increased risk. Eventually, MEMI offered, for a fixed fee of $2500, to provide consulting services in order to show REI how to accurately predict the average profit before each run (i.e., the four possibilities calculated above by Sofia) based on REI’s anticipated mix of variables for that run. Depending on results, Sofia could then choose to run production through the new MEMI equipment, or the DPL equipment on another line, on an off‐shift, at another site, etc. Given that Sofia had to replace the DPL production equipment on one of 10 production lines in one facility, timing couldn’t be better. She would either go with the new MEMI equipment, or simply replace the equipment with another DPL unit.
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(a) Should Sofia consider purchasing MEMI’s equipment? Should she pay for MEMI’s consulting services?
(b) What other factors should be considered in determining whether to switch to MEMI’s equipment?