Ozman Manufacturing, Inc. (OMI) is a small manufacturing company that produces components used in the aerospace industry. The company has learned about an opportunity to bid on a defense contract as a subcontractor with Avionics by producing their R-7 relay switches. They are required to meet a minimum amount of relay switches daily (the amount they bid); otherwise, a penalty of $5,000 will be imposed each day production falls short. A new production process was also proposed to increase production; analysis of the data shows that the new process will reduce production deviations and increase average production. We recommend switching to the new process to increase production and propose a bid that guarantees at least 626 units produced per day. This will average approximately $2,000 profit each day while keeping the probability of incurring penalties under 10%.
Analysis
OMI’s performance data under the existing process shows that the company can ensure a daily profit of $1,000 if it proposes a minimum daily production level of 612 units, with a probability of penalty of 28.26%. Accordingly, we believe that the probability of default is too high, forcing the company to lower the bid amount and resulting in a competitor potentially winning the contract. OMI has also reviewed a new process suggested by one of the …show more content…
Figure 3 looks at the average profits of each bid amount and probability of incurring a penalty based on the new production method data after Day 22. The other factor we considered was making a higher bid to increase the chances of winning the contract. We applied a target value of 10% likelihood of incurring a penalty and determined this bid number would be 626 units. This would still result in over $2,000 average daily profit, which is double the profit that Mr. Ozman targeted. While lower bid amounts would increase potential profit, this could jeopardize winning the