Em 680 - Sps Recommendation

SPS Recommendation

EM680 Final Project

8/6/18

Jeremy Dutton

Justin Foss

Rebekah Wilkinson

Our recommendation to SPS is to order the medium production of the current fuel cell using Apex. This is based on our finding that SPS has a risk averse attitude. At this time SPS does not need to refine any estimates or parameters, however they should continue to monitor the state of the market and adjust sales and production estimates year to year. SPS should not purchase the market prediction from ODG.

        Our group has been hired to conduct analysis on a decision case for Stimulus Power
Systems (SPS). The first decision facing SPS is whether they should launch the product now or wait an additional year to perfect an advanced fuel cell to be able to sell a more state-of-the-art product at a higher price. The company does not have enough on-hand capital to invest in the new product and launch the current product at the same time. Currently there are two manufacturers with the capability to mass produce the SPS fuel cell: Apex Production Company and Omni Manufacturing. Only Omni can produce the new cell fuel, but at a 33% increase in cost. Therefore, the second decision is which vendor to contract with. The market research the company has worked on has shown that it should choose between three different production strategies: a low production of 200,000, a medium production of 300,000 or a high production of 400,000. Representing the third decision to be made; what production level to go with. The forth decision involves determining the benefits of using a consultant to better understand the market.

        Figure 1.1 is the Influence Diagram generated by the group based on the information provided by SPS. Many factors are important to consider and therefore it is important to understand where each factor is applied.

[pic 1]

[pic 2]

The following assumptions were made to determine the best option for SPS.  

1. SPS will fulfill all orders made, including those about batch production
2. ODG data will reduce standard deviation by 50%
3. Risk Tolerance of SPS is determined from lowest possible revenue in one year of selling the current product
4. SPS will have the option to change the production level each year, but it will keep the same manufacturing company due to the fixed costs and intellectual property.

        SPS has a current product that is ready to go to market. This option provides SPS the option to immediately start producing the fuel cell and selling to customers. The new product, while selling for a higher price, has more risk to get the product to market because it only has a 72% success rate. When simply evaluating the potential profits for SPS including the Net Present Values (NPV), the new product may seem more appealing. If SPS can sell the expected units of 250,000, then based on the revenue of Year 2, the current product is the correct choice. See the Figure 1.2 below as well as “Multi Year NPV Calculations” in the supporting documentation for more information. The NPV summary provides a general estimate that SPS can expect to have as Revenue at the end of year 5. They expect the product to be able to be successful in the market for 5 years, before the need to release a newer technology. There are many external factors that will influence these values impacting the final recommendation. Even though based on NPV the revenue for the new product will be significantly higher than the current product by Year 5, the risk tolerance of SPS will be a major factor. Figure 1.2 provided us a good starting point to provide the best recommendation once risk was considered.