DECISION MAKING UNDER UNCERTAINTY—BIOTECHNICAL ENGINEERING

As you have examined this week, healthcare administration leaders are expected to exercise decision making under conditions of uncertainty. Perhaps more so than any other business, healthcare administration leaders face multiple challenges since ineffective business practices might not result in poor performance with their bottom lines and, if not, it might negatively impact patient safety. Understanding how to appropriately exercise decision making under conditions of uncertainty is a useful skill for effective healthcare administration practice.

For this Assignment, review the resources for this week, and reflect on how healthcare administration leaders must exercise decision making under conditions of uncertainty. Consider how you might engage in decision making under uncertainty, as you complete the Assignment and the Case Study 6.4 on pages 275-276 of your course text. Note: You will need to use Excel and the textbook add-in, "Precision Tree."

Alternatively, you may also download the PrecisionTree software as a Free Trial by accessing the following:

http://www.palisade.com/precisiontree/Links to an external site.

You will need to fill out the information presented and will need to use a personal email address to use the Free Trial provided.

C A SE 6.4 DEVELOPING A HELICOPTER COMPONENT FOR THE ARMY

The Ventron Engineering Company has just been awarded a $2 million development contract by the U.S. Army Aviation Systems Command to develop a blade spar for its Heavy Lift Helicopter program. The blade spar is a metal tube that runs the length of and provides strength to the helicop- ter blade. Due to the unusual length and size of the Heavy Lift Helicopter blade, Ventron is unable to produce a single-piece blade spar of the required dimensions using existing extrusion equipment and material. The engineering department has prepared two alternatives for developing the blade spar: (1) sectioning or (2) an improved extrusion process. Ventron must decide which process to use. (Backing out of the contract at any point is not an option.) The risk report has been prepared by the engineer- ing department. The information from this report is explained next.

The sectioning option involves joining several shorter lengths of extruded metal into a blade spar of sufficient length. This work will require extensive testing and rework over a 12-month period at a total cost of $1.8 million. Although this process will definitely produce an adequate blade spar, it merely represents an extension of existing technology. To improve the extrusion process, on the other hand, it will be necessary to perform two steps: (1) improve the material used, at a cost of $300,000, and (2) modify the extrusion press, at a cost of $960,000. The first step will require six months of work, and if this first step is successful, the second step will require another six months of work. If both steps are successful, the blade spar will be available at that time, that is, a year from now. The engineers estimate that the probabilities of succeeding in steps 1 and 2 are 0.9 and 0.75, respectively. However, if either step is unsuccessful (which will be known only in six months for step 1 and in a year for step 2), Ventron will have no alternative but to switch to the sectioning process—and incur the sectioning cost on top of any costs already incurred.

Development of the blade spar must be com- pleted within 18 months to avoid holding up the rest of the contract. If necessary, the sectioning work can be done on an accelerated basis in a six-month period, but the cost of sectioning will then increase from $1.8 million to $2.4 million. The director of engineering, Dr. Smith, wants to try developing the improved extrusion process. He reasons that this is not only cheaper (if successful) for the current proj- ect, but its expected side benefits for future projects could be sizable. Although these side benefits are dif- ficult to gauge, Dr. Smith’s best guess is an additional $2 million. (These side benefits are obtained only if both steps of the modified extrusion process are completed successfully.)

a. Develop a decision tree to maximize Ventron’s EMV. This includes the revenue from this project, the side benefits (if applicable) from an improved extrusion process, and relevant costs. You don’t need to worry about the time value of money; that is, no discounting or net present values are required. Summarize your findings in words in the spreadsheet.

b. What value of side benefits would make Ventron indifferent between the two alternatives?

c. How much would Ventron be willing to pay, right now, for perfect information about both steps of the improved extrusion process? (This information would tell Ventron, right now, the ultimate success or failure outcomes of both steps.