NVIDIA is headquartered in Santa Clara, California, and became a major force in the computer gaming industry with the launch of the RIVA series of graphics processors in 1997. To date, the company has become the world’s leading graphic card manufacturer with a wide product range. In 2022, the production plant of NVIDIA’s major supplier in Delaware producing the graphic processing units was damaged by a big fire which would negatively impact the production capability of the plant in the immediate future.
The management of NVIDIA must decide to either stay with the supplier in Delaware or source from an alternative supplier in Mexico for the coming three years. In both options, NVIDIA will incur an initial cost (at present value) but expects to get some savings every year.
The expected cost of sourcing a new supplier in Mexico, upgrading its production equipment, and implementing the necessary quality assurance procedures is estimated at $5 million. Once in place, this partnership is expected to yield savings in the next three years as shown in Table 1. The discount rate for this alternative is 3%.
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The other alternative is to stay with the current supplier at Delaware for the next three years. The cost to undertake a temporary urgent repair of the damage caused by the fire is estimated at $3 million. Production engineers and risk assessors have estimated the savings of this alternative as shown in Table 2. The discount rate for this alternative is 5%.
Draw a decision tree in the Excel file to represent the two alternatives being considered. Show all the nodes and the branches with proper labels, probabilities, and expected returns dearly.
Show clearly how the total present value of each alternative is calculated in separate spreadsheets, one for one alternative.
Create a comparison sheet using the following format. Based on the findings from (b), which alternative should NVIDIA pursue? Why?
Conduct your own research and find out how the decision tree methodology can be applied to risk analysis in the integrated circuit chip manufacturing industry. As the type of risks in the upstream, midstream, and downstream of an integrated circuit chip supply chain can vary, the tools for risk analysis may be different. You may wish to discuss the application in the different aspects of the supply chain operation based on the uncertainties involved.
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