Smart House Inc Observation - Case Study Example

Observation Review Name: University: Course Title: Instructor: Date of Submission: Summary of the Observation Smart House Inc. deals with interior décor with specialisation in curtains and blinds. The company main raw material is rolls of bleached cotton and linen. The company does not have capacity to manufacture its own and with the need to focus on core aspect which is design & reduce production costs and operation costs, the firm agreed to outsource the raw materials. The supplies manager and secretary to the board managed to convince the tendering board to award the contract to Goldtex Textiles Company as the main supplier of linen & cotton wool. One reason why those who were in the procurement board accepted the supplier was that Goldtex Textiles Company was willing to alter the designs delivered the company without any additional costs so long as they were notified within 24 hours. This is opposed to the previous supplier (Interior Packs Inc.) which didn’t accept any alterations once the order was done unless Smart House Inc were willing to meet 20% of the associated cost due to alteration. Moreover, the other bidder (Interior Packs Inc.) which was the previous supplier was not in good books with the company. The staff in supplies manager office claimed they disliked the attitude of some of their employees. Four months down the line, it emerged that Goldtex Textiles Company had engaged in management buyout without any venture capitalist. This made financing very difficult. Consequently, this meant that Goldtex Textiles Company had to count every cent to be able to produce its main products. The eminent danger was that it was a matter of time before the products they were contracted by Smart House Inc. to supply no longer belonged within the focus of its business unless Smart House Inc. is prepared to finance the investment. The blame pointed was that the procurement board and supplies manager were not able to check the financial position of Goldtex Textiles Company much earlier. In a nutshell, the supplies manager and the board had chosen a small supplier in comparative terms without assessing their suitability to supply a big company with the driving motive being that Interior Packs Inc. was not able to accommodate alterations as specified in the order without increasing the cost with 20% of production cost. Analysis of Bounded Rationality Theory and the Decision Making Process Above Decision making is a process that occurs in all organizations whether profit or non-profit. However, competent decision making is essential for successful organizations, groups, as well as individuals (Johnson, 2009). Beresford & Sloper (2008, p.3) notes that theories of judgement, decision-making and choice fall broadly in two groups. The first they note is the normative theory of cognition that is based on how individual should think. The second is the descriptive theory of cognition that explains how individuals think. Rationality as an approach to decision making is closely related to economic theories of choice. Hodgkinson and Starbuck (2008, p.457) posit that in rational approach to decision making, a choice has to be made among a set of alternatives. Such alternatives then generate outcomes which can be evaluated based on individual preferences. Uncertain events, contingencies, as well as states of nature significantly influence the path between alternatives and outcomes leading to various outcomes. Therefore, decision makers rationally select the alternative which will produce the maximum satisfaction of their expected preference (Chandra, Krovi and Rajagopalan, 2009, p.48). According to Jones (1999, p.297), bounded rationality approach to decision making asserts that decision makers are goal-oriented or rather objective and adaptive in their decision making. As such, in bounded rationality decision makers are intentional in their decisions. However, decision makers sometimes fail in crucial decisions due to their human emotional and cognitive make-up. This is influenced by two kinds of limits. First, procedural limits which influence the how decision makers go about decision making. Second, substantive limits which directly influence particular choices made by the decision maker. The decision made by a manager or a leader is of significant importance due to the fact that a manager or a leader plays a crucial role with regard to the production, dissemination, interpretation, storage, as well as use or disuse of organizational information. According to Shanteau (2001, p.913), a major concern in decision making has been to understand and improve decision making. In making the decision to drop the initial supplier (Interior Packs Inc.), Smart House Inc. was goal oriented in their process. The evidence arises from the fact that their former supplier used to make them incur extra 20% of the production cost if they altered the initial design yet this is unavoidable in interior décor and design industry where client’s mind is likely to change. The decision serves the company right since the competitive strategy of the company is to be a low cost producer which majors in economical products and thus, would not wish to increase the cost when margin cost is minimal. This approach is based on the utilitarian approach to decision making of reducing the pain while increasing the pleasure (Sunita, 2005, p.112). The utilitarian principle of utility seeks to either approve or disapprove the actions of individuals depending on whether or not they promote/increase the amount of an individual’s happiness (one’s interests). With regard to this principle an individual can either be Act Utilitarianism or Rule Utilitarianism. In the former case, an act is right only if it leads to as much good as any other available alternative while in the latter, an ac is right only if it is required by a rule which generates greater good for the society that any other available alternative (Parisi and Rowley, 2005, p.341). However, despite of making the right choice of selecting a new supplier, the company erred when they did not do thorough background review of the company’s financial capability. Asch (2001) cited in Oliveira (2007, p.14) indicates that “individuals tend to value alternatives that offer early reassurances, the ability to avoid or delay making difficult trade­offs is greatly sought, and humans often pursue changing one’s mind”. On the other hand what makes entrepreneur unique and successful is being able to take risks based on rational choices. In this perspective the board and supplies manager were neither rational in their choice nor adaptive in the process. One theory which would have been critical here is consequentialism ethics as advocated in utilitarian model (Sunita, 2005, p.110). The driving force then would have been the benefit the company would accrue rather than the additional 20% cost charged as result of design alteration by a reliable and financially stable supplier. The kind of thinking was not normative, descriptive or rational. It was a non rational process since it was not backed with thorough research and evaluation of alternatives. Reflection Each firm in the supply chain directly and indirectly affects the performance of all other supply chain members, as well as ultimate, overall channel performance (Mentzer, 2001, p.9). This can only be achieved by efficiently integrating suppliers, manufacturers, warehouses, and stores so that merchandise is produced and distributed at the right quantities to the right location and at the right time (Simchi-Levi, Kaminsky and Simchi-Levi, 2004, p.2). Decisions made under this section can be analysed in mixed reactions. In one instance, the approach is working especially by cushioning them from price fluctuations since their initial suppliers used to vary costs if the original design is altered yet the new one does it at a fixed price. On the other hand lack picking of a small supplier has caused the supply system to be grounded. If I were the person making the decision about the outsourcing procedure I would have done it differently as outlined below using payoff matrix and decision trees so that a right mix of suppliers are identified. Payoff matrix is among the commonly used quantitative tools in rational decision making. Payoff matrix is a tool which employs probability technique in decision making. Burton and Thakur (1995, p.118) reiterates that the tool depicts the probable value of all the alternatives or options available for the decision maker. As such, payoff matrix shows the various outcomes together with their probability of occurring. The probabilities usually range from 0 (zero) indicating no chance of occurrence to 1 (one) indicating a certain chance of occurrence. These figures are usually expressed as percentages. These percentages represents the number of times the alternatives or rather options available for the decision maker is actually apt to occur in a hundred trials. For instance, if a businessman predicts a 70 per cent probability that a company dealing in automobiles will incur losses in a particular financial year, then it means that the company has a seventy out of a hundred chance of incurring loss and thirty out of a hundred chance of making profit in that particular financial year. Evaluating the companies using payoff matrix would have made it easier for me to pick the two in combination or retain the former supplier. Griffin (2011, p.755) notes that the decision tree is a technique in rational decision making which extends the basic concept of payoff matrix through a sequence or rather a series of decisions. Burton and Thukar (1995, p.120) on the other hand define a decision tree as a graphic representation of the series or rather the sequence of decisions required by the decision makers in coming up with the expected values of the various options or the alternative courses of actions available to them in the decision making process. Like payoff matrices, decision trees also enhance the ability of decision makers to evaluate possible alternatives available to them by taking advantage of or rather making use of expected values. Decision trees work best for decision makers when there are several decisions to be made in series (Barrett, 2012, p.63). This is the case where our company had to choose between former supplier and new one. References Barrett, I. R. (2012). Administrative and Management theory and Techniques: A Guide for Practising Managers. Bloomington: AuthorHouse. Beresford, B. and Sloper, T. (2008). Understanding the Dynamics of Decision-Making and Choice: A Scoping Study of Key Psychological Theories to Inform the Design and Analysis of the Panel Study. ISBN 978-1-871713-24-4. Burton, G. & Thakur, M. (1995). Management Today: Principles and Practice. Tata McGraw-Hill Publishing Company Limited. Chandra, A., Krovi, R. & Rajagopalan, B. (2009). 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The Origins of Law and Economics: Essays by Founding Fathers. Cheltenham: Edward Elgar Publishing Limited. Shanteau, J. (2001). Management Decision Making. In Craighead,W.E. & Nemeroff, C.B. (Eds), Encyclopedia of Psychology and Behavioral Science (913-915). New York: Wiley. Simchi-Levi, D., Kaminsky, P. and Simchi-Levi, E. (2004). Managing the supply chain: the definitive guide for business professional. New York: McGraw-Hill. Sunita. (2005). Politics, Ethics and Social Responsibility of Business. New Delhi: Paragon Books. Read More