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The warehouse manager at CCI is deciding whether to hire a security company called ProGuard to monitor their warehouse during a tenting process to treat a termite infestation. Tenting requires opening windows and turning off alarms for 48 hours, leaving the warehouse vulnerable to burglary. ProGuard charges $150 per hour and has a 3% burglary rate for clients. The warehouse deductible is $25,000. A decision tree analysis shows it is better financially to not hire ProGuard given the costs and burglary probabilities. A general rule is not to hire security unless the difference in burglary probabilities outweighs the cost of security divided by the deductible. The decision does not guarantee success as ProGuard does not ensure

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Andrew Ramzy
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92 views

OM Mod A

The warehouse manager at CCI is deciding whether to hire a security company called ProGuard to monitor their warehouse during a tenting process to treat a termite infestation. Tenting requires opening windows and turning off alarms for 48 hours, leaving the warehouse vulnerable to burglary. ProGuard charges $150 per hour and has a 3% burglary rate for clients. The warehouse deductible is $25,000. A decision tree analysis shows it is better financially to not hire ProGuard given the costs and burglary probabilities. A general rule is not to hire security unless the difference in burglary probabilities outweighs the cost of security divided by the deductible. The decision does not guarantee success as ProGuard does not ensure

Uploaded by

Andrew Ramzy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Warehouse

tenting at
the port
of miami
MODULE A
Warehouse Tenting At the Port of Miami
• The Collector’s Choice Inc. (CCI), a luxury car import company, has an old warehouse at the Port of
Miami, Florida, where it temporarily stores expensive sports cars and automotive parts that arrive
from Europe. This summer, CCI has noticed that the termite infestation in the warehouse has
escalated to a point where tenting cannot be postponed anymore. (Tenting is the process of
wrapping a building inside a huge tent that is subsequently filled with a poisonous gas capable of
killing most forms of life inside, including insects, plants, pets, and human beings.) CCI’s pest
control company’s contract specifies a to-do list of pre-tenting tasks, which include: ◆ Turning off
all air-conditioning units and opening all windows of the warehouse ◆ Turning off all internal and
external lights, including those operating on a timer ◆ Pruning all outdoor vegetation at least 18"
away from the warehouse ◆ Soaking the soil around the warehouse on the first day of tenting The
requirement of opening all windows is particularly worrisome to CCI because it means turning off
the alarm system, leaving the warehouse vulnerable to burglary for 48 hours—the required amount
of time for the poisonous gas to do its job. Therefore, Alex Ferrari, the warehouse manager, is
thinking about hiring a security company to monitor the facility during that period. CCI’s property
insurance deductible is $25,000, and Alex is assuming that if thieves are willing to enter a building
full of poisonous gas to steal something, they would certainly take more than $25,000 worth of
parts—or even an entire car! After making a few phone calls, Alex gets in touch with ProGuard, a
trustworthy local security company that charges $150 per hour to have a security guard stationed
outside their warehouse. The city of Miami police records indicate that about 30% of businesses
that left their facilities unattended during tenting reported stolen property in the past 3 years.
Although Alex thinks ProGuard’s prices are reasonable, and having a guard outside the warehouse
would certainly help, he is still not sure whether it is worth spending the extra money. After all,
ProGuard’s contract does not guarantee the protection it provides is infallible. In fact, an analysis
of the company’s records indicates that 3% of their clients were burglarized over the past 3 years.
(Despite this figure, ProGuard is still the best security company in the area.)
1. Create a decision tree analysis to help decide
whether Alex Ferrari should hire ProGuard’s
services.
Burglary will take place (3%) (150$ ×48hr) +25000=32200$

1
(150$ ×48hr) =7200$
Property will be safe (97%)

Burglary will take place (30%)


25000$

2
0$
Property will be safe (70%)
• EMV 1 = (97% × -7200) + (3%×-32200) = -7950
• EMV 2 = (70% × 0) + (30% × -25000) = -7500
• EMV2 > EMV1
2. Come up with a simple rule of thumb that can be applied to
decisions of this nature, given any deductible amount d , extra
surveillance cost c , and burglary probabilities p1 (without
surveillance) and p2 (with surveillance).
Answer : If we look at the calculations in Question 1 and replaced d for $25,000, c for
$7,200, p1 for 30%, and p2 for 3%,

we conclude that EMV2 <EMV1 (–$7,950< – $7,500)

Therefore, unless the difference between burglary probabilities is greater than the cost of
security divided by the deductible, you should not hire security.
In example, p1 – p2 = 27%, which is smaller thanC/d = 7,200/25,000=28.8%.Interestingly,

if p1 were already below 28.8% to begin with, even if the security company were perfect
(p2 = 0%), it would still be better not to hire them given the projected expenses.
3. Does your decision based on the
tree guarantee success? Why or why
not?
• Answer : The company is facing a lot of risks and it could not
afford paying 150$ per hour for 48hr for a security company to
secure 25000$ property & the proguard doesn’t guarantee the
protection it provides , so we see that Its still be better not to hire
them given the projected expenses .
Team
members
• Esraa Ahmed Ali
• Khaled Mohamed Abdel
Aziz
• Ahmed Mohamed Naguib
• Ahmed Tarek
• Ahmed Talaat
• Karim Maher

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