Babcock and Wilcox (B&W) obtained the contracts for the supply of fuel material, boilers and services of the steam engine by bidding. It had many manufacturing facilities that operated internationally in China, India, Egypt, Mexico, Indonesia and Turkey. As acquisitions that started in 1978, the B&W Company became a big player in the fuel and power industry. However, since bidding on projects was a very expensive process, the company had to first evaluate the available orders to calculate the feasibility of the projects. It was estimated that an average bid could be as expensive as a million dollars. Therefore, it was necessary for B&W to bid for only those contracts that were highly probable to be converted to contracts within that year. Since the business of manufacturing boilers and other related products was highly capital intensive, it was necessary for the company to plan ahead of the contracts about the revenue the contracts are going to generate and to optimally utilize the manufacturing capacity. A failure in the estimate about revenue and the capacity utilization could be very crucial for the company because the costs associated with low capacity utilization or loss of revenue was very high. Therefore, it was critical for the company to take into account all the factors while planning ahead in the future about revenue and expenses. Since the company had limited resources, it had to select the best of all the available resources to maximize profit and the utilization of available capacity. The company could not simply selected the projects with the highest values without taking into account costs associated with the projects and the shop hours it would require from the manufacturing facilities. Therefore, probabilities were used to assess the expected profit, compare it with the number of shop hours required and then, finally selected the best projects that maximized the profit for the company.
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1. How is B&W using probabilities in their forecasting?
2. How might they quantify the uncertainty in their forecasts?
3. How might they estimate their business risk?
4. What business can B&W expect to win in the first quarter of 1988?
5. In the same quarter, for what range of business activity should they plan?
6. What are the key assumptions in the P1 and P2 that might account for what you see?
7. What might you suggest would work better?