Question

Phillip? Witt, president of Witt Input? Devices, wishes to create a portfolio of local suppliers for his new line of keyboards. As the suppliers all reside in a location prone to? hurricanes, tornadoes,? flooding, and? earthquakes, Phillip believes that the probability in any year of a? "super-event" that might shut down all suppliers at the same time at least 2 weeks is

3?%.

Such a total shutdown would cost the company approximately

?$520,000.

He estimates the? "unique-event" risk for any of the suppliers to be

7?%.

Assuming that the marginal cost of managing an additional supplier is

?15,500

per? year, how many suppliers should Witt Input Devices? use? Assume that up to three nearly identical local suppliers are available.

Find the EMV for alternatives using? 1, 2, or 3 suppliers.

?EMV(1)equals=?$

EMV(2)equals=$

EMV(3)equals=$

?(Enter your response rounded to the nearest whole? number.)

Answer 1

• The probability of disruption of one supplier, P1 = Super event risk + Unique event risk = 0.03 + (1-0.03)*0.07 = 0.0979
• The probability of disruption of two supplier, P2 = Super event risk + Unique event risk = 0.03 + (1-0.03)*0.07*0.07 = 0.0348
• The probability of disruption of three supplier, P3 = Super event risk + Unique event risk = 0.03 + (1-0.03)*0.07*0.07*0.07 = 0.0303

EMV supplier = Probability of no disrupiton * Total cost of managing supplier + Probability of disruption * (Total cost of managing supplier + Total cost of risk)

Total cost of managing supplier 1 supplier = 15000 , | 2 suppliers = 15000 + 15000 = 3000 | 3 suppliers = 30000 + 15000 = 45000

EMV 1 = (1-P1) * 15000 + P1 * (15000 + 520000) = 0.9021*15000 + 0.0979* 535000 = $ 65,908

EMV 2 suppliers =  (1-P2) * 30000 + P2 * (30000 + 520000) = $48,072

EMV 3 suppliers =  (1-P3) * 45000 + P3 * (45000 + 520000) = $60,773

We can go with two supplier as it is least cost (EMV).