Question

In: Operations Management

Phillip? Witt, president of Witt Input? Devices, wishes to create a portfolio of local suppliers for...

Phillip? Witt, president of Witt Input? Devices, wishes to create a portfolio of local suppliers for his new line of keyboards. Suppose that Phillip is willing to use one local supplier and up to two more located in other territories within the country. This would reduce the probability of a? "super-event" that might shut down all suppliers at the same time at least 2 weeks to 0.3?%, but due to increased distance the annual costs for managing each of the distant suppliers would be ?$24 000 ?(still ?$16000 for the local? supplier). A total shutdown would cost the company approximately ?$450000. He estimates the? "unique-event" risk for any of the suppliers to be 4?%. Assuming that the local supplier would be the first one? chosen, how many suppliers should Witt Input Devices? use?

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

Based on the EMV? value, the best choice is to use.

Solutions

Expert Solution

The probability of disruption in case of 1,2 or 3 suppliers = Probability of super event + (1-probability of super event) * Probability of unique event risk

One supplier, P1 = 0.003 + (1-0.003) * 0.04 = 0.0428

Two supplier , P2 = 0.003 + (1-0.003) * 0.04^2 = 0.0045952

Three supplier , P3 = 0.003 + (1-0.003) * 0.04^3 = 0.0030638

EMV 1 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 = 16000 , | 2 suppliers = 16000 + 24000 = 40000 | 3 suppliers = 16000 + 24000 *2 = 64000

= (1-P1) * 16000 + P1 * (16000 + 450000) = 0.95712*16000 + 0.04288* 466000 = $35,296

EMV 2 suppliers =  (1-P2) * 40000 + P2 * (40000 + 450000) = $42,067

EMV 3 suppliers =  (1-P3) * 64000 + P3 * (64000 + 450000) = $65,378

We can go with one supplier as it is least cost.


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