Phillip Witt, president of Witt Input Devices, wishes to create a portfolio of l
ID: 385070 • Letter: P
Question
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 comma 00024,000 (still $16,000 for the local supplier). A total shutdown would cost the company approximately $380,000. 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.
Explanation / Answer
Probability of unique event, U = 4%
Probability of super event, S = 0.3%
Loss in the event of total shutdown, L = 380,000
Cost of managing local supplier, C1= 16,000
Cost of managing additional supplier , C = 24,000
EMV of using n suppliers = (S+(1-S)*Un)*L + nC
EMV of using 1 supplier (n=1) = (0.3%+(1-0.3%)*4%1)*380000+1*16000
= $ 32,294.40
EMV of 2 suppliers (n=2) = (.3%+(1-.3%)*4%2)*380000+16000+24000
= $ 41,746.18
EMV of using 3 suppliers (n=3) = (.3%+(1-.3%)*4%3)*380000+16000+24000*2
= $ 65,164.25
EMV of cost of using 1 supplier is the minimum.
Therefore With Input Devices should use only 1 supplier.