Phillip Witt, president of Witt Input Devices, wishes to create a portfolio of l
ID: 385071 • Letter: P
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 2%. Such a total shutdown would cost the company approximately $480,000. He estimates the "unique-event" risk for any of the suppliers to be 5%. 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.
Explanation / Answer
EMV is a risk management technique used in both small and large projects and is one of the techniques used in PMBOK guide.It is a statistical technique which is used for conversion of the risk into quantifiable numbers and helps to comparebetween many risks.
In other words, it helps in calculating the amount required to manage all identified risks as well as in selecting the choice which involvesless money to manage the risks.
EMV is calculated using the formula,
EMV= Probability * Impact
In the above scenario, given:
EMV of using a single supplier will be:
EMV= 5%*-$480,000= -$24,000
EMV for using two supplier will be:
EMV= EMV for first supplier+EMV for having a second supplier+any additional cost
=-$24000+7%*$495500
=-$24000-$34,685
=-$58,685
EMV for using three suppliers will be,
EMV= -$58685+7%*$511,000
= -$59,770