Phillip Witt, president of Witt Input Devices, wishes to create a portfolio of l
ID: 448450 • 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, torna-does, 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 for at least 2 weeks is 3%. Such a total shutdown would cost the company approximately $ 400,000. 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 $ 15,000 per year, how many suppliers should Witt Input Devices use? Assume that up to three nearly identical local suppliers are available.
Explanation / Answer
Probability of ‘super event’ that shut down all suppliers at least for 2 weeks is 3%. Cost of total shut down $ 400000. ‘Unique risk’ for any suppliers is 5%. Marginal cost for additional supplier is $ 15000 per year. Local suppliers available are 3.
Witt Input Devices use 2 additional suppliers as the unique event risk for supplier is 5%. Also shutting down cost is much higher rather using additional suppliers.