Reasonable balance between costs and risks

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Reference no: EM131279171

Sarah, the procurement manager at Blenheim furniture wants to create a portfolio of suppliers for a new line of products her company is planning to launch. She wants to achieve a reasonable balance between costs and risks. The suppliers all reside in Christchurch, a location prone to earthquakes and flooding. Sarah believes that the probability in any year of a “super-event’ that might shutdown all suppliers at the same time for at least 5 weeks is 4%. Such a total shutdown would cost the company $500,000 approximately. She estimates the “unique-event” risk for any of the suppliers to be 6%. The marginal cost of managing an additional supplier is $15,000 per year. Evaluate how many suppliers Sarah should use assuming that there are up to three identical suppliers available.

Reference no: EM131279171

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