How many suppliers should witt input devices use

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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 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.

Reference no: EM131258609

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