Reference no: EM133865204

Question

PepsiCo wants to create a portfolio of suppliers for the corn used in their products that will represent a reasonable balance between costs and risks. While it knows that the single-supplier approach has many potential benefits with respect to quality management and just-in-time production, there are also worries about the risk of fires, natural disasters, or other catastrophes at supplier plants disrupting their firm's performance. Based on historical data and climate and geological forecasts, the organisation estimates the probability of a "super-event" that would negatively impact all suppliers simultaneously to be 0.5% (i.e., probability = 0.005) during the supply cycle. They have further estimated that the "unique-event" risk for any of the potential suppliers to be 4% (probability = .04). Assuming that the marginal cost of managing an additional supplier is R10,000, and the financial loss incurred if a disaster caused all suppliers to be down simultaneously is R10,000,000. Critically evaluate the approach that you will use in determining the number of suppliers to be used. Assume that up to three nearly identical suppliers are available. Make use of relevant illustrations.