Suzy Jones Is Trying to Decide Whether to Use One

Essay

Suzy Jones is trying to decide whether to use one or two suppliers for the motors than go into the chain saws that her company produces. She wants to use local suppliers because her firm runs a JIT operation. Her factory is located in a coastal town that is prone to hurricanes. She estimates that the probability in any year of a "super-event" that might shut down all suppliers at the same time for at least two weeks is 5%. Such a total shutdown would cost the company approximately $100,000. She estimates the "unique-event" risk for any of the suppliers to be 8%. Assuming that the marginal cost of managing an additional supplier is $6,000 per year, should Suzy use one or two suppliers?