Asked by McKall Hulsey on Jun 21, 2024
Verified
Machado Construction is considering two options for its supplier portfolio. Option 1 uses two local suppliers. Each has a "unique-event" risk of 8%, and the probability of a "super-even" that would disable both at the same time is estimated to be 2.5%. Option 2 uses two suppliers located in different countries. Each has a "unique-event" risk of 18%, and the probability of a "super-event" that would disable both at the same time is estimated to be 1.2%.
(a) What is the probability that both suppliers will be disrupted using option 1?
(b) What is the probability that both suppliers will be disrupted using option 2?
(c) Which option would provide the lowest risk of a total shutdown?
Unique-Event Risk
Risk associated with a specific and non-recurring event that can affect the outcome of a project or investment.
Super-Event
A significant occurrence or gathering with a large impact, often exceeding the scale and effects of typical events.
Total Shutdown
A situation where an organization ceases all operations, often due to economic challenges, natural disasters, or strategic decisions.
- Elucidate techniques for mitigating risks within supply chains, notably through the diversification of suppliers.
Verified Answer
From (S11 - 1), P(2) = 0.025 + (1 - 0.025)0.082 = 0.025 + 0.975(0.0064) = 0.03124
(b) S = 0.012; U = 0.18
From (S11 - 1), P(2) = 0.012 + (1 - 0.012)0.182 = 0.012 + 0.988(0.0324) = 0.04401
(c) Since 0.03124 < 0.04401, Option 1 (two local suppliers) carries the lower risk.
Learning Objectives
- Elucidate techniques for mitigating risks within supply chains, notably through the diversification of suppliers.
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