Question: Phillip Witt president of Witt Input Devices wishes to create
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, torna-does, 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.
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