Samsung needs your assistance determining whether to source a critical component from outside Korea using either one, two, or three suppliers.

• Samsung estimates the probability of a super-event which would knock out all of the potential suppliers (e.g. a natural disaster or global pandemic) to be 1.5%.
• Samsung estimates the probability that any given supplier fails independently of the others (e.g. due to a quality or yield failure) to be 5.5%.
• The cost to manage a supplier is $12,000 per year.
• A total disruption of the order would create an annualized loss of $9,000,000

Rounding instructions: Enter all costs in as positive amounts in dollars rounded to the nearest dollar.

Part a. Draw a decision tree to determine the best strategy for Samsung. Use a cost minimization approach.

a1) For the single supplier strategy

The total expected cost is $ _________

a2) For the dual supplier strategy

The total expected cost is $ _________

a3) For the triple supplier strategy

The total expected cost is $ _________

a4) What is the optimal strategy?

Answer: Three Suppliers, One Supplier, or Two Suppliers?

a5) The optimal expected cost is $ _______

Part b.To reduce the risk of a total disruption, Samsung is considering cross-country diversification: one supplier in China, one in Eastern Europe, and one in the US.

• If Samsung does this, the cost to manage a supplier increases to $24,000 per year
• The probability of a super-event decreases to 1.25%, but the probability of a unique-event increases to 5.75%.
• The loss from a total disruption remains the same.

b1) The optimal expected cost with cross-country diversification is $ _______

b2) Calculate the potential cost savings obtained from cross-country diversification. Enter 0 if expected total costs increase due to cross-country diversification.

Potential savings = $ _________