Driftwood Hotels: One Supplier, One Region, One Problem
Driftwood Hotels makes hospitality products for Southeast Asia. A single supplier provides a component representing $232 M of annual spend — around a third of bill-of-materials cost — and there is no qualified alternative.
Procurement has found a second source. It would cost about 7.4% more per unit and take 7 months to qualify. The incumbent has hinted that splitting the volume would cost the company its current pricing tier.
Risk modelling puts the chance of a material disruption at that supplier at roughly 10% a year, with an expected outage of 7 weeks. Contribution margin at risk is about $2.01 M a week if the line stops.
The alternative supplier's plant is in the same region as the incumbent's.
risk model
- expected outage weeks
- 7
- annual disruption probability pct
- 10
- contribution margin at risk per week m
- 2.01
alternative
- region
- same as incumbent
- qualification months
- 7
- unit cost premium pct
- 7.4
current sourcing
- suppliers
- 1
- annual spend m
- 232
- share of bom pct
- 33
Advise the COO. Your answer should provide:
- Analysis — price the insurance. What does dual sourcing cost, and what expected loss does it avoid?
- Risks — including whether this second source actually reduces the risk you care about.
- Recommendation — a sourcing structure and volume split, with the trigger to revisit.
State any assumptions you make.
80 points, 60% to pass.
- recommendation15
- market analysis20
- risk assessment25
- financial analysis20
Reveal suggested structure
Expected loss = probability x duration x margin per week. Compare against the annual premium of holding a second source. Then test whether the sources are correlated.