Halcyon Bank: One Supplier, One Region, One Problem
Halcyon Bank makes retail banking products for UK. A single supplier provides a component representing £188 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 6.7% more per unit and take 12 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 13% a year, with an expected outage of 13 weeks. Contribution margin at risk is about £0.98 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
- 13
- annual disruption probability pct
- 13
- contribution margin at risk per week m
- 0.98
alternative
- region
- same as incumbent
- qualification months
- 12
- unit cost premium pct
- 6.7
current sourcing
- suppliers
- 1
- annual spend m
- 188
- 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.