OUTSOURCING DECISION

In supply chain outsourcing decisions, a number of factors can involve uncertainty, and simulation can be useful in gaining better understanding of systems.  We begin by looking at expected distributions of prices for the component to be outsourced from each location. 

 

	Quote	Exchange	Product	Firm	Politic	P{OK}
China A	0.82	1.3,.2	0.1	0.15	0.05	=(1-D2)*(1-E2)*(1-F2)
China B	0.85	=above	0.09	0.15	0.05	=(1-D3)*(1-E3)*(1-F3)
China C	0.92	=above	0.07	0.13	0.05	=(1-D4)*(1-E4)*(1-F4)
Taiwan	1.36	1.03,.02	0.01	0.01	0.1	=(1-D5)*(1-E5)*(1-F5)
Vietnam	0.85	1.1,.1	0.15	0.25	0.05	=(1-D6)*(1-E6)*(1-F6)
Germany	3.2	0.9,.02	0.01	0.02	0.01	=(1-D7)*(1-E7)*(1-F7)
Iceland	2.65	1.6,.3	0.03	0.1	0.2	=(1-D8)*(1-E8)*(1-F8)
Michigan	2.4	1	0.02	0.2	0.03	=(1-D9)*(1-E9)*(1-F9)
California	3.85	1	0.01	0.25	0.03	=(1-D10)*(1-E10)*(1-F10)
Alabama	2.3	1	0.03	0.2	0.03	=(1-D11)*(1-E11)*(1-F11)

 

Here you have the basic stated quote from ten sources.  The exchange rate is given, and is normally distributed for cases China A, Taiwan, Vietnam, Germany, and Iceland with the mean and standard deviation stated.  China B and China C have the same exchange rate as drawn for China A.  Product, Firm, and Politic columns show the probability of a problem for each of the three categories.  The probability of no problem is thus given by the formula in the P{OK} column.

China A in this case has the lowest estimated price, but it has a wide expected distribution of exchange rate fluctuation.  These distributions will affect the actual realized price for the outsourced component.  The Chinese A vendor is also rated as having relatively high probabilities of failure in product compliance with contractual standards, in vendor financial survival, and in political stability of host country. 

Simulation to generate 1000 samples of actual realized price after exchange rate variance, to include having to rely upon an expensive ($5 per unit) price in case of outsourcing vendor failure.  Identify vendor costs, and the proportion of times that that vendor would have the lowest cost.  Also measure the proportion of times each vendor fails.  Compare the ten vendors in terms of costs and failure, analyze, and recommend.