How many suppliers are best? A decision-analysis approach

As more supply chains are becoming dependent upon suppliers, an interruption of supply networks can obstruct the functionality of the entire supply chain. The purpose of this paper is to present what we believe is a useful way to think about the number of suppliers needed in the presence of risks. We model the decision-making process using a decision tree approach. We consider catastrophic, “super-events,” which affect many/all suppliers, as well as “unique events” that affect only a single supplier. The probabilities of these events, the financial loss caused by disasters, and the operating cost of working with multiple suppliers are captured by decision trees, from which the expected cost function is obtained and the optimal number of suppliers is determined. Our methodology will help purchasing managers, materials management, as well as academics that are considering such issues.