ModelChoice decision tree · Manufacturing

Supply Chain Resilience Decision

A nearshore second source, a better offshore supplier, vertical integration, or the status quo?

Complexity: ★★★★★
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From the model’s decision tree

Best first decision: Single Offshore Supplier

The expected value of each first option when every later decision is also made well (the tree rolled back).

First decision	Expected value
Nearshore + Dual Source	$10,690,000
Single Offshore Supplier	$12,085,000	✔ best
Vertical Integration	$2,345,000
Status Quo	$10,450,000

Measure	Value
Expected value of the best strategy	$12,085,000
Best outcome on the best strategy	$17,500,000
Worst outcome on the best strategy	$2,000,000

The best strategy: chance of each outcome or less

S-curve (cumulative probability) of Single Offshore Supplier from the saved simulation.

The decision

A consumer electronics manufacturer sources critical components from a single offshore supplier. Recent global disruptions (COVID, Suez Canal, chip shortage) have exposed the vulnerability of this approach. The COO must recommend a supply chain strategy to the board.

Objective

Maximize expected net profit over 5 years (revenue minus costs and disruption losses). This post-pandemic model shows why supply chain resilience has measurable economic value.

The options

Option 1: Nearshore + Dual Source ($3M): Establish a nearshore supplier as backup. Higher unit costs but much lower disruption risk (10% vs 25%). If major disruption hits, activate backup.
Option 2: Single Offshore Supplier ($500K): Continue current arrangement with minor improvements. Lowest cost if nothing goes wrong, but exposed to shipping delays, geopolitical risk, and quality. If geopolitical crisis: emergency nearshore, find alternative, or halt.
Option 3: Vertical Integration ($8M): Build own factory. Highest cost, factory ramp-up risk, but complete control. Eliminates supply chain dependency entirely.
Option 4: Status Quo: No investment. Current multi-supplier arrangement with known vulnerabilities.

The decision tree

The tree has 3 decisions, 10 chance events and 25 outcomes. The best path is open: at every decision the best choice is marked, and the expected value beside each branch counts every cash flow from the start. Open any other branch to see what follows it.

DecisionChance event+$ cash flow on the branch

Decision: Supply Chain Strategy

Nearshore + Dual Source −$3,000,000expected $10,690,000
Chance: Disruption Risk (Nearshore)
- 70% No Disruption +$15,000,000payoff $12,000,000
- 20% Minor Disruption +$12,000,000payoff $9,000,000
- 10% Major Disruptionexpected $4,900,000
  Decision: Major Disruption Response
  - Activate Backup Supplier −$500,000expected $4,900,000 ✔ best
    Chance: Backup Supplier Speed
    60% Fast Switchover +$10,000,000payoff $6,500,000
    40% Slow Switchover +$6,000,000payoff $2,500,000
  - Wait for Recoveryexpected $1,400,000
    Chance: Recovery Timeline
    40% Quick Recovery +$8,000,000payoff $5,000,000
    60% Extended Downtime +$2,000,000payoff −$1,000,000
Single Offshore Supplier −$500,000expected $12,085,000 ✔ best
Chance: Disruption Risk (Offshore)
- 45% No Disruption +$18,000,000payoff $17,500,000
- 25% Shipping Delays +$12,000,000payoff $11,500,000
- 15% Geopolitical Riskexpected $4,400,000
  Decision: Geopolitical Crisis
  - Emergency Nearshoring −$4,000,000expected $1,000,000
    Chance: Emergency Nearshore Outcome
    50% Successful Transition +$8,000,000payoff $3,500,000
    50% Partial Success +$3,000,000payoff −$1,500,000
  - Find Alternative Offshore −$1,500,000expected $4,400,000 ✔ best
    Chance: Alternative Supplier
    40% Good Alternative Found +$10,000,000payoff $8,000,000
    60% Poor Alternative +$4,000,000payoff $2,000,000
  - Halt Production −$2,000,000payoff −$2,500,000
- 15% Quality Issues +$5,000,000payoff $4,500,000
Vertical Integration −$8,000,000expected $2,345,000
Chance: Factory Ramp-Up
- 35% Smooth Ramp-Upexpected $8,900,000
  Chance: Market Demand (Smooth)
  - 35% Strong Demand +$25,000,000payoff $17,000,000
  - 45% Normal Demand +$15,000,000payoff $7,000,000
  - 20% Weak Demand +$7,000,000payoff −$1,000,000
- 40% Slower Than Expected −$1,500,000expected $2,450,000
  Chance: Market Demand (Slow Start)
  - 30% Strong Demand +$20,000,000payoff $10,500,000
  - 45% Normal Demand +$11,000,000payoff $1,500,000
  - 25% Weak Demand +$4,000,000payoff −$5,500,000
- 25% Significant Problems +$1,000,000payoff −$7,000,000
Status Quoexpected $10,450,000
Chance: Disruption Risk (Status Quo)
- 50% No Disruption +$16,000,000payoff $16,000,000
- 25% Minor Disruption +$10,000,000payoff $10,000,000
- 15% Major Disruption +$3,000,000payoff $3,000,000
- 10% Catastrophic Disruption −$5,000,000payoff −$5,000,000

Change the numbers. Open the workbook with ModelChoice, change a probability or a cost in the tree, and the best decision updates at once.

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Key assumptions

Assumption	Value	Notes
Nearshore Setup Cost	$3,000,000	Qualifying supplier, tooling, logistics
Offshore Improvement Cost	$500,000	Audit, quality systems, buffer stock
Vertical Integration Cost	$8,000,000	Factory build, equipment, staffing
Factory Ramp-Up Overrun	$1,500,000	40% probability of delay
Emergency Nearshoring Cost	$4,000,000	Crisis-mode supplier qualification
Geopolitical Risk (Offshore)	15%	Trade restrictions, sanctions, conflict
Major Disruption (Nearshore)	10%	Reduced by dual-sourcing
Catastrophic Loss (Status Quo)	−$5,000,000	Production halt, customer loss

The figures are illustrative: the companies and numbers are invented for teaching.

Try it in ModelChoice

Strategy Table. Compare resilience strategies with risk-return frontier
Sensitivity Analysis. How does disruption probability change the optimal strategy?
Risk Profile. What's the tail risk of the cheap offshore option?

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An illustrative example: the figures are invented for teaching. Last updated 9 October 2026.