Allocation After a Tier-2 Fire
A contract manufacturer supplies three OEM customers from one plant. A fire at its sole Tier-2 supplier of a machined housing eliminates 40% of capacity for 10 weeks. The plant holds 3,200 housings, weekly demand is 1,000, and contracts specify a 95% fill rate with penalties of $12,000 per week per customer below 90%. Customer A is 55% of revenue and has a strategic long-term agreement; Customer B is 30% and growing; Customer C is 15% and pays premium prices. The Tier-2 supplier can ship 600 units/week from an alternate site beginning week 5 after three weeks of qualification. The plant has one other qualified source that can produce 250 units/week at 18% higher cost, starting immediately. Sales has promised Customer A no disruption. Finance wants to minimize penalty and premium-freight costs. Operations wants equal service for all customers. What should the supply chain lead recommend?
1. Recommend a week-by-week allocation for weeks 1-10. Show the supply-demand balance and state which customer bears the residual shortfall.
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Start with the balance. Weeks 1-4: inventory 3,200 plus alternate source 250/week = 4,200 available against 4,000 demand. Fill all customers at 100% and end week 4 with 200 units. Weeks 5-10: alternate 250 plus Tier-2 600 = 850/week against 1,000 demand, a 150/week gap, or 900 over six weeks. The 200 buffer reduces the net gap to 700.
A defensible allocation is: A 550/week (100%), B 285/week (95%), C 15/week from constrained supply. That totals 850/week. C is below 90% and triggers the $12,000/week penalty, or $72,000 over six weeks. Therefore, price a bridge buy of 135/week for C so C reaches 90%. If the bridge-buy premium is below $12,000/week, buy it; if it is above, let C take the penalty and document the trade-off. Do not equal-allocate: equal service would push A and B below 90% and trigger two penalties while breaking the Sales promise to A.
Report the plan as a rolling allocation, not a fixed promise. Recalculate weekly as Tier-2 output and bridge-buy availability are confirmed.
2. What risk-mitigation actions should be launched during the 10 weeks, and which contracts should be changed afterward?
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During the 10 weeks: map the Tier-2 site and qualify the alternate source immediately; reserve capacity at the 18%-higher-cost source only for A and B; place a small strategic buffer of finished housings; assign one person to daily Tier-2 output tracking; and pre-agree allocation rules with Sales so promises are not made outside the plan.
Afterward, change contracts and sourcing design. Add Tier-2 visibility and right-to-audit clauses, require disclosure of sole-source sub-tier sites, and pre-approve an alternate source before the next contract. Add a capacity-reservation clause or a pre-priced surge option. Clarify force-majeure allocation rights so the plant is not forced into equal allocation when one customer is strategic. Finally, set a target of no single Tier-2 site above 60% of a critical part's capacity, with a qualified backup or a documented risk acceptance.
3. Draft the customer communication for Customer C and the internal metric set the lead should report weekly.
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Customer C message: state the confirmed supply gap, the weeks affected, the volume C will receive, and the bridge-buy option being priced. Avoid blaming the Tier-2 supplier and avoid promising full recovery until the alternate site is qualified. Offer a weekly call and a recovery date. If C will be below 90%, disclose the penalty exposure and the plan to cure it.
Internal weekly metrics: fill rate by customer; days of supply by customer; Tier-2 actual versus committed output; bridge-buy units and premium cost; penalty exposure by customer; recovery milestone status; and inventory buffer consumed. These metrics connect the allocation decision to financial and customer consequences, which is what the exam expects rather than a generic 'improve communication' answer.