Aster Medical Devices: Single-Source Hub Disruption
Aster Medical Devices makes infusion sets. A single supplier in an earthquake-exposed region provides the catheter hub used in products generating 34% of €260m revenue; annual hub spend is €6.2m and normal volume is 100,000 hubs a month. Lead time is 45 days and safety stock is 18 days; Aster currently holds 21 days of hubs. A six-week disruption is forecast, after which the supplier will need a further 45 days to deliver. Air freight can move 40,000 hubs per shipment at €38,000, up to 12 shipments. Qualifying a second source takes 22 weeks and €1.2m, with a 9% unit-cost premium. Two hospital customers have contracts with €40,000/day penalties when backorders exceed 5% of order lines. The COO wants to air-freight everything possible; the CFO argues that paying penalties is cheaper than freight and that Aster should allocate scarce hubs to the most profitable accounts.
1. Quantify the shortage and decide between air freight, penalty payments, and allocation.
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With 21 days of hubs and replenishment 45 days after restart, the shortfall runs for about 66 days. At 100,000 hubs a month, that is roughly 220,000 hubs. Air freight moves 40,000 hubs per shipment, so 220,000 ÷ 40,000 = 5.5, meaning six shipments at €38,000 = €228,000, or about €0.95 per hub.
Penalty exposure is €40,000 per day; 21 days of penalties alone is €840,000, before lost contracts and the cost of re-qualifying customers. On these numbers freight is far cheaper than defaulting, so the CFO's claim fails unless freight exceeds roughly €840,000 or the shortfall is under a week.
Do not simply fly everything. The 5% order-line tolerance means Aster can absorb some backorders, and the remaining 530 shipment slots are not the issue - the issue is prioritisation. Recommend six shipments released against a customer-priority list: the two penalty-bearing hospital accounts first, then products with the highest margin and the longest qualification cycle, then the rest. Track freight cost per hub against penalty cost per day weekly, and pre-agree with the hospitals what counts as an order line so the 5% threshold is not disputed after the event.
2. Should Aster invest €1.2m in a second source at a 9% unit-cost premium? Justify the answer beyond a simple expected-cost calculation.
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The annual premium is 9% × €6.2m = €558,000, plus €1.2m one-time. A simple expected-cost calculation is unflattering: if a six-week disruption occurs every five years and costs roughly €0.8m in penalties plus €0.23m in freight, the expected annual cost is about €0.2m, well below €558,000. On that basis, no.
But expected cost ignores tail risk and contract reality. The two hospital contracts are worth far more than the hub spend, and large hospital systems increasingly require validated dual sourcing in tenders. A single earthquake-exposed source is also a concentration risk that insurers and regulators will question.
The better answer is not the full 9% premium. Recommend a dual-source 70/30 split: keep 70% with the incumbent to preserve volume leverage, qualify the second source on 30% (about €1.86m of spend), and negotiate the premium down to 4–5%, or €75,000–€93,000 a year. Require the new supplier to hold 30 days of consignment stock. Meanwhile raise hub safety stock from 18 to 30 days during qualification; the carrying cost is trivial against €40,000 per day of penalty.