Supply Chain Risk Management

Risk Measurement • 255

Assume a supplier delivers $1 million worth of parts to a company in the

third quarter of a year. e supplier also commits three infractions that quar-

ter—a late delivery, missing documentation, and a parts shortage. Further

assume the buyer assigns $30,000 in total nonconformance charges to these

infractions. e supplier’s SPI for the third quarter is 1.03, or (($1,000,000 +

$30,000)/$1,000,000). e SPI of 1.03 means the total cost of doing business

with this supplier is 3% higher than the unit price. If the unit price of a sup-

plier’s good is $127, then the estimated total cost of that item is really $130.81

($127 × 1 ...