Posted: February 7th, 2016

Evaluating disaster risk

Johnson Chemicals is considering two options for its supplier portfolio. Option 1 uses two local suppliers. Each has a “unique-event” risk of 5%, and the probability of a “super-event” that would disable both at the same time is estimated to be 1.5%. Option 2 uses two suppliers located in different countries. Each has a “unique-event” risk of 13%, and the probability of a “super-event” that would disable both at the same time is estimated to be 0.2%.

a) What is the probability that both suppliers will be disrupted using option 1?
b) What is the probability that both suppliers will be disrupted using option 2?
c) Which option would provide the lowest risk of a total shutdown?