In the United States, the Federal Emergency Management Agency (FEMA) says that after a natural disaster, about 40 percent of affected businesses do not reopen. Managing risk, including supply chain risk, following a catastrophe is becoming increasingly important as businesses rely on multi-national operations.
AIR Worldwide has recently announced that it is expanding its suite of Catastrophe Risk Engineering (CRE) solutions to help quantify, mitigate, and manage the risk associated with the impact of catastrophes on supply chain networks. AIR’s new offering will help risk managers better assess and reduce their risk from catastrophic perils such as hurricanes, earthquakes, floods, tornadoes, and tsunamis. This includes risk not only from physical damage but also from direct and contingent business interruption losses across the entire supply chain network.
“The catastrophe risk to supply chain networks came into focus following the volcanic eruption in Iceland in 2010. Just one year later, awareness of this risk was heightened further by the Tohoku earthquake and tsunami in Japan, as well as the major flooding in Thailand,” said Dr. Akshay Gupta, P.E., director of AIR’s Catastrophe Risk Engineering practice. “While the catastrophe risk to supply chain networks is quite complex, it can be effectively quantified. Once completed, the work involved to quantify this risk can also help expand risk assessment to other noncatastrophe perils.”
AIR says the traditional approach to account for the resulting impact on a supply chain — and propagating the effect throughout the network — has considerable limitations.
“The existing method of assessing supply chain catastrophe risk is based on worst-case scenarios, establishing either 0% or 100% disruption one node at a time and propagating the impact through the entire the supply chain,” explained Dr. Gupta. “It does not include the likelihood or frequency of shutdown, nor does it consider the partial shutdown of a single node or the simultaneous disruption of multiple nodes. This traditional approach can now be improved to provide a realistic and comprehensive assessment of the supply chain’s catastrophe risk exposure.
Dr. Gupta continued, “AIR’s CRE solutions combine a detailed network analysis with catastrophe risk models. As a result, partial damage and downtime states for all nodes can be simultaneously and explicitly considered. CRE solutions also account for the level of disruption at each location from multiple perils. By quantifying the impact of these disruptions on the overall supply chain network, CRE solutions provide a much more realistic and reliable view of downtime and loss.”
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