This document presents a framework for proactively planning for catastrophic risks in a supply chain. It involves identifying key locations, potential threats, estimating probabilities and losses, and evaluating countermeasures. Key steps include supply chain mapping to identify locations, using simulators to estimate probability of catastrophes based on historical data, considering various types of losses, and using a risk management matrix to evaluate countermeasures based on their costs and impacts on probability and loss. The goal is to mitigate risk and losses from potential catastrophes through preventative planning and countermeasures.

1. Journal of OperationsManagement
A.Micheal Knemeyer, Walter Zinn, Cuneyt Eroglu
Shriram Prabhu.S
Shanmukha Sreenivas.P
-Shriram Prabhu S & Shanmukha Sreenivas P 1

2. SUPPLY CHAIN
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3. Risk Categorization scheme
No Minor Medium Serious Catastrophic
Business Impact
Probability
Very High
High
Medium
Low
Very Low
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4. Primary focus
Proactive planning for a catastrophic event and not how
to respond once a catastrophe occurs .
Prevention is better than cure !!!!
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5. Conceptual framework for Risk
analysis
Risk
Assessment
&
Vulnerability
Analysis
Risk
perception
Risk
Management
Strategies
Continuous Evaluation
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6. Process of proactive planning
1)Identify key locations and threats
2)Estimate probabilities and
potential loss for each location
3)Evaluate alternate
countermeasures for each location
4)Select counter measures for each
location
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7. Step 1a: Identify key locations
A location is considered key if interruption of its
operations results in a major disruption in the flow of
goods in the supply chain.
One methodology used for the same is supply chain
mapping.
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8. Supply chain mapping
A visual representation of goods, information,
processes, and money flows that occur throughout a
supply chain, both upstream and downstream.
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9. Why supply chain mapping?
Supply chains must now compete against other supply
chains
Supply chains are a points of strategic advantage
Maps highlight inefficiencies
Provide a methodology for analyzing processes
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10. Step 1b: Listing of threats
Once key locations are identified , a list of potential
threats to each location should be established.
Possible sources – Public sources, Insurance
companies.
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11. Step 2a: Estimation of probabilities
In this step, we estimate probabilities for each
potential catastrophe for each key location
Simulators are used typically. These use historical data
as input.
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12. Scheme of a Simulator
Damage
Estimation
Policy
Conditions
Local Intensity
Calculation
Exposure Data
Event
Generation
Insured Loss
calculation
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13. Step 2a: Contd.
The probability distributions for different potential
catastrophes are convolved to produce a consolidated
probability distribution for each key location
Point estimates are generated by looking at
hypothetical loss values.
Disruption Analysis Network DA_NET
Wu et al. (2007)
This paper presents a network-based modelling methodology to determine how changes or
disruptions propagate in supply chains and how those changes or disruptions affect the
supply chain system.
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14. Model output
Key location Catastrophe 1 Catastrophe
2
Catastrophe
3
Overall
KL 1 X.XXX Y.YYY Z.ZZZ A.AAA
KL 2 B.BBB C.CCC D.DDD E.EEE
These point estimates are probability values
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15. Scheme of a Hurricane Simulator
Past data, prev
damages
Policy
Conditions
Local wind fields,
distance from
coast..etc
Exposure Data
Exp no. of hurricanes in a
season,,hurricane
size,centralpressure,wind
speed
Total exposure of an
insurance company
(not dealt here)
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16. Step 2b: Estimate loss
Effect on revenue
and cost
Potential loss of
market share
Loss of customer
trust
We estimate loss from a catastrophic event.
We should consider total impact of the loss of the
facility on the supply chain.
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17. Possible losses
Human resources
Product/Inventory
Physical assets
Public infrastructure
Information
Financial
Helfrich and Cook (2002)
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18. Approach with losses
Look at quantifiable losses at first.
Use managerial discretion and know how to estimate
qualitative items
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19. Potential Loss function
PLK = PK LK
Where,
PK is the probability estimate of a catastrophic event impacting key
location K
LK is the estimated loss incurred if catastrophic event occurs at location
K
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20. Step 3: Evaluate Countermeasures
To manage risk we make use of a catastrophic risk
management matrix.
It shows the probability estimate of a catastrophic
event against the estimated loss exposure for each of
the firm’s key locations.
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21. Catastrophic risk management
Matrix
•Managers prepare
and implement
counter measures to
mitigate risk from ‘C’
Events
•Managers accept the
risk as potentially
less costly than
counter measures
•Managers prepare
and implement
counter measures to
mitigate loss & risk
from ‘C’ Events
•Managers prepare
and implement
counter measures to
mitigate loss from ‘C’
Events
Loss
Mitigation
Risk & Loss
Mitigation
Risk
Mitigation
Risk & Loss
Acceptance
Proability
Estimated loss from the catastrophic event
Lower Higher
Lower Higher
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22. Considerations
For each counter measure consider the following
Cost of the countermeasure.
Effect on PK i.e. quantum of reduction of PK.
Effect on LK i.e. increase in Loss if catastrophe occurs
in spite of the countermeasure.
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23. Model Output
Key
Counter
Investmen
location
measure
t
Cost
Rs /
Year
Reductio
n in PK
Loss L K Change
in PL
Rs/Year
Ignore those countermeasures whose cost exceeds decrease in PL
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24. Implementation
Implementation team needs to decide the frequency of
this exercise.
Organizational commitment and zest to this complex
process is vital
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25. -Shriram Prabhu S & Shanmukha Sreenivas P 25