AIR Worldwide (AIR) has expanded its suite of Catastrophe Risk Engineering (CRE) products to help quantify, mitigate, and manage the risk associated with the impact of catastrophes on supply chain networks.
AIR’s new offering is designed to 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.”
A supply chain is a collection of operational points, or nodes (as a simple example, a location with a single function such as a production facility, supplier, or distribution center), that are linked based on functional and revenue stream relationships. When all nodes in the network are identified and appropriately characterized, quantifying the physical damage potential associated with each individual node is a relatively straightforward exercise.
However, 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 percent or 100 percent disruption one node at a time and propagating the impact through the entire supply chain,” explained 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.”
Gupta says AIR’s CRE products 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 products also account for the level of disruption at each location from multiple perils,” he says.
Understanding both the upstream and downstream components of the supply chain network enables companies to clearly identify network vulnerabilities, as well as the potential impact of catastrophes to their supply chain and, ultimately, to their business. With this information, corporations can consider various physical, financial, or operational mitigation measures to undertake to improve supply chain resiliency; they can also incorporate such measures into the network analysis to quantify distinct benefits.
Risk managers and brokers use AIR’s CRE products for risk assessment, mitigation, and emergency response planning. They are also used to facilitate decisions regarding insurance coverage. By combining CRE capabilities with AIR’s risk modeling, AIR is able to provide catastrophe risk products for commercial and industrial supply chain networks worldwide.