Johnson Chemicals is considering two options for its supplier portfolio. Option

Question

Johnson Chemicals is considering two options for its supplier portfolio. Option 1 uses two local suppliers. Each has a "unique-event" risk of 5.8%, and the probability of a "super-event" that would disable both at the same time is estimated to be 1.6%. Option 2 uses two suppliers located in different countries. Each has a "unique-event" risk of 12%, and the probability of a "super-event" that would disable both at the same time is estimated to be 0.24%.

a) What is the probability that both suppliers will be distrupted 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?

Explanation / Answer

answer-

a) Probability that both suppliers will be disrupted using option 1, P(n) = S+(1-S)*Un = 1.6% + (1-1.6%)*(5.8%)2 = 0.01931

b) Probability that both suppliers will be disrupted using option 2 = 0.27% + (1-0.27%)*(12%)2 = 0.01706

Probability of total disruption using option 2 = 0.01706

c) Probability of total disruption is lower in case of option 2, therefore, Option 2 provides the lowest risk of a total shutdown.

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