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%, and the probability of a "superevent" 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

Answer 1

Answer:

a) P=0.0175

b) P=0.0189

Step-by-step explanation:

For both options we have to take into account that not only the chance of a "superevent" will disable both suppliers.

The other situation that will disable both is that both suppliers have their "unique-event" at the same time.

As they are, by definition, two independent events, we can calculate the probability of having both events at the same time as the product of both individual probabilities.

a) Then, the probability that both suppliers will be disrupted using option 1 is

$P_1=P_{se}+P_{ue}^2=0.015+(0.05)^2=0.015+0.0025=0.0175$

b) The probability that both suppliers will be disrupted using option 2:

$P_2=P_{se}+P_{ue}^2=0.002+(0.13)^2=0.002+0.0169=0.0189$

Pue = probability of a unique event

Pse = probability of a superevent