From Superstorms to
Factory Fires: Managing
Unpredictable Supply-Chain
Disruptions
by David Simchi-Levi, William Schmidt, and Yehua Wei
FROM THE JANUARY 2014 ISSUE
Traditional methods for managing supply chain risk rely on knowing the
likelihood of occurrence and the magnitude of impact for every potential
event that could materially disrupt a firm’s operations. For common supplychain
disruptions—poor supplier performance, forecast errors, transportation
breakdowns, and so on—those methods work very well, using historical data to
quantify the level of risk.
But it’s a different story for low-probability, high-impact events—megadisasters like
Hurricane Katrina in 2005, viral epidemics like the 2003 SARS outbreak, or major
outages due to unforeseen events such as factory fires and political upheavals.
Because historical data on these rare events are limited or nonexistent, their risk is
hard to quantify using traditional models. As a result, many companies do not
adequately prepare for them. That can have calamitous consequences when