Risk Controlling Management Research On Supply Interruption Based On BI Insurance

This paper studies the differences of effects on inventory strategy and profit whena manufacturer purchases business interruption insurance (BI insurance) to controlsupply interruption. Although there have been several researches on supplyinterruption and BI insurance in theoretical circle at home and abroad, the relevantresearches on supply interruption focus on inventory strategy, multi-suppliers orbackup supplier and etc., and researches on BI insurance focus on introduction ofproducts or provisions designing. Based on the existing literature, this paper quantifiesBI insurance and offers firms to avail of BI insurance for supply interruptioncontrolling. This paper studies the values of BI insurance through comparisons ofinventory strategy and profit after the manufacturer purchases BI insurance to controlsupply interruption.This paper firstly constructs the decision model on maximization of profit basedon BI insurance when the manufacturer encounters an interrupt during a singlebusiness cycle. Then, this paper proves that there exists optimal inventory levelweather the manufacturer purchases BI insurance or not. Through the comparisonbetween two optimal inventory decisions, this paper obtains that BI insurance canreduce the level of inventory in some circumstances but will increase on the otherconditions. By comparing the inventory levels and profits based on two differentoptimal inventory decisions through numerical analysis, this paper obtains thatgoodwill cost and probability of supply interruption occurrence have significantimpacts on the values of BI insurance for supply interruption control. Also, this paperconstructs the decision model on maximization of profit based on BI insurance whenthe manufacturer encounters more than one interrupt during a single business cycle. Bycomparison to one interrupt, this paper obtains that the frequency of interruption also do affect the effects of BI insurance on supply risk controlling. At last, this paper setsup supply interruption controlling strategies based on BI insurance from both supplyand demand perspectives.This paper helps to improve both supply interruption risk management theoriesand BI insurance theories. Also this paper helps enterprises to better control supplyinterruption risks and thus improves their comprehensive benefit.