Optimal Strategy of Supply Chain considering Interruption Insurance

Abstract

The interruption of supply chain caused by unexpected events results in great economic losses. In this paper, we consider that the supply chain risk management consists of a manufacturer and a retailer faced with demand and supply uncertainties caused by the interruption of supply chain. We consider that the manufacturer transfers the disruption risk by purchasing BI (business interruption) insurance. Three models are established to illustrate the impact of insurance on supply chain decision-making under risk. It is observed that business interruption insurance can increase the retailer's order quantity and supply chain profit. The higher the interrupt probability is, the more obvious the value of the business interruption insurance is. Furthermore, the retailer helps the manufacturer to share the premium, and the manufacture shares the proceeds of insurance with the retailer, which can stimulate retailer to order more and increase the profit of manufacturer and retailer.