Transportation disruption risk management: business interruption insurance and backup transportation

Business interruption (BI) insurance and backup transportation have been widely used in distribution centers' daily risk management. If disruption occurs, a firm (distribution center) can exert efforts to resume its transportation, although its unit transportation cost during the recovery process is uncertain. This paper studies how ex ante BI insurance can affect the ex post transportation recovery, and compares BI insurance with the ex post action backup transportation. We investigate four strategies: basic strategy, BI insurance strategy, backup transportation strategy, and mixed strategy (integration of the last two). The distribution center that seeks the least profit loss prefers the mixed strategy to other three strategies. However, the mixed strategy might in turn require longer transportation recovery time than the BI insurance strategy. The BI insurance and transportation recovery are complementary, but the BI insurance and backup transportation are substitutable, the backup transportation and the transportation recovery are also substitutable. We also find that the choice of BI insurance strategy and the backup transportation strategy depends on transportation market, insurance market and distribution center's operational environments. (C) 2016 Elsevier Ltd. All rights reserved.