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Guilt by Association: Strategic Failure Prevention and Recovery Capacity Investments

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  • Sang-Hyun Kim

    (Yale School of Management, Yale University, New Haven, Connecticut 06511)

  • Brian Tomlin

    (Tuck School of Business at Dartmouth, Hanover, New Hampshire 03755)

Abstract

We examine technological systems that display the following characteristics: (i) unplanned outages incur significant costs, (ii) the system experiences an outage if one or more of its subsystems fails, (iii) subsystem failures may occur simultaneously, and (iv) subsystem recovery requires specific resources and capabilities that are provided by different firms. Firms may invest in two measures to enhance system availability---namely, failure prevention and recovery capacity. If recovery capacity investment is the only option, we find that the firms in a decentralized setting overinvest in capacity, resulting in higher system availability but at a higher cost. If both investments can be made, we find that the firms underinvest in failure prevention and overinvest in recovery capacity. That is, firms in a decentralized setting shift their focus from preventing failures to responding to failures. The net effect is lower system availability, reversing the conclusion above. We also find that, unexpectedly, firms are more willing to let their subsystems fail if a joint failure is more likely to occur. This paper was accepted by Martin Lariviere, operations management.

Suggested Citation

  • Sang-Hyun Kim & Brian Tomlin, 2013. "Guilt by Association: Strategic Failure Prevention and Recovery Capacity Investments," Management Science, INFORMS, vol. 59(7), pages 1631-1649, July.
    • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:7:p:1631-1649
    DOI: 10.1287/mnsc.1120.1658
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    References listed on IDEAS

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    Cited by:

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    3. Kort, Peter & Lavrutich, Maria & Nunes, Cláudia & Oliveira, Carlos, 2023. "Preventive investment, malfunctions and liability," International Journal of Production Economics, Elsevier, vol. 263(C).
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    14. Wang, Haijun & Tan, Jie & Guo, Shuojia & Wang, Shenhao, 2018. "High-value transportation disruption risk management: Shipment insurance with declared value," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 109(C), pages 293-310.
    15. Malgorzata Pankowska, 2019. "Information Technology Outsourcing Chain: Literature Review and Implications for Development of Distributed Coordination," Sustainability, MDPI, vol. 11(5), pages 1-28, March.
    16. Jin Sung Rha, 2020. "Trends of Research on Supply Chain Resilience: A Systematic Review Using Network Analysis," Sustainability, MDPI, vol. 12(11), pages 1-27, May.
    17. Azimian, Alireza & Kilgour, D. Marc & Noori, Hamid, 2016. "Mitigating contagion risk by investing in the safety of rivals," European Journal of Operational Research, Elsevier, vol. 254(3), pages 935-945.
    18. Shao, Xiao-Feng, 2018. "Production disruption, compensation, and transshipment policies," Omega, Elsevier, vol. 74(C), pages 37-49.
    19. Na Wang & Jingze Chen & Hongfeng Wang, 2023. "Resilient Supply Chain Optimization Considering Alternative Supplier Selection and Temporary Distribution Center Location," Mathematics, MDPI, vol. 11(18), pages 1-22, September.
    20. Ivanov, Dmitry & Pavlov, Alexander & Sokolov, Boris, 2014. "Optimal distribution (re)planning in a centralized multi-stage supply network under conditions of the ripple effect and structure dynamics," European Journal of Operational Research, Elsevier, vol. 237(2), pages 758-770.
    21. Juan Camilo Serpa & Harish Krishnan, 2017. "The Strategic Role of Business Insurance," Management Science, INFORMS, vol. 63(2), pages 384-404, February.
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