Contracting for Infrequent Restoration and Recovery of Mission-Critical Systems

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dc.contributor.authorKim, Sang-Hyun
dc.contributor.authorCohen, Morris A
dc.contributor.authorNetessine, Serguei
dc.date2023-05-17T14:58:15.000
dc.date.accessioned2023-05-23T00:15:27Z
dc.date.available2023-05-23T00:15:27Z
dc.date.issued2010-09-01
dc.date.submitted2016-07-12T14:07:44-07:00
dc.description.abstractFirms that rely on functioning mission-critical equipment for their businesses cannot afford significant operational downtime due to system disruptions. To minimize the impact of disruptions, a proper incentive mechanism has to be in place so that the suppliers provide prompt restoration and recovery services to the customer. A widely adopted incentive mechanism is performance-based contracting (PBC), in which suppliers receive compensation based on realized system uptime. A key obstacle is that disruptions occur infrequently, making it very expensive for a supplier to commit the necessary resources for recovery because they will be idle most of the time. In this paper, we show that designing a successful PBC creates nontrivial challenges that are unique to this environment. Namely, because of the infrequent and random nature of disruptions, a seemingly innocuous choice of performance measures used in contracts may create unexpected incentives, resulting in counterintuitive optimal behavior. We compare the efficiencies of two widely used contracts, one based on sample-average downtime and the other based on cumulative downtime, and identify the supplier's ability to influence the frequency of disruptions as an important factor in determining which contract performs better. We also show that implementing PBC may create high agency cost when equipment is very reliable. This counterintuitive situation arises because the realized downtimes from which the customer might intuit about the supplier's capacity investment are highly uncertain when there are not many samples of downtimes, i.e., when disruptions occur rarely.
dc.identifier.urihttps://repository.upenn.edu/handle/20.500.14332/42072
dc.legacy.articleid1141
dc.legacy.fields10.1287/mnsc.1100.1193
dc.legacy.fulltexturlhttps://repository.upenn.edu/cgi/viewcontent.cgi?article=1141&context=oid_papers&unstamped=1
dc.source.beginpage1551
dc.source.endpage1567
dc.source.issue167
dc.source.issue9
dc.source.journalOperations, Information and Decisions Papers
dc.source.journaltitleManagement Sciecne
dc.source.peerreviewedtrue
dc.source.statuspublished
dc.source.volume56
dc.subject.otherservice outsourcing
dc.subject.othersupply chain
dc.subject.otherafter-sales support
dc.subject.othermaintenance–repairs
dc.subject.otherdisaster recovery
dc.subject.otherOperations and Supply Chain Management
dc.titleContracting for Infrequent Restoration and Recovery of Mission-Critical Systems
dc.typeArticle
digcom.identifieroid_papers/167
digcom.identifier.contextkey8827347
digcom.identifier.submissionpathoid_papers/167
digcom.typearticle
dspace.entity.typePublication
upenn.schoolDepartmentCenterOperations, Information and Decisions Papers
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