Enterprise IT service downtime cost and risk transfer in a supply chain

Abstract

In this paper we present an economic model for analyzing enterprise IT service downtime cost, first on a standalone basis and then in a supply chain setting. With a baseline probability model of Poisson arrival frequency with random downtime duration, we analyze optimal production of a firm’s investments in reducing frequency and duration of downtime, and corresponding premiums for insuring against downtime cost. We also present a model for the spillover effect of downtime for interconnected firms in a supply chain, and discuss how third-party insurance coverage can help enterprises to internalize the externalities of spillover effects on the supply chain.