The Role of Real-Time Event Monitoring in Dynamic Response to Disruptions

Abstract

This paper investigates a risk-averse firm's investment strategy in real-time event-monitoring technologies coupled with dynamic disruption response decisions. The firm does not know how long the disruption will last, and the event-monitoring solutions provide the firm with a quicker update regarding the length of the disruption. When the firm receives an update, it has the flexibility to revise its initial response action. We model a two-stage stochastic program to study this problem where risk aversion is modeled in the form of a Service-at-Risk constraint. Our paper makes four important contributions. First, it characterizes the optimal recourse strategies given an update and identifies the conditions when the firm benefits from the recourse. Second, we characterize the optimal investment and initial response strategies where we find that the investment behavior is non-monotone. Third, our paper shows an interesting impact of risk aversion on the investment decision such that the firm may benefit from investing in event monitoring at moderate degrees of risk aversion, but not necessarily at low or high degrees of risk aversion. Fourth, we find that a firm's benefit from event monitoring is more profound when the capacity of contingency response is moderately limited.