A Newsvendor's Procurement Problem when Suppliers Are Unreliable
Manufacturing & Service Operations Management
Competition and Diversification Effects in Supply Chains with Supplier Default Risk
Manufacturing & Service Operations Management
Supply Disruptions, Asymmetric Information, and a Backup Production Option
Management Science
Long-Term Contracts Under the Threat of Supplier Default
Manufacturing & Service Operations Management
Mitigating Supply Risk: Dual Sourcing or Process Improvement?
Manufacturing & Service Operations Management
Independence of Capacity Ordering and Financial Subsidies to Risky Suppliers
Manufacturing & Service Operations Management
Optimal Procurement Design in the Presence of Supply Risk
Manufacturing & Service Operations Management
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Disruptive events that halt production can have severe business consequences if not appropriately managed. Business interruption (BI) insurance offers firms a financial mechanism for managing their exposure to disruption risk. Firms can also avail of operational measures to manage the risk. In this paper, we explore the relationship between BI insurance and operational measures. We model a manufacturing firm that can purchase BI insurance, invest in inventory, and avail of emergency sourcing. Allowing the insurance premium to depend on the firm's insurance and operational decisions, we characterize the optimal insurance deductible and coverage limit as well as the optimal inventory level. We prove that insurance and operational measures are not always substitutes, and we establish conditions under which they can be complements; that is, insurance can increase the marginal value of inventory and can increase the overall value of emergency sourcing. We also find that the value of insurance is higher for those firms less able to absorb financially significant disruptions. As disruptions become longer but rarer, the value of emergency sourcing increases, and the value of inventory and the value of insurance increase before eventually decreasing. This paper was accepted by Martin Lariviere, operations management.