Customized warranty policies for heterogeneous populations

Abstract

Warranty policies are typically optimized under the assumption that customer populations are homogeneous—each customer's time to failure is calculated from the same probability distribution. A more realistic approach to the study of optimal warranty duration leads to the consideration of heterogeneous customer populations, where customers can be divided into groups, with each group following a separate failure distribution. This situation can be addressed in two ways. First, the individual failure distributions can be used to find optimal warranty durations for each customer group. Second, the distributions of the groups can be mixed to form a single distribution, used to optimize a warranty policy for the entire population. In this study, our objective is to analyze the economic impact of implementing a customized warranty policy. We begin by calculating failure distributions for each customer group that are dependent on the differentiating customer characteristic as well as one for the entire population. In addition, we develop a demand curve that is a function of the warranty duration and a profit function that utilizes demand, population, and failure properties to determine the total profit generated by each customer group. We can maximize this profit by changing the duration of the warranty to find an optimal warranty policy for each of these customer profiles. The same profit optimization is then used to develop a warranty policy for the overall distribution situation. We find that the implementation of customized warranty policies increases the profitability of the system when operating under the assumption that customization does not change the demand profile.