Developing a new PRW policy with limitation on each rectification cost

Abstract

Warranty as a kind of service contract today plays a key role in business and legal transactions. Currently, a large number of products are being sold with warranty policies in the form of free replacement warranty, pro-rata warranty, and combined warranty policies. During PRW, when the product fails, the failed product is replaced with a new product with some cost to the consumer. Modeling failures and costs of PRW have complexities; because rectification cost of a product is in fact a random variable that interest rates and inflation will affect it. In this research we present a new pro rata warranty model. In this model the cost of individual claims to the manufacturer is limited to a predetermined fixed cost. Mathematical model for predicting expected costs to the manufacturer and buyer is developed at system level and analyzed by capturing the uncertainties of rectification costs over warranty period and considering the inflationary conditions. Finally, the model has been tested using numerical example.