Dynamic Warranty Reserve Planning Over a Finite Horizon

Abstract

This article studies the warranty reserve planning problem for a firm that makes electronic products and maintains a reserve fund for warranty claims. For accounting purposes, the reserve fund is adjusted periodically. We model this problem in a multiperiod single-product setting.We propose a model that incorporates the randomness of product sales and failures to explicitly characterize the time-varying behavior of the warranty demand, which allows the firm to dynamically manage the reserve fund. Since the firm will eventually discontinue the product, we investigate a multiperiod dynamic reserve planning model to optimize warranty reserve levels over a finite horizon. We derive a closed-form expression of time-dependent warranty demand with general product sales and failure distributions. From the perspective of after-sales service, this result can be used to explain the dynamics involved in demand for warranty service. With the objective of minimizing the discounted total loss, we obtain the optimal reserve-setting policy and prove that the firm should set the reserve fund at either zero or a warranty-demand-dependent base stock level. To show the applicability and flexibility of our model, numerical experiments are conducted for some typical sales patterns and the Weibull lifetime distribution.