Optimal decisions on product reliability, sales and promotion under nonrenewable warranties

Abstract

With the rapid development of technologies and the consequent emergence of new business modes, products such as smart phones and personal computers have come to have relatively short lifecycles. As a result, products are designed, produced, and sold to accommodate the shorter lifecycles. From a practical point of view, the sales of products are assumed to have two phases: regular sales and promotions/disposal. In this paper, we propose an optimization model to jointly design and determine product reliability, warranty policy, regular price, promotion price, and lengths of regular sales and promotions. These decision variables are correlated and influence the quantity of sales, the cost of research and development, the production cost, the warranty cost, and ultimately the total profit attainable from launching a new product. We investigate and compare four nonrenewable warranty policies, i.e., free replacement, free minimal repair, pro-rata replacement, and pro-rata minimal repair. Numerical examples and a sensitivity analysis provide the managerial insights into the influences of promotion, product reliability, prices, warranty, and sales period on sales quantity and total profit.