Optimal pro-rata warranty decision with consideration of the marketing strategy under insufficient historical reliability data

Abstract

Warranties play an important role in the market, not only safeguarding the rights and interests of consumers, but also promoting the sales and reputation of manufacturers. Due to their impacts on the market, manufacturers should take their warranty policies into consideration in developing an integrated marketing strategy which can promote a product by simultaneously considering pricing, production, and related post-sale services. Most of the studies regarding the issue of pro-rata warranties (PRW) only focus on cost analysis with the reliability estimation, and few consider how marketing strategies can be integrated in the warranty decision. Moreover, the manufacturer may not have sufficient historical data to estimate the deterioration of a newly developed product, and therefore, the results obtained from analytical models may not be reliable. A Bayesian analysis should be a reasonable approach in order to deal with such a problem for the situation of insufficient historical data because it can effectively assess the deterioration based on experts’ opinions and possibly few relevant data. Accordingly, this paper proposes a Bayesian decision-making model which considers the PRW policy with the pricing and the production strategy. Moreover, in order to deal with the complexity of computation of the proposed model, a heuristic algorithm is also provided, and finally, a practical application case is used to demonstrate its usefulness.