The impact of parts obsolescence on contracts for durable goods with after-sales service

Abstract

High-quality product support is vital for production, because utility can only be generated by working equipment and system downtime can cause serious consequences. Thus, the suppliers are often required to provide efficient product maintenance and repair services for customers. Component obsolescence is a challenging factor for spare parts management which affects the overall system performance. In this paper, we build a game-theoretic model to study joint contracting on product order quantity and after-sales service in a B2B supply chain, where spare part availability is affected by obsolescence risk, and the after-sales service is operated under the warranty and transaction-based contracts (W&T) and the performance-based contracts (PBC). Our model provides advice for practitioners on how to choose a service contract type: Given a low (high) cost of lifetime-buy of parts, W&T can lead to a higher (lower) supply chain profit than PBC when the warranty period is sufficiently long. Furthermore, we find that PBC can result in higher product availability; however, this may be achieved by overinvestment in spare parts when the supplier is penalised on the buyer's lost revenue, and in such a setting the buyer may order fewer products, which leads to lower profits for the supplier.