Two-dimensional warranty period optimization considering the trade-off between warranty cost and boosted demand

Abstract

Product warranty in the market has a significant role in both protection and promotion. The manufacturer faces a problem of optimizing the warranty period considering a trade-off between the warranty cost and marketing competition. Meanwhile, for a two-dimensional (2D) warranty, customers with different usage rates have various perceptions on warranty period. Based on the relationships between nominal usage rate and customer’s usage rates, three different cases of designed 2D warranty period are discussed. Considering the variations in customers perceptions, a demand function based on attractiveness index is proposed to describe the boosted sales volume. Meanwhile, the expected warranty cost of 2D warranty based on a bivariate approach is derived when the product failures are minimally repaired. A profit model is developed to estimate the manufacturer’s expected profit of providing a longer warranty period. The optimal extension of 2D base warranty period is obtained by maximizing the manufacturer’s expected profit. Numerical examples in the automobile market are also conducted to validate the proposed model.