Vehicle Maintenance Contracting in Developing Economies: The Role of Social Enterprise

Abstract

Problem definition: Difficulties in healthcare delivery in developing economies arise from poor road infrastructure of rural communities, where the bulk of the population resides. Although motorcycles are an effective means for delivering healthcare products, governments in developing economies lack expertise in proper maintenance, resulting in frequent vehicle breakdowns. Riders for Health, a nonprofit social enterprise (SE), has developed specialized capabilities that enable significant enhancements in vehicle maintenance. Riders for Health has engaged with the governments and provided its services using different contracting approaches. However, the effect of such practice on improving vehicle availability—the main social mission of Riders for Health—is not well understood. Academic/practical relevance: This paper presents one of the first rigorous analyses of how SEs achieve their goals through innovations in operations. Our analysis highlights the relationship between a social mission objective and a service contract choice, contrasting it with the choice by a profit-maximizing organization traditionally assumed in the service contracting literature in operations management. Methodology: We construct and analyze a stylized model that combines the elements of reliability theory and contract theory, explicitly accounting for the SE’s social mission in her objective function. Results: We find that the “total solution” approach of providing all aspects of vehicle maintenance, including fleet ownership, is a preferred choice for an SE that prioritizes improving vehicle availability; by contrast, an organization that focuses on profit maximization would find this approach less attractive. Moreover, we show that the total solution approach induces the SE to exert more efforts on failure prevention and repair lead time reduction in equilibrium. Our analysis also suggests that the SE could further improve vehicle availability by the total solution approach if it manages a large fleet that consists of vehicles with high resale values. Managerial implications: Our findings provide theoretical support for Riders for Health’s recent move toward the total solution approach as it expands its service into wider rural areas in many countries. The insights obtained from our analysis offer actionable guidelines to other SEs operating in developing economies.