Extended Warranty Research Articles

Optimal extended warranty pricing and retailing strategies in a closed-loop supply chain

Extended warranties are widely adopted and accepted in the marketplace by manufacturers and retailers as it helps to enhance the customers' post-sale satisfaction. In closed-loop supply chains, the extended warranty not only generates profit for the manufacturer, but also provides warranty returns of the new products for remanufacturing. In this paper, a two-period model is developed and optimal pricing strategies for the extended warranties are derived. We compare the optimal pricing and retailing strategies of the extended warranties for remanufactured and new products offered by the manufacturer with and without the retailer's own extended warranty while considering the competition between the manufacturer and the retailer for the extended warranty of new products. We find that the introduction of the retailer's extended warranty does not always hurt the manufacturer's profit. Numerical analyses also show that there exists an optimal extended warranty length for the manufacturer that maximises its profit. Moreover, we show that the retailer cannot extract more profit by increasing the length of its own extended warranty.

Decision and coordination analysis of extended warranty service in a remanufacturing closed-loop supply chain with dual price sensitivity under different channel power structures

This paper studies the impact of dual price sensitivity (product price sensitivity and extended warranty service price sensitivity) on the decision of the closed-loop supply chain (CLSC) where manufacturers are responsible for recycling and providing extended warranty service under different channel power structures. First, the dynamic game model is used to describe the three channel power structure models of centralized (C), Manufacturer-led Stackelberg (MS), and Retailer-led Stackelberg (RS). Then, mathematical optimization and reverse induction are used to derive supply chain decision-making and performance levels. On this basis, we further designed a contract to coordinate the supply chain, and use numerical examples to analyze and verify the impact of remanufacturing cost savings and dual price sensitivity on the supply chain system. Research shows that channel power structures, remanufacturing cost savings and dual price sensitivity all have an important impact on the supply chain and corporate profits.

“Free replacement extended warranty” or “traditional extended warranty”: Optimal extended warranty selection strategy

A variety of new extended warranty services are increasingly emerging nowadays, among which “free replacement extended warranty” service is favored by many consumers. Considering resource constraints and cannibalism, firms are facing the challenge of providing the “free replacement extended warranty” service (NR) or the “traditional extended warranty” service (EW). To meet this challenge, we develop theoretical models and optimize the models to obtain management implications. The results show that firms should choose the NR strategy when the traditional extended warranty cost coefficient is relatively high and the free replacement cost coefficient is relatively low. Otherwise, the EW strategy is better.

Extended Warranty Strategy and Its Environment Impact of Remanufactured Supply Chain.

To reduce environmental pollution, the government has issued relevant laws and regulations, and more and more enterprises engage in remanufacturing and recycling used products. Trade old for new and trade old for remanufactured have become marketing means to promote product recycling. The extended warranty service is used to promote the recycling of waste products. To design an optimal extended warranty service strategy and analyze its environment impact in a remanufactured supply chain, game theory is used to model the competitive relationship between a manufacturer and an E-commerce platform. Considering whether the E-commerce platform provides extended warranty service, four models are constructed, and the extended warranty service strategy and its environment impact can be analyzed. The results show that, when the level of substitutability between remanufactured and new products meets a certain rage, new or remanufactured products with extended warranty service strategy can increase the demand for new or remanufactured products, respectively. In the four models, the changing trends of manufacturer’s profit, E-commerce platform’s profit and supply chain’s profit, consumer surplus, environmental impact and social welfare are the same, but only the thresholds are different. From the perspectives of supply chain member, supply chain system, consumer, environment and society, the new and remanufactured products with extended warranty service strategy is the best choice.

Optimal maintenance policy for equipment leased with base and extended warranty

ABSTRACT In this paper, we consider an equipment leased with a warranty contract with the possibility to extend the warranty at a given price that depends on its duration. During the warranty period, the lessor (who possesses the equipment) performs and pays for repairs at failure and for preventive maintenance (PM) actions whenever the equipment reliability reaches a specific limit. After the warranty ends, repairs and PM actions are still performed by the lessor, but they are billed to the lessee (who rents the equipment). Furthermore, in case the total average equipment downtime due to repair and PM actions during the lease period surpasses a certain pre-specified limit agreed on in the lease contract, a penalty is supported by the lessor. A mathematical model and numerical procedure are proposed to determine the PM intervals durations that maximise the lessor’s expected total profit during the lease period. The optimal solution is obtained by determining the combination between the optimal equipment reliability threshold that triggers a PM action and the optimal extended warranty period. A numerical example is given to illustrate the use of the proposed model and a sensitivity analysis is performed.

Two-Dimensional Extended Warranty Strategy for an Economic Dependence Multi-Component Series System With Grid Search Algorithm

Extended warranty is an optional contract that often provides additional protection for users after the basic warranty expires. Considering the high warranty cost borne by manufacturers and the lack of system availability guarantee, the present study proposes a two-dimensional extended warranty approach for a multi-component series system considering economic dependence. Based on the imperfect preventive maintenance model and the combination of free warranty and pro-rata warranty policies, the manufacturer’s and user’s warranty cost model and availability model for a single component are established. Considering the economic dependence between multi-components, the preventive maintenance of each component is combined using the grouping maintenance approach. In the case study, we consider the reconnaissance equipment as the research object and use the grid search method to obtain the two-dimensional extended warranty scheme of reconnaissance equipment considering economic dependence. Comparative and sensitivity analyses verify that the approach can effectively reduce the extended warranty cost of the manufacturer and improve the availability of the multi-component system. Additionally, the approach can provide support for warranty cost calculation and system availability estimation under different extended warranty periods.

Joint preventive maintenance and extended warranty strategy for leased unreliable equipment submitted to imperfect repair at failure

This paper examines the maintenance policy and the length of the extended warranty for leased equipment from the lessor's perspective. When the equipment fails within the base and extended warranty periods, imperfect repairs are carried out with a given efficiency following a decreasing quasi-renewal process. To reduce the number of failures, the lessor performs imperfect periodic preventive maintenance (PM) actions restoring the equipment to the state ‘as good as new’ with probability p and keeping it at state ‘as bad as old’ with probability q. A mathematical model and a numerical algorithm are developed to jointly determine the optimal PM period T* and the optimal extended warranty period we* maximizing the lessor's expected total profit over a finite time horizon. A numerical example is presented to illustrate the use of the developed model.

Product reliability and extended warranty in supply chains

AbstractWe study firms' product reliability and extended warranty (EW) pricing decisions in different supply chains. Using a game‐theoretic model, we analyze three supply chains: a centralized supply chain in which the manufacturer sells products and optional EWs directly to consumers (Model C), and two decentralized models in which products and EWs are sold through a retailer with the EW offered by the manufacturer (Model M) or a third‐party insurer (Model I). We also study cases where consumers cannot observe product reliability and investigate the impact of unobservable quality. We find that the manufacturer generates most profits by directly selling both products and EWs, irrespective of whether reliability is observable or not; whereas the retailer prefers selling EWs offered by an insurer when consumers can observe product reliability but prefers sourcing EWs from the manufacturer when product reliability is unobservable. In addition, when the reliability is unobservable to consumers, the manufacturer always chooses a lower reliability than that when consumers can observe the reliability. Such information advantage (over consumers) on product reliability hurts the manufacturer and consumers, and the retailer. With the existence of a third‐party insurer, the manufacturer may be indifferent or prefer to provide EWs. But having the manufacturer competing with the insurer benefits consumers and the retailer under certain conditions. This study offers guidelines on how firms should determine product reliability and EW prices in different supply chains, and sheds light on where a retailer should source EWs based on whether reliability is observable to consumers or not. Finally, our results highlight the importance of establishing a mechanism to credibly disclose product reliability information to consumers.

Condition-Based Maintenance Modeling and Reliability Assessment for Multi-Component Systems with Structural Dependence under Extended Warranty

For engineering and production systems, due to the structural dependence between components, the disassembly operation caused by the replacement of components will affect the failure and degradation processes of other components in the system. In order to optimize the extended warranty (EW) cost of the multi‐component system with structural dependence, this paper described the structural dependence and modeled the disassembly operation impact, and then the failure rate model of the component considering the impact of disassembly operation under EW was developed. Combined with the actual situation, a condition-based maintenance (CBM) strategy was employed to construct the EW cost model of the multi‐component system with structural dependence. Monte Carlo simulation was proposed to determine the optimal EW cost of the system and the optimal periodic inspection interval of the CBM strategy. Finally, a numerical example of the planetary gear train of an automobile generator is introduced to demonstrate the feasibility and advantages of the proposed model in EW cost optimization and the analysis of disassembly operation impact on the optimal maintenance strategy.

Integration of marketing and maintenance decisions in two-dimensional warranty contracts under a win-win strategy for two transaction sides

ABSTRACT This study proposes a mathematical model to simultaneous decision-making about the marketing and maintenance decisions. Also, a win–win strategy for manufacturer and buyer is established under the two-dimensional basic and extended warranty coverages. The product demand and the extended warranty demand are, respectively, considered as functions of the basic and extended warranty regions. To illustrate the advantages of the model, three comparative studies are conducted. The first one approves the fact that concurrent optimization from the perspective of two transaction sides leads to better results compared to the single-objective optimization from each of views mentioned above. The second comparison shows that providing extended warranty benefits both the transaction sides. The third comparison proves that the implementation of a PM program throughout the warranty region has a significant effect on both the imposed cost on the customer during the post-warranty period and the manufacturer’s profit. Finally, a sensitivity analysis is conducted on some parameters to extend insights into the impact of them on the objective function.

A Bi-Objective Simulation-Based Optimization Approach for Optimizing Price, Warranty, and Spare Part Production Decisions Under Imperfect Repair

This paper proposes an efficient methodology based on the Monte-Carlo simulation-based bi-objective optimization, to determine base-warranty (BW) and extended warranty (EW) parameters based on the product lifecycle. The first objective, which is from the manufacturer’s perspective, maximizes the profit while the second objective minimizes the expected number of failures that occurred during the out-of-warranty period. The manufacturer can rectify failed products via minimal repair, imperfect repair and perfect repair. The optimization model has decision variables including the product price, BW length, EW length, EW price, product failure rate, imperfect repair level, and spare part production rate in each time interval. The structure of the model admits the design of a hybrid method based on the multi-objective optimization search algorithm, Monte-Carlo simulation and an exact Out-Of-Kilter (OOK) algorithm. The nondominated sorting genetic algorithm (NSGA-II) and the multi-objective particle swarm optimization (MOPSO) algorithm are used as search algorithms. The proposed approach consists of three stages, where in the first stage, product price, BW length, EW length, EW price, product failure rate, imperfect repair level are set by NSGA-II/MOPSO. In the second stage, the number of failed products is calculated by the Monte-Carlo simulation and in the third stage, we show that the spare part inventory control sub problem can be transformed to a minimum cost network flow problem which is optimized by the OOK algorithm to attain a unified solution. A Taguchi approach is used to find the optimum level of parameters. The performance of algorithms is compared based on three different metrics. Results on a real-world problem demonstrate that the NSGA-II-OOK algorithm is more effective than the MOPSO-OOK algorithm. Through a sensitivity analysis, we analyze how various levels of planning horizon can affect Pareto-set which indicates valuable managerial insight.

Optimization of Extended Warranty Cost for Multi-Component Products with Failure Interaction

In practice, the assumption of failure independence between components is seldom valid, especially for those complex systems with complicated failure mechanism. Users can decide whether to purchase extended warranty (EW) at the end of basic warranty, and there are many factors that influence this decision, such as product reliability and EW price. In order to solve the problem of EW pricing for multi-component systems with failure interaction reasonably, considering the failure interaction characteristics between components of the multi-component systems, under the condition of type II failure interaction, this paper constructed a dependent failure rate model and developed a EW cost model of two-component systems. Thus, after optimizing the preventive maintenance (PM) strategy, this paper obtained the optimal PM interval when EW cost is the lowest, which is a win-win strategy to reduce the EW price for manufacturers and users under the premise of ensuring the manufacturer's profit demand. Finally, the validity of the model was verified by a numerical example and sensitivity analysis for important parameters was presented.

Customized Preventive Maintenance Strategies for Products Sold with Two-Dimensional Warranty

Two-dimensional warranty has played a significant role in improving product quality and competitiveness. However, two-dimensional basic warranty (BW) and extended warranty (EW) have not yet been combined effectively, and the customized maintenance strategies based on the consumers’ heterogeneity have been quite limited, which result in high maintenance costs. In this paper, the possibility of reducing warranty cost over BW and EW is explored by classifying customers based on their usage rates and then offering them with customized preventive maintenance (PM) strategies. By considering the purchasing ratio of EW contracts, the PM strategies for BW and EW are closely combined by the bi-level programming model. Numerical analysis is given to show the application of the proposed warranty strategy, and the significant findings and sensitivity of the main parameters are analyzed in the end. The findings demonstrate that the customized PM strategies combining BW and EW can effectively reduce warranty costs within the warranty period and provide a scientific guidance for manufacturers to design a more reasonable PM strategy.

Dynamic pricing of two-dimensional extended warranty considering the impacts of product price fluctuations and repair learning

Product prices fluctuate dynamically with changes in market supply and demand. This poses a dilemma for dealers, that is, dealers need to establish a dynamic extended warranty (EW) pricing strategy based on the fluctuations in product prices to attract consumers. To address this challenging issue, we establish a dynamic integration model to derive optimal product prices and two-dimensional (2D) EW prices in a multistage dynamic market environment to maximize the dealer’s expected discounted profit during the product life cycle. In order to explore the dynamic influence mechanism between reliability engineering factors and market elements, this model combines the warranty cost model influenced by reliability related repair learning characteristics and the 2D EW demand model influenced by product price fluctuations. The model allows dealers to identify the relationships among various factors, including repair learning characteristic, production scale effect, product cost, EW cost in product reliability level, and fluctuating product demand and EW demand in market demand level, and more important, their effects, on the dealers’ profit. The necessary optimality conditions and case study are conducted for static and dynamic markets.

Decision Making under Ignorance and Product Disclosure: Implications in Buying Insurance

Purpose – The subject of making choices under risk has been studied based on the assumption that decision makers are fully informed. However, in real life situations individuals frequently need to make choices without the benefit of essential information. This study analyzes decision making in the absence of information about the probabilities of losses and potential impacts, which constitutes a context of ignorance, or alternatively making choices under risk or uncertainty. Theoretical framework – This study is supported by theoretical aspects related to decision making under ignorance, specifically within the context of buying insurance. Design/methodology/approach – We used One Way ANOVA and regressions based on the data collected from two experiments regarding the willingness to acquire extended warranties for electronic equipment, which involved the participation of over 130 volunteers. Findings – Our findings suggest that the absence of economic information – deficient disclosure – makes the cost of insurance relevant to the consumer and is negatively associated with the propensity to acquire it. In addition, the cost of repairs and the probability of equipment breaking increase the propensity to acquire an extended warranty. Practical & social implications of research – By making information relevant to consumption decisions and accessible in a transparent manner, agents can induce a surge in consumption, making the market more efficient and society more resilient in the face of risks. Originality/value – This study may be the first to provide empirical evidence regarding the purchase of insurance within a context of ignorance in emerging markets.  Keywords – choices under ignorance, insurance, risk aversion, uncertainty, resilience.

Does extended warranty depict competitive advantage to a retailer in a retail-e-tail channel supply chain

For a strong presence of online channel with superior policy traditional brick and mortar channel is losing its footprint rapidly. Under this situation does retail channel survive? To analyze this paper considers a retail-e-tail channel supply chain, where the retailer sells an extended warranty policy purely for its existence given the fierce price competition with the e-tail channel. It is realized that by selling a properly designed extended warranty policy the retailer generates a higher rate of profit margin than the manufacturer. Longer duration of extended warranty at a lower price attracts more customers to buy through the retail channel and hence enhances the retailer’s profit margin. Two different coordination contract mechanisms, namely, all unit quantity discount along with franchise fee, and revenue sharing contracts are proposed to resolve channel conflict and asymmetric Nash bargaining product is used for a particular profit split. It revels under any circumstance the retailer denies manufacturer’s warranty cost-sharing proposal for a better pay off.

Coordinating an ExtendedWarranty Supply Chain under Increasing, Constant and Decreasing Product Failure Rates

A product typically exhibits three different failure rates across its lifetime: increasing, decreasing, or constant. This paper studies how the characteristics of failure rate impact the supply chain coordination for an extendedwarranty programinvolving a manufacturer and a retailer. Atwo-stage Stackelberg game is utilized to model the interaction between these two players. Two extended warranty channel structures are compared depending on whether the manufacturer or the retailer offers the warranty service. The analysis shows that the failure rate trend during the warranty period has different effects on the coordination of the service supply chain. When a product has an increasing or constant failure rate, the optimal length of extended warranty offered by the retailer is longer than that of the manufacturer, while the optimal length is shorter for a product with a decreasing failure rate. If a product during the warranty coverage has an increasing or constant failure rate, a longer extended warranty period will motivate customers to buy the product without the warranty, whereas more customers will buy both the product and the warranty if the product experiences a decreasing failure rate. It is concluded that, if the manufacturer and the retailer incur the same warranty service cost, the total profit in the supply chain is higher when the manufacturer offers the extended warranty. From the game participants’ perspective, the one which sells the extended warranty will obtain more profit.

Who is better off by selling extended warranties in the supply chain: the manufacturer, the retailer, or both?

An extended warranty is an additional service in the market that manufacturers and retailers provide for their customers. In this study, we investigate the optimal extended warranty strategies in a supply chain with a single manufacturer and a single retailer, and consider two single-channel models (the retailer solely provides the service, and the manufacturer solely provides the service) and a dual-channel model (both the retailer and the manufacturer provide the service). Using an analytical model, we demonstrate the optimal pricing decisions for the manufacturer and the retailer under these models and compare the profits of the manufacturer, retailer and supply chain. We find that among the models, customers enjoy a lower extended warranty price with a mild condition when the manufacturer provides the extended warranty service. However, the total profits of the supply chain are usually larger when the retailer sells the extended warranty. Through numerical experiments, we further investigate the influence of customer preferences, and find that the total profits of the supply chain increase if more customers purchase extended warranties from the retailer in the dual-channel model.

A complimentary extended warranty: Profit analysis and pricing strategy

This paper aims to investigate the emerging trend of a new warranty policy in industries, namely, complimentary extended warranty. For the warranty with complimentary extended service, customers can enjoy a free extended warranty if they register online before expiration of the base warranty. At present, with frequent technological innovations, customers are more willing to replace the product instead of repair, which makes traditional warranty less attractive. Since the warranty with complimentary extended service does not charge extra fees for the customers and the option of online registration is open to customers, it can attract a broad range of customers. Compared with traditional warranties, the proposed warranty provides flexibility for customers in their post-purchase choice of online registration. We develop a warranty model to investigate the popularity of the warranty. It turns out that the proposed warranty model exhibits advantages over the traditional warranties. The proposed warranty is profitable for risk averse customers and for products that heap benefits from customer information. We design and price the warranty for unit product when the customers have heterogeneous risk attitudes. In addition, we analyze the total profit and determine the optimal selling price considering the customer demand. Finally, a numerical example is presented to illustrate the effectiveness of the proposed warranty policy.

Should a retailer sell its own extended warranties or resell those from the manufacturer when confronting supplier encroachment?

Due to fierce competition in the product market under conditions of supplier encroachment, many brand name retailers, including Sears, Best Buy, and Circuit City, depend on the extended warranty contracts that they sell along with the products. The distribution of extended warranties through an intermediary can be characterized in terms of two basic forms. A large proportion of retailers sell their own extended warranty, whilst others choose to resell the extended warranty provided by upstream agents. Several questions arise from these conditions. How will optimum decisions vary under different strategic choice? Is it profitable for a retailer to engage in selling extended warranties? And finally, which strategy is more profitable for related players? We answer these questions using a game theoretic model where the retailer has the flexibility to choose between offering its own extended warranties (Model ER) or reselling extended warranties provided by a manufacturer (Model EM). Our analysis reveals that it is indeed a profitable business for both parties when the retailer engages in selling extended warranty, irrespective of whether they are owned by the retailer or by the manufacturer. Surprisingly, we find that, when marketing cost of the extended warranty is high, the retailer benefits more from reselling the extended warranty, a strategy that is always beneficial for the manufacturer. Put differently, when marketing cost of the extended warranty is high, reselling extended warranties from the manufacturer can secure Pareto improvements. However, when marketing cost of the extended warranty is not pronounced, a preference confliction arises between both parties: The retailer prefers to sell its own extended warranty, while the manufacturer would be fond of the other one. Extending both models to the case where the manufacturer encroaches into retail market with selling both products and extended warranty reveals that the preference confliction between both parties is quite robust.