Outsourcing Prioritized Warranty Repairs

We consider the problem of outsourcing warranty repairs to outside vendors when items have priorities in service. The manufacturer has a contract with a fixed number of repair vendors. The manufacturer pays a fixed fee for each repair done by a vendor which is independent of the repair type and priority class but depends on the vendor. There are a fixed number of items under warranty, and each item belongs to one of a fixed number of priority classes. The manufacturer also pays for holding costs incurred when the items are at the vendors, the holding cost being higher for the higher priority items. We focus on static allocation of the warranty repairs; that is, we assign all items to the vendors at the beginning of the warranty period. We give the known algorithm to optimally solve the one priority class problem and solve the multi-priority class problem by formulating it as a convex minimum cost network flow problem. Then, we give numerical examples to illustrate the cost benefits of a multi-priority structure.