Managing Warranty Services: Pricing, Inventory and Outsourcing

Wei Huang: Managing Warranty Services: Pricing, Inventory and Outsourcing (Under the direction of Jayashankar Swaminathan, Vidyadhar Kulkarni) Managing warranty services plays a very important role in today’s business environment. This thesis concentrates on three specific areas related to warranty: joint control of new and warranty parts inventory, outsourcing of repair services, coordinated pricing and fulfillment of warranty plans. The first part of this study is motivated by the inventory planning issues faced by a manufacturer of a digital projector. The seller faces demand from two sources: new demand, and demand to replace failed items under warranty. We model this setting as a multi-period single product inventory problem where the new demand in different periods are independent and the demand for replacing failed items under warranty is proportional to the number of items under warranty. We assume linear procurement, penalty and holding costs. We consider backlogging and emergency supply cases, and study both discounted cost and average cost cases. We prove the optimality of the w-dependent base stock ordering policy where the base stock level is a function of w, the number of items currently under warranty. For the special case, where the demand for new products is stationary, we prove the optimality of a stationary w-dependent base stock policy for the finite horizon discounted and the infinite horizon discounted and average cost cases. In our computational study, we find that such an integrated policy can lead to 31% average improvement in expected costs when compared to a policy that neglects warranty repairs. We extend this analysis to the case of constant warranty periods and age dependent failure rates. In the second part, we consider a game-theoretic model of a warranty repair allocation problem with one manufacturer and multiple vendors where the vendors compete with each other in setting prices for their services, and the manufacturer responds by optimally allocating its products to its own repair facility and to the vendors for services to minimize the repair and waiting cost. We examine the pricing decisions facing vendors and the manufacturer and study the Nash equilibria in two different models. In v the first model, the vendors are the leaders, while in the second model, the manufacturer is the leader. We prove the existence and uniqueness of the Nash equilibrium in both models. Further, we numerically compare the optimal outsoucing contracts in the two models. The last issue is about how to price service plans to optimize a company’s profits, when it offers multiple warranty plans to customers. We study pricing for such warranty plans and how they might be affected by competition. We assume a stylized deterministic demand model where the demand not only depends on its price but also on the lead time of service that is guaranteed. We first study the optimal prices for a monopolist that may offer one or two plans that are differentiated by their service time. Next, we analyze a duopoly case where each firm offers one plan and prove the existence of a unique Nash equilibrium. We provide insights on the effect of the repair setting, service rate and competition on pricing strategies and profitability of firms.