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Determination of Warranty Reserves

Author

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  • Warren W. Menke

    (College of Business Administration, University of Florida)

Abstract

Cost of warranty claims for failure of a product is an identifiable business cost. Methods of calculation are presented for determining this cost item for a linear prorata rebate plan and for a lump sum rebate plan where the customer receives a fixed amount for any failures within the warranty period. It is shown that a calculable amount, usually modest for good products, can be allocated by the manufacturer to a warranty reserve fund to cover the expected risks of warranty claims. Additionally, it is shown that the insight gained by a manufacturer about the components contributing to warranty reserve funding can furnish him with new marketing strategies.

Suggested Citation

  • Warren W. Menke, 1969. "Determination of Warranty Reserves," Management Science, INFORMS, vol. 15(10), pages 542-549, June.
    • Handle: RePEc:inm:ormnsc:v:15:y:1969:i:10:p:b542-b549
    DOI: 10.1287/mnsc.15.10.B542
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    Cited by:

    1. Kunpeng Li & Suman Mallik & Dilip Chhajed, 2012. "Design of Extended Warranties in Supply Chains under Additive Demand," Production and Operations Management, Production and Operations Management Society, vol. 21(4), pages 730-746, July.
    2. Marlin U. Thomas & Sridevi S. Rao, 1999. "Warranty Economic Decision Models: A Summary and Some Suggested Directions for Future Research," Operations Research, INFORMS, vol. 47(6), pages 807-820, December.
    3. Mitra, Amitava & Patankar, Jayprakash G., 1997. "Market share and warranty costs for renewable warranty programs," International Journal of Production Economics, Elsevier, vol. 50(2-3), pages 155-168, June.
    4. Rezapour, Shabnam & Allen, Janet K. & Mistree, Farrokh, 2016. "Reliable flow in forward and after-sales supply chains considering propagated uncertainty," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 93(C), pages 409-436.
    5. Duong, Quang Huy & Zhou, Li & Meng, Meng & Nguyen, Truong Van & Ieromonachou, Petros & Nguyen, Duy Tiep, 2022. "Understanding product returns: A systematic literature review using machine learning and bibliometric analysis," International Journal of Production Economics, Elsevier, vol. 243(C).
    6. Chen, Cheng-Kang & Lo, Chih-Chung & Weng, Tzu-Chun, 2017. "Optimal production run length and warranty period for an imperfect production system under selling price dependent on warranty period," European Journal of Operational Research, Elsevier, vol. 259(2), pages 401-412.
    7. Sheu, Shey-Huei & Chien, Yu-Hung, 2005. "Optimal burn-in time to minimize the cost for general repairable products sold under warranty," European Journal of Operational Research, Elsevier, vol. 163(2), pages 445-461, June.
    8. Wang, Xin & Xie, Wei & Ye, Zhi-Sheng & Tang, Loon-Ching, 2017. "Aggregate discounted warranty cost forecasting considering the failed-but-not-reported events," Reliability Engineering and System Safety, Elsevier, vol. 168(C), pages 355-364.
    9. Cao, Zixia, 2022. "Brand equity, warranty costs, and firm value," International Journal of Research in Marketing, Elsevier, vol. 39(4), pages 1166-1185.
    10. Subramanian Balachander, 2001. "Warranty Signalling and Reputation," Management Science, INFORMS, vol. 47(9), pages 1282-1289, September.
    11. Chun, Young Hak & Tang, Kwei, 1995. "Determining the optimal warranty price based on the producer's and customers' risk preferences," European Journal of Operational Research, Elsevier, vol. 85(1), pages 97-110, August.
    12. Arda Yenipazarli, 2015. "A road map to new product success: warranty, advertisement and price," Annals of Operations Research, Springer, vol. 226(1), pages 669-694, March.

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