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Design of customized two-dimensional extended warranties considering use rate and heterogeneity

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  • Xin Wang
  • Zhi-Sheng Ye

Abstract

Extended warranties have become a rich source of profits for manufacturers. In the current marketplace, two-dimensional extended warranties are often sold to all customers with a fixed coverage region and the same price. However, customers are heterogeneous, as they have different use rates and failure history, which significantly affects the cost of the extended warranty. In this study, we first propose a customized extended warranty strategy that takes into account the use rate of the customer. Under the strategy, we develop a warranty cost model to compute the expected repair cost and the expected profit of the manufacturer, based on which the optimal price for the customized extended warranty can be determined. Building upon this model, we further propose a policy that makes use of both the customer’s use rate and the product’s failure history. We conduct a comprehensive numerical study to compare the two proposed policies with the prevailing fixed-region strategy. The results reveal that the customized policies are better than the prevailing policy in terms of fairness, flexibility, and profitability.

Suggested Citation

  • Xin Wang & Zhi-Sheng Ye, 2020. "Design of customized two-dimensional extended warranties considering use rate and heterogeneity," IISE Transactions, Taylor & Francis Journals, vol. 53(3), pages 341-351, December.
  • Handle: RePEc:taf:uiiexx:v:53:y:2020:i:3:p:341-351
    DOI: 10.1080/24725854.2020.1768455
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    Cited by:

    1. Zhu, Ying & Xia, Tangbin & Chen, Zhen & Pan, Ershun & Xi, Lifeng, 2022. "Optimal maintenance service strategy for OEM entering competitive MRO market under opposite patterns," Reliability Engineering and System Safety, Elsevier, vol. 217(C).
    2. Lijun Shang & Xiguang Yu & Yongjun Du & Anquan Zou & Qingan Qiu, 2022. "An Optimal Random Hybrid Maintenance Policy of Systems under a Warranty with Rebate and Charge," Mathematics, MDPI, vol. 10(18), pages 1-19, September.
    3. Liu, Peng & Wang, Guanjun, 2023. "Generalized non-renewing replacement warranty policy and an age-based post-warranty maintenance strategy," European Journal of Operational Research, Elsevier, vol. 311(2), pages 567-580.
    4. Zhu, Ying & Xia, Tangbin & Hong, Ge & Chen, Zhen & Pan, Ershun & Xi, Lifeng, 2022. "Collaborative maintenance service and component sales under coopetition patterns for OEMs challenged by booming used-component sales," Reliability Engineering and System Safety, Elsevier, vol. 226(C).

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