Inventory management for maintenance service outsourcing: Should a manufacturer choose full outsourcing?

This paper addresses a critical yet underexplored contract selection and design problem for manufacturers in a decentralized two-echelon system with multiple contractors. We analyze two prevalent outsourcing service contracts – semi-outsourcing and full outsourcing – where the manufacturer must simultaneously optimize inventory allocation and pricing decisions to strategically influence contractor participation. The decision-making of this problem is pivotal for the manufacturer, as it directly impacts after-sales service performance. This problem also represents a novel departure from conventional research, which traditionally treats pricing and inventory decisions in isolation under the assumption of predetermined contractor participation. We develop a two-echelon inventory allocation framework that jointly optimizes pricing and inventory decisions for each contract type. Through theoretical analysis, we demonstrate that the optimal contract choice critically depends on the number of participating contractors: semi-outsourcing proves superior with limited participating contractors, while full outsourcing becomes preferable as contractor availability increases. Furthermore, we design an efficient computational method to compute optimal inventory levels and prices. In summary, our work provides managerial insights and operational tools for, e.g., equipment manufacturers to allocate spare parts inventory and select outsourcing service contracts in practice. The proposed framework advances supply chain coordination theory by bridging the critical gap between strategic contracting and operational inventory management.