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Optimisation of warranty reserve policies


  • Cigdem Z. Gurgur


Companies typically plan for warranty costs through creation of a reserve fund. Most researchers assume that the warranty reserve is set based on the expected total warranty costs. However, companies rarely keep reserves to cover their liabilities for the whole life of their products, since maintaining excess reserves would cause opportunity cost. We propose an optimal policy rule based on the amount of cash additions/subtractions at the beginning of each period and the amount to contribute to the reserve after each sale. We model the warranty reserve problem as a single period inventory problem. We have shown that when there is no contribution after each sale the optimal policy resembles a 'base-stock' policy. When contribution after each sale is permissible, the optimal reserve level decreases as warranty costs can be covered by accruals. However, this kind of 'pay-as-you-go' system also increases the uncertainty in net flows from the fund.

Suggested Citation

  • Cigdem Z. Gurgur, 2011. "Optimisation of warranty reserve policies," International Journal of Applied Management Science, Inderscience Enterprises Ltd, vol. 3(3), pages 241-258.
  • Handle: RePEc:ids:injams:v:3:y:2011:i:3:p:241-258

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    References listed on IDEAS

    1. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    2. Halkos, George & Salamouris, Dimitrios, 2001. "Efficiency Measures of the Greek Banking Sector: A Non-Parametric Approach for the Period 1997-1999," MPRA Paper 2858, University Library of Munich, Germany.
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