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Outsourcing warranty repairs: Dynamic allocation

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  • Michelle Opp
  • Kevin Glazebrook
  • Vidyadhar G. Kulkarni

Abstract

In this paper we consider the problem of minimizing the costs of outsourcing warranty repairs when failed items are dynamically routed to one of several service vendors. In our model, the manufacturer incurs a repair cost each time an item needs repair and also incurs a goodwill cost while an item is awaiting and undergoing repair. For a large manufacturer with annual warranty costs in the tens of millions of dollars, even a small relative cost reduction from the use of dynamic (rather than static) allocation may be practically significant. However, due to the size of the state space, the resulting dynamic programming problem is not exactly solvable in practice. Furthermore, standard routing heuristics, such as join‐the‐shortest‐queue, are simply not good enough to identify potential cost savings of any significance. We use two different approaches to develop effective, simply structured index policies for the dynamic allocation problem. The first uses dynamic programming policy improvement while the second deploys Whittle's proposal for restless bandits. The closed form indices concerned are new and the policies sufficiently close to optimal to provide cost savings over static allocation. All results of this paper are demonstrated using a simulation study. © 2005 Wiley Periodicals, Inc. Naval Research Logistics, 2005

Suggested Citation

  • Michelle Opp & Kevin Glazebrook & Vidyadhar G. Kulkarni, 2005. "Outsourcing warranty repairs: Dynamic allocation," Naval Research Logistics (NRL), John Wiley & Sons, vol. 52(5), pages 381-398, August.
    • Handle: RePEc:wly:navres:v:52:y:2005:i:5:p:381-398
    DOI: 10.1002/nav.20084
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    Cited by:

    1. I. Adan & O. Boxma, 2007. "Comments on: Dynamic priority allocation via restless bandit marginal productivity indices," TOP: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer;Sociedad de Estadística e Investigación Operativa, vol. 15(2), pages 199-201, December.
    2. Dong Li & Kevin D. Glazebrook, 2010. "An approximate dynamic programing approach to the development of heuristics for the scheduling of impatient jobs in a clearing system," Naval Research Logistics (NRL), John Wiley & Sons, vol. 57(3), pages 225-236, April.
    3. Feng Chen & Vidyadhar G. Kulkarni, 2008. "Dynamic routing of prioritized warranty repairs," Naval Research Logistics (NRL), John Wiley & Sons, vol. 55(1), pages 16-26, February.

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