Coordinating an ExtendedWarranty Supply Chain under Increasing, Constant and Decreasing Product Failure Rates
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ISSN: 1004-3756 (paper), 1861-9576 (online) CN 11-2983/N
Coordinating an Extended Warranty Supply Chain under Increasing, Constant and Decreasing Product Failure Rates Yuwen Chen,a, b Jin Qin,a Tongdan Jin,c Yating Chena a School
of Management, University of Science and Technology of China, Hefei 230026, China [email protected] (), [email protected] b Department of Information Systems, City University of Hong Kong, Kowloon 999077, Hong Kong, China [email protected] c Ingram School of Engineering, Texas State University, San Marcos TX 78666, USA [email protected]
Abstract. A product typically exhibits three different failure rates across its lifetime: increasing, decreasing, or constant. This paper studies how the characteristics of failure rate impact the supply chain coordination for an extended warranty program involving a manufacturer and a retailer. A two-stage Stackelberg game is utilized to model the interaction between these two players. Two extended warranty channel structures are compared depending on whether the manufacturer or the retailer offers the warranty service. The analysis shows that the failure rate trend during the warranty period has different effects on the coordination of the service supply chain. When a product has an increasing or constant failure rate, the optimal length of extended warranty offered by the retailer is longer than that of the manufacturer, while the optimal length is shorter for a product with a decreasing failure rate. If a product during the warranty coverage has an increasing or constant failure rate, a longer extended warranty period will motivate customers to buy the product without the warranty, whereas more customers will buy both the product and the warranty if the product experiences a decreasing failure rate. It is concluded that, if the manufacturer and the retailer incur the same warranty service cost, the total profit in the supply chain is higher when the manufacturer offers the extended warranty. From the game participants’ perspective, the one which sells the extended warranty will obtain more profit. Keywords: Supply chain coordination, extended warranty, failure rate, warranty policy, game theory
1. Introduction An extended warranty is a service contract between a consumer and the service provider under which the provider promises to maintain, repair, or replace a failed product free of charge or at a low price during the warranty period (Li et al. 2012). Compared with the base warranty that is often part of a product offering, an extended warranty is sold separately only at the time of product purchase or within a limited period thereafter (Zheng et al. 2018). An optional extended warranty may offer additional coverage for events such as drops, spills, or other accidental damage, especially to electronic devices (Jiang and Zhang 2011). Extended warranty coverage usually
starts immediately after the product purchase, which means it automatically incorporates the base warranty period. Extended warranties not only generate 50%-60% revenue margins to t
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