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

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.

Key Words:

• Non-homogeneous Poisson process
• use rate
• failure history
• heterogeneity

Acknowledgments

The authors would like to thank the review team for their insightful comments that helped significantly improve the paper.

Additional information

Funding

This work is supported by Natural Science Foundation of Jiangsu Province under Grant BK20180232, and Natural Science Foundation of China under Grant 71871191 and 71771221.

Notes on contributors

Xin Wang

Xin Wang received a B.Ec. degree in international economy and trade from Harbin Institute of Technology, Harbin, China, in 2013. She received a Ph.D. degree in industrial systems engineering and management from the National University of Singapore, Singapore, in 2018. Her research interests include warranty management, resilience modeling and assessment, and reliability engineering.

Zhi-Sheng Ye

Zhi-Sheng Ye received a joint B.E. degree in material science and engineering and in economics from Tsinghua University, Beijing, China, in 2008, and a Ph.D. degree in industrial and systems engineering from the National University of Singapore, Singapore, in 2012. He is currently an assistant professor with the Department of Industrial Systems Engineering and Management, National University of Singapore. His research interests include reliability engineering, complex systems modeling, and engineering statistics.