Technology investment effects in performance-based maintenance contracts

Abstract

This work analyses the effects of a fixed initial investment in technology or infrastructure on performance-based maintenance contracts. We present a mathematical expression which reflects the trade-off between an upfront technology investment by the vendor and the cost of required future interventions. We develop a mathematical model of a performance-based maintenance contract that uses this technology trade-off expression and determines the value of the contract for each party. Contractually, the client indicates the duration of the contract and the optimal number of maintenance interventions to maximise asset availability; the vendor quotes the cost for the requested interventions. We study how the initial investment and the contract parameters affect the net present value for each party and the supply chain, demonstrating the existence of an optimal relation between the number of preventive maintenance interventions and level of investment. We derive the optimal contract parameters for the client, vendor and chain and show lack of coordination between the parties. To achieve coordination, we present a revenue sharing mechanism which maximises the value for the chain. Finally, an industry study case with data from the mining sector is presented. Results indicate that by investing and coordinating, the entire supply chain can improve the contract NPV by 149.7%.

Keywords:

• technology investment
• fixed term contracts
• preventive maintenance
• supply chain coordination
• outsourcing
• net present value analysis

Notes

No potential conflict of interest was reported by the authors.