Coordinating an ExtendedWarranty Supply Chain under Increasing, Constant and Decreasing Product Failure Rates

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 extendedwarranty programinvolving a manufacturer and a retailer. Atwo-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

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