Design and Optimization of a Performance-Based Warranty Policy with Repair-or-Refund Option

Abstract

The performance-based warranty can not only protect customers against uncertainty regarding product performance but also assist manufacturers in establishing credibility and promoting sales. This study first develops a novel performance-based warranty policy that integrates limits on the number of repairs for both performance failure and customer-induced accidental failure, aiming to safeguard customer rights and mitigate potential risks for the manufacturer. When the total number of repair actions for performance failures exceeds the threshold, we offer customers flexible compensation options. We use the expected total maintenance cost during the cycle to determine the optimal warranty length and guaranteed performance level from the manufacturer’s perspective. Through numerical experiments, we have derived several interesting practical implications: (i) The manufacturer’s top priority is to continuously improve product performance to reduce the potential number of performance failures. (ii) When limits on the number of repairs for performance failures are lower, the manufacturer is advised to provide more reliability information to help customers evaluate repair expenses more accurately. This mutual exchange benefits both parties by reducing the expected cost during the maintenance cycle.

Keywords

Performance-based warranty / maintenance strategy / competing failure model / Monte Carlo simulation

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Systems Engineering Society of China and Springer-Verlag GmbH Germany

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