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Title: A performance-based warranty for products subject to competing hard and soft failures
Authors: Wang, X 
Liu, B
Zhao, X
Issue Date: 3-Nov-2020
Source: International journal of production economics, Available online 3 November 2020, 107974, p. 1-13, https://doi.org/10.1016/j.ijpe.2020.107974
Abstract: This article studies a performance-based warranty for products subject to competing hard and soft failures. The two failure modes are competing in the sense that either one, on a “whichever-comes-first” basis, can cause the product to fail. A performance-based warranty not only covers the repair or replacement of any defect, but also guarantees the minimum performance level throughout the warranty period. In this article, we propose three compensation policies—that is, free replacement, penalty, and full refund, when a product’s performance fails to meet the guaranteed level. The expected warranty servicing costs for the three policies are derived, based on the competing risks concept. A warranty design problem is further formulated to simultaneously determine the optimal product price, warranty length, and performance guarantee level so as to maximize the manufacturer’s total profit. Numerical studies are conducted to demonstrate and compare the three performance-based compensation policies. It is shown that the full refund policy always leads to the lowest total profit, whereas neither of the other two policies can dominate each other in all scenarios. In particular, the free replacement policy results in a higher total profit than the penalty policy when the replacement cost is low, the penalty cost coefficient is high, and/or the product reliability is high.
Keywords: Warranty
Performance deterioration
Competing risks
Warranty policy design
Publisher: Elsevier
Journal: International journal of production economics 
ISSN: 0925-5273
DOI: 10.1016/j.ijpe.2020.107974
Rights: © 2020 Elsevier B.V. All rights reserved.
Appears in Collections:Journal/Magazine Article

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