Toward servitization: Optimal design of uptime‐guarantee maintenance contracts

Hezarkhani, Behzad; Nagarajan, Mahesh; Tong, Chunyang

doi:10.1111/poms.13789

Cited by 4 publications

(1 citation statement)

References 32 publications

(53 reference statements)

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“…The incentive issues of these contracts have been studied by Hezarkhani et al. (2022), among others. In result‐based servicizing, the OEM and customer agree on payment terms based on the outcome, but the OEM does not specify which product should be used to deliver the service.…”

Section: Introductionmentioning

confidence: 99%

OEM‐servicizing with a multiusecycle product: Model analysis and insights

Gao,

Bansal,

Guide

2023

Production and Operations Management

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Customers of many OEMs in business‐to‐business markets today demand product‐servicizing in which instead of buying the product from the OEM they buy the use of a product during a lease. During the lease, (i) the customer uses the product and returns it to the OEM after the use reaches a specific level, (ii) the OEM remanufactures the product in a costly process and sends it back to the customer, and this usecycle is repeated multiple times. The lease terms typically involve a use‐based payment. While a greater product‐use by a customer brings a larger revenue to the OEM it also increases the remanufacturing cost incurred by the OEM. We investigate this tradeoff using an analytical model for a contract that is used extensively in industry. For the case of homogenous customers with a common use‐rate of the product, we optimize lease payment terms and identify market and product‐remanufacturing characteristics for which the OEM should servicize the product instead of selling it. We show that an OEM should not servicize a product when the customers' use‐rate exceeds a threshold. This is because beyond this threshold, the remanufacturing cost increases disproportionably, exceeding the higher usage based revenue. Subsequently, we consider a market with two segments with different use‐rates. We consider two servicizing modes: (i) servicize both market segments, or (ii) selectively servicize only one segment and sell the product to the other segment, and the default mode of selling in both segments. We develop optimal lease payment terms for these use‐based servicizing modes, identify thresholds of product and market characteristics for the optimality of these modes. Finally, we extend the results to a market with more than two segments, and compare the environmental impacts of the servicizing or sell decision. Numerical results informed by empirical data show that the OEM's loss of profit from choosing a sub‐optimal servicizing/sell decision can be significant.This article is protected by copyright. All rights reserved

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Section: Introductionmentioning

confidence: 99%

OEM‐servicizing with a multiusecycle product: Model analysis and insights

Gao,

Bansal,

Guide

2023

Production and Operations Management

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Can direct finance within a servitizing supply chain reduce the moral hazard associated with the servitized user’s care of the product?

Bian,

Reimann,

Zhang

2023

Cent Eur J Oper Res

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Servitizing business models can provide economic benefits in a supply chain by utilizing products more efficiently. However, the transfer of the burden to keep the product operable from the user to the servitizing provider may cause issues. As a result of no longer owning the product, a user may be less inclined to taking care of it thereby increasing the maintenance effort for the servitizing provider. This may induce additional financial stress on the latter, specifically if it is a small company with lack of budget to begin with. In this study we analyze whether direct finance within a supply chain, where the user lends money to the servitizing provider, can alleviate this problem, when compared with a more traditional bank finance option. We find that improved access to finance indeed enables the servitizing provider to induce high effort by the user through lower servitizing fees. This also makes the servitizing model economically more attractive for both firms involved. Besides those economic implications, direct finance increases consumer demand and surplus, while at the same time resource consumption for satisfying this increased demand increases.

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