Understanding the Impacts of Length of the Contract and Fleet Size on Spare Parts Level and Reliability Investments in Performance-based Contracting

Abstract

This essay investigates the impacts of contract features such as contract length and fleet size on reliability investment, spare parts, supplier's profit, and the annual cost of the system in performance-based contracting (PBC). The impact of each contract feature analyzed using the multi-objective genetic algorithm in a mathematical model. We found that failure rates of the systems and the annual unit cost for the buyer exponentially decrease when the fleet size or contract length becomes larger. Also, an annual profit of suppliers grows substantially with an increase in fleet size and length of contracts. Additionally, we explored that these features have little impact on spare parts in PBC. Findings of this study advance understanding of the impact of fleet size and the length of contracts on decisions made by suppliers for the reliability and inventory investments in PBC. Furthermore, practitioners will benefit from the results to build effective and efficient PBC.

Decreasing e-waste through reliability enhancement encouraged by performance-based contracting

“…This result is consistent with Jin et al. (2012), Uvet et al. (2019) and Mirzahosseinian and Piplani (2011).…”

“…Conversely, under a typical RBC, suppliers make much more substantial investments in spare parts inventory than reliability improvement (Kim et al, 2017). Uvet et al (2019) used multiobjective modeling to investigate the effects of contract length and fleet size under PBC on spare stock, upfront investment for reliability, total cost of ownership and supplier's profits, finding that the longer the contract duration and larger the fleet size, the more suppliers were willing to make investments in reliability improvement. They also found that spare parts inventory level has minor effects on system availability, especially in larger fleet sizes and during longer contract durations.…”

“…One advantage of this new logistics support technique that is based on a pay-for-performance strategy is that customers can share the risk with the supplier (Gansler and Lucyshyn, 2006). Performance-based contracting (PBC) motivates suppliers to invest in increasing system reliability and generating greater operational availability (Gansler and Lucyshyn, 2006; Vitasek et al ., 2007; Uvet et al ., 2019). These upfront investments made by suppliers enhance their economic return throughout the remaining life cycle of a supported system, affecting the spare and repair strategies (Kim et al ., 2007; Randal et al ., 2010).…”

Supplier goal commitment in performance-based contracts: the lens of goal-setting theory

“…Furthermore, investment in innovation enhances performance, leading to higher profits and reduced total cost of ownership through improvements in reliability and services (Boyce and Banghart, 2012;Kratz and Diaz, 2012;Uvet et al, 2022). From the buyers' perspective, PBC enables them to gain specified performance outcomes while reducing costs and logistics complexities (Glas et al, 2013;Uvet et al, 2019).…”

“…From the buyers' perspective, PBC enables them to gain specified performance outcomes while reducing costs and logistics complexities (Glas et al. , 2013; Uvet et al. , 2019).…”