Warranty reserves for nonstationary sales processes

Abstract

Estimation of warranty costs, in the event of product failure within the warranty period, is of importance to the manufacturer. Costs associated with replacement or repair of the product are usually drawn from a warranty reserve fund created by the manufacturer. Considering a stochastic sales process, first and second moments (and thereby the variance) are derived for the manufacturer's total discounted warranty cost of a single sale for single-component items under four different warranty policies from a manufacturer's point of view. These servicing strategies represent a renewable free-replacement, nonrenewable free-replacement, renewable pro-rata, and a nonrenewable minimal-repair warranty plans. The results are extended to determine the mean and variance of total discounted warranty costs for the total sales over the life cycle of the product. Furthermore, using a normal approximation, warranty reserves necessary for a certain protection level, so that reserves are not completely depleted, are found. Results and their managerial implications are studied through an extensive example.

Dynamic Cash Management of Warranty Reserves

“…Eliashberg et al (1997) addressed the issue of the optimal reserve level for a two-dimensional warranty policy by defining a loss function that incorporates the cost of overstocking and understocking. More recently, Ja et al (2001Ja et al ( , 2002 studied what the level of warranty reserves should be to cover future warranty costs with a certain confidence level over the life cycle of a product.…”

Dynamic optimisation of price, warranty length and production rate

“…The design phase must incorporate marketing variables and the design and marketing decisions must be made jointly (Huang, Liu and Murthy 2007). The cost of a warranty program must be estimated precisely, and its effect on the firm's profitability must be studied (Ja, Kulkarni, Mitra and Patankar 2002;Kleyner and Sandborn 2008;Chattopadhyay and Rahman 2008;Wu and Xie 2008). Basically, the warranty length is determined by the cost of warranty, which involves considerations such as warranty type, warranty service mechanisms, product failure rates and price (Raham and Charttopadhyay 2006).…”

Simultaneous Confidence Bands for the Estimation of Expected Discounted Warranty Costs for Coherent Systems under Minimal Repair

“…Bai & Pham (2006) highlight that warranty analysis is very important for cost modeling, especially for discounted costs (Blischke & Murthy 1994, Chien 2005, Ja, Kulkarni, Mitra & Patankar 2002, Murthy & Djamaludina 2002, Nguyen & Murthy 1984. Discounted warranty cost models consider the product age and provide a proper measurement of the costs involved in the warranty program, given that they can be treated as random cash ows.…”

“…Therefore, it is possible to model their evolution throughout the lifetime of the product under warranty, as well as to estimate the necessary fund reserve levels to meet future warranty claims. Several aspects regarding discounted warranty costs and their corresponding reserves have been studied by Bai & Pham (2004), Duchesne & Marri (2009), Ja et al (2002), Jain & Maheshwari (2006), Patankar & Mitra (1995), and Thomas (1989).…”