A model for maintenance service contract design, negotiation and optimization

A model is presented in this paper for maintenance service contract design, negotiation and optimization. The model was developed under the assumption that there are one customer and one unique service provider who is the Original Equipment Manufacturer (OEM) and is called the agent in this paper. This is typically applied to the situation where the OEM is the only possible service supplier such as in the case of major military equipment in the defense sector. Three contract options were considered, depending on the extent of outsourced maintenance activities. From an agent point of view, they are, (1), the agent carries out all repairs and inspections; (2), the agent carries out failure based repairs, and (3), the agent does inspections and repairs to the defects identified at inspections. For options two and three, the customer does the rest of maintenance. The relationship between inspections and failures was modeled using the delay time concept and a numerical example was illustrated. The cases of perfect information to both parties and information asymmetry were also discussed in the example. The model developed can be used for contract design, negotiation and optimization.