Modelling and analysis of reliability and costs for lifetime warranty and service contract policies

Reliability of products is becoming increasingly important due to rapid technological development and tough competition in the product market. One effective way to ensure reliability of sold product/asset is to consider after sales services linked to warranty and service contract. One of the major decision variables in designing a warranty is the warranty period. A longer warranty term signals better reliability and provides higher customer/user peace of mind. The warranty period offered by the manufacturer/dealer has been progressively increasing since the beginning of the 20th Century. Currently, a large number of products are being sold with long term warranties in the form of extended warranty, warranty for used product, long term service contracts, and lifetime warranty. Lifetime warranties and service contracts are becoming more and more popular as these types of warranties provide assurance to consumer for a long reliable service and protecting consumers against poor quality and the potential high cost of failure occurring during the long uncertain life of product. The study of lifetime warranty and service contracts is important to both manufacturers and the consumers. Offering a lifetime warranty and long term service contracts incur costs to the manufacturers/service provider over the useful life of the product/contract period. This cost needs to be factored into the price/premium. Otherwise the manufacturer/ dealer will incur loss instead of profit. On the other hand, buyer/user needs to model the cost of maintaining it over the useful life and needs to decide whether these policies/service contracts are worth purchasing or not.The analysis of warranty policies and costs models associated with short-term or fixed term policies have received a lot of attention. A significant amount of academic research has been conducted in modelling policies and costs for extended warranties and warranty for used products. In contrast, lifetime warranty policies and longer term service contracts have not been studied as extensively. There are complexities in developing failure and cost models for these policies due to the uncertainties of useful life, usage pattern, maintenance actions and cost of rectifications over longer period.This thesis defines product's lifetime based on current practices. Since there is no acceptable definition of lifetime or the useful life of product in existing academic literatures, different manufacturer/dealers are using different conditions of life measures of period of coverage and it is often difficult to tell whose life measures are applicable to the period of coverage (The Magnuson-Moss Warranty Act, 1975). Lifetime or the useful life is defined in this thesis provides a transparency for the useful life of products to both manufacturers/service provider and the customers. Followed by the formulation of an acceptable definition of lifetime, a taxonomy of lifetime warranty policies is developed which includes eight different one dimensional and two dimensional lifetime warranty policies and are grouped into three major categories, A. Free rectification lifetime warranty policies (FRLTW), B. Cost Sharing Lifetime Warranty policies (CSLTW), and C. Trade in policies (TLTW). Mathematical models for predicting failures and expected costs for different one dimensional lifetime warranty policies are developed at system level and analysed by capturing the uncertainties of lifetime coverage period and the uncertainties of rectification costs over the lifetime. Failures and costs are modelled using stochastic techniques. These are illustrated by numerical examples for estimating costs to manufacturer and buyers. Various rectification policies were proposed and analysed over the lifetime.Manufacturer's and buyer's risk attitude towards a lifetime warranty price are modelled based on the assumption of time dependent failure intensity, constant repair costs and concave utility function through the use of the manufacturer's utility function for profit and the buyer's utility function for cost. Sensitivity of the optimal warranty prices are analysed with numerical examples with respect to the factors such as the buyer's and the manufacturer/dealer's risk preferences, buyer's anticipated and manufacturer's estimated product failure intensity, the buyer's loyalty to the original manufacturer/dealer in repairing failed product and the buyer's repair costs for unwarranted products.Three new service contract policies and cost models for those policies are developed considering both corrective maintenance and planned preventive maintenance as the servicing strategies during the contract period. Finally, a case study is presented for estimating the costs of outsourcing maintenance of rails through service contracts. Rail failure/break data were collected from the Swedish rail and analysed for predicting failures. Models developed in this research can be used for managerial decisions in purchasing life time warranty policies and long term service contracts or outsourcing maintenance. This thesis concludes with a brief summary of the contributions that it makes to this field and suggestions and recommendations for future research for lifetime warranties and service contracts.