Chapter 3: An Integrated Model to Determine Optimal Two-Dimensional Warranty Policy Parameters

We consider determination of the warranty parameters for a two-dimensional policy, such as those for automobiles, that involves time since purchase of the product and miles driven till failure of the product. While prior research has focused only on the manufacturer to determine the warranty policy parameters, here we consider the customer, supplier, manufacturer, and distributor/retailer in an integrated manner. Manufacturers may shift some of the cost burden to the appropriate supplier, in case of product failure within the defined warranty policy parameters. Further, a manufacturer may reward a distributor/retailer through a commission based on product sales exceeding a chosen norm. So, from the manufacturer’s point of view of maximizing net income per unit, an optimal level of the warranty policy parameters may be found. Here, a model is formulated to determine the optimal levels of the warranty policy parameters along with unit product price, the commission to be paid to the distributor, and the burden ratio (portion of the expected costs incurred because of product failure within the policy guidelines) that is passed on to the supplier. The impact of observed failures on the policy parameters is also investigated through the usage of posterior probability distributions.