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ISSN : 1598-7248 (Print)
ISSN : 2234-6473 (Online)
Industrial Engineering & Management Systems Vol.17 No.3 pp.497-513
DOI : https://doi.org/10.7232/iems.2018.17.3.497

Modeling Product Failures and Determining Optimal Upgrade, Preventive Maintenance, and Price Decisions in Two-Dimensional Extended Warranty Contracts

Majeed Heydari*, Mina Alimohammadi
Department of Mechanical and Industrial Engineering, University of Zanjan, Iran
Department of Industrial Engineering, Iran University of Science and Technology, Tehran, Iran
* Corresponding Author, E-mail: mheydari@znu.ac.ir

Abstract

Modeling the failure process of products, optimizing engineering decisions, i.e. upgrade and preventive maintenance, as well as marketing decisions such as price have been the major concerns of extended warranty (EW) providers. In this paper, for a product sold with two-dimensional warranty, like automobiles, we mathematically model and analyze the effects of reliability improvement programs, including an upgrade action and a preventive maintenance (PM), on the failure process of the product during the EW period. Besides, considering the demand for EW contract, we determine the optimal upgrade improvement level, the number of preventive maintenance during the EW period, and price of EW contract to maximize the profit of service providers. The failure history of a commercial vehicle, adopted from the literature, is also used to illustrate the proposed model. Through this numerical example and assuming four different servicing scenarios, we study the effect of upgrade and preventive maintenance actions as well as the price of EW contract on the profit of EW providers. The provided results reveal that considering both upgrade and preventive maintenance actions during the EW contract is the most profitable servicing scenario.

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