Optimisation of warranty reserve policies
by Cigdem Z. Gurgur
International Journal of Applied Management Science (IJAMS), Vol. 3, No. 3, 2011

Abstract: Companies typically plan for warranty costs through creation of a reserve fund. Most researchers assume that the warranty reserve is set based on the expected total warranty costs. However, companies rarely keep reserves to cover their liabilities for the whole life of their products, since maintaining excess reserves would cause opportunity cost. We propose an optimal policy rule based on the amount of cash additions/subtractions at the beginning of each period and the amount to contribute to the reserve after each sale. We model the warranty reserve problem as a single period inventory problem. We have shown that when there is no contribution after each sale the optimal policy resembles a 'base-stock' policy. When contribution after each sale is permissible, the optimal reserve level decreases as warranty costs can be covered by accruals. However, this kind of 'pay-as-you-go' system also increases the uncertainty in net flows from the fund.

Online publication date: Tue, 30-Sep-2014

The full text of this article is only available to individual subscribers or to users at subscribing institutions.

 
Existing subscribers:
Go to Inderscience Online Journals to access the Full Text of this article.

Pay per view:
If you are not a subscriber and you just want to read the full contents of this article, buy online access here.

Complimentary Subscribers, Editors or Members of the Editorial Board of the International Journal of Applied Management Science (IJAMS):
Login with your Inderscience username and password:

Username:        Password:          Forgotten your password?

Want to subscribe?
A subscription gives you complete access to all articles in the current issue, as well as to all articles in the previous three years (where applicable). See our Orders page to subscribe.

If you still need assistance, please email subs@inderscience.com