Title: Optimisation of warranty reserve policies

Authors: Cigdem Z. Gurgur

Addresses: Doermer School of Business, Indiana – Purdue University, 2101 East Coliseum Blvd., Fort Wayne, IN 46805, USA

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.

Keywords: decision analysis; risk management; base stock policy; warranty reserve; optimisation; warranty costs; reserve funds.

DOI: 10.1504/IJAMS.2011.041316

International Journal of Applied Management Science, 2011 Vol.3 No.3, pp.241 - 258

Published online: 30 Sep 2014 *

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