Optimal pricing, EOL (end of life) warranty, and spare parts manufacturing strategy amid product transition

We study firm's strategy to determine its product price and warranty period, and plan the spare parts manufacturing so as to maximize its profit and at the same time to fulfill its commitment to providing the customer with the key part continuously over the relevant decision time horizon, i.e., the product's life cycle plus its EOL service (warranty) period. To examine the research question, we develop and solve a two-stage optimal control theory model. From the numerical analysis, we infer as follows. It is not always true that the longer the EOL warranty period, the better for the company's profitability, implying there exists an optimal EOL warranty period that balances all the relevant forces like market demand and cost structures. The relationship between optimal EOL warranty period and failure rate (defect rate) is concave: when the defect rate is moderate, the company has to increase its EOL warranty period as the defect rate increases so as to compensate for the...

• Type: Journal
• Year: 2008
• Where: EOR
• Authors: Bowon Kim, Sangsun Park
• Keywords: Defect Rate, EOL Warranty Period, EOR 2008, Optimal Eol Warranty