Analysis of a hybrid warranty policy for discrete-time operating products

This article considers a warranty policy consisting of a renewable free-replacement period and a rebate period for products operating in discrete time. Under such a Hybrid Warranty Policy (HWP), if a product fails during the first N periods (from period 1 to period N), it is replaced with either a new or a repaired unit for free (or at the manufacturer's expense) and the policy is renewed; if it fails in the next W − N periods (from period N + 1 to period W), then the manufacturer refunds a pre-specified proportion of the sales price to the buyer. A pure rebate warranty policy and a pure renewable replacement policy can be considered as special cases of the HWP. With the HWP, customer service and warranty cost can be traded off. The conditions under which the HWP is more cost-effective are derived from the perspective of the manufacturer or seller. Some structural properties of the HWP are examined. Furthermore, how to choose between using new and repaired products to replace failed products is discussed. A numerical example is presented to demonstrate the computation of the optimal N*, the decision variable of the HWP, and a sensitivity analysis is performed to gain some managerial insights for practitioners.