Estimation of future breakdowns to determine optimal warranty policies for products with deterioration

Abstract Warranty has been played an important role not only for safeguarding the rights and interests of consumers but also for promoting the sales and reputation of manufacturers, since a good warranty policy signifies the image of high-quality products and thus becomes a powerful weapon for marketing products in increasingly competitive markets. It is obvious that a more thoughtful warranty policy of a product will attract more customers to consume the specific product, and increase the product's market share accordingly. However, an unlimited warranty for monopolizing the market is absolutely unrealistic, since the cost will significantly increase for maintaining such a warranty policy with better offers. In this paper, a Bayesian decision model for determining the optimal warranty policy for repairable products is proposed. The successive failure times of the repairable product are assumed to be drawn from a nonhomogeneous Poisson process. Both the repair costs for restoring the product to full functionality after each breakdown and the potential sales increases due to the specific warranty policy are also considered. Finally, an application case is utilized to demonstrate the feasibility and validity of the proposed approach.