IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v256y2017i2p556-566.html
   My bibliography  Save this article

Optimal design of uptime-guarantee contracts under IGFR valuations and convex costs

Author

Listed:
  • Hezarkhani, Behzad

Abstract

An uptime-guarantee contract commits a service provider to maintain the functionality of a customer’s equipment at least for certain fraction of working time during a contracted period. This paper addresses the optimal design of uptime-guarantee contracts for the service provider when the customer’s valuation of a contract with a given guaranteed uptime level has an Increasing Generalized Failure Rate (IGFR) distribution. We first consider the case where the service provider proposes only one contract and characterize the optimal contract in terms of price as well as guaranteed uptime level assuming that the service provider’s cost function is convex. In the second part, the case where the service provider offers a menu of contracts is considered. Given the guaranteed uptime levels of different contracts in the menu, we calculate the corresponding optimal prices. We also give the necessary and sufficient conditions for the existence of optimal contract menus with positive expected profits.

Suggested Citation

  • Hezarkhani, Behzad, 2017. "Optimal design of uptime-guarantee contracts under IGFR valuations and convex costs," European Journal of Operational Research, Elsevier, vol. 256(2), pages 556-566.
    • Handle: RePEc:eee:ejores:v:256:y:2017:i:2:p:556-566
    DOI: 10.1016/j.ejor.2016.06.032
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0377221716304520
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ejor.2016.06.032?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Sang-Hyun Kim & Morris A. Cohen & Serguei Netessine & Senthil Veeraraghavan, 2010. "Contracting for Infrequent Restoration and Recovery of Mission-Critical Systems," Management Science, INFORMS, vol. 56(9), pages 1551-1567, September.
    2. Wang, Wenbin, 2010. "A model for maintenance service contract design, negotiation and optimization," European Journal of Operational Research, Elsevier, vol. 201(1), pages 239-246, February.
    3. Jackson, Canek & Pascual, Rodrigo, 2008. "Optimal maintenance service contract negotiation with aging equipment," European Journal of Operational Research, Elsevier, vol. 189(2), pages 387-398, September.
    4. Esmaeili, M. & Shamsi Gamchi, N. & Asgharizadeh, E., 2014. "Three-level warranty service contract among manufacturer, agent and customer: A game-theoretical approach," European Journal of Operational Research, Elsevier, vol. 239(1), pages 177-186.
    5. Huber, Sebastian & Spinler, Stefan, 2012. "Pricing of full-service repair contracts," European Journal of Operational Research, Elsevier, vol. 222(1), pages 113-121.
    6. Mihai Banciu & Prakash Mirchandani, 2013. "Technical Note—New Results Concerning Probability Distributions with Increasing Generalized Failure Rates," Operations Research, INFORMS, vol. 61(4), pages 925-931, August.
    7. Murthy, D. N. P. & Asgharizadeh, E., 1999. "Optimal decision making in a maintenance service operation," European Journal of Operational Research, Elsevier, vol. 116(2), pages 259-273, July.
    8. So, Kut C. & Song, Jing-Sheng, 1998. "Price, delivery time guarantees and capacity selection," European Journal of Operational Research, Elsevier, vol. 111(1), pages 28-49, November.
    9. Teixeira de Almeida, Adiel, 2001. "Multicriteria decision making on maintenance: Spares and contracts planning," European Journal of Operational Research, Elsevier, vol. 129(2), pages 235-241, March.
    10. Martin A. Lariviere, 2006. "A Note on Probability Distributions with Increasing Generalized Failure Rates," Operations Research, INFORMS, vol. 54(3), pages 602-604, June.
    11. Kostas Selviaridis & Finn Wynstra, 2015. "Performance-based contracting: a literature review and future research directions," International Journal of Production Research, Taylor & Francis Journals, vol. 53(12), pages 3505-3540, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Li, Dong, 2020. "When less is more: Recovery technology investment and segmentation for uptime-centered services," European Journal of Operational Research, Elsevier, vol. 286(1), pages 267-281.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jackson, Canek & Pascual, Rodrigo & Mac Cawley, Alejandro & Godoy, Sergio, 2023. "Product–service system negotiation in aircraft lease contracts with option of disagreement," Journal of Air Transport Management, Elsevier, vol. 107(C).
    2. Rahimi-Ghahroodi, S. & Al Hanbali, A. & Zijm, W.H.M. & Timmer, J.B., 2019. "Emergency supply contracts for a service provider with limited local resources," Reliability Engineering and System Safety, Elsevier, vol. 189(C), pages 445-460.
    3. Darghouth, M.N. & Ait-kadi, D. & Chelbi, A., 2017. "Joint optimization of design, warranty and price for products sold with maintenance service contracts," Reliability Engineering and System Safety, Elsevier, vol. 165(C), pages 197-208.
    4. Behzad Hezarkhani & Mahesh Nagarajan & Chunyang Tong, 2022. "Toward servitization: Optimal design of uptime‐guarantee maintenance contracts," Production and Operations Management, Production and Operations Management Society, vol. 31(10), pages 3806-3822, October.
    5. Jackson, Canek & Pascual, Rodrigo, 2021. "Joint pricing and maintenance strategies in availability-based product-service systems under different overhaul conditions," Reliability Engineering and System Safety, Elsevier, vol. 216(C).
    6. Miguel Cruz, Antonio & Maria Rios Rincon, Adriana, 2012. "Medical device maintenance outsourcing: Have operation management research and management theories forgotten the medical engineering community? A mapping review," European Journal of Operational Research, Elsevier, vol. 221(1), pages 186-197.
    7. Wang, Yulan & Wallace, Stein W. & Shen, Bin & Choi, Tsan-Ming, 2015. "Service supply chain management: A review of operational models," European Journal of Operational Research, Elsevier, vol. 247(3), pages 685-698.
    8. Esmaeili, M. & Shamsi Gamchi, N. & Asgharizadeh, E., 2014. "Three-level warranty service contract among manufacturer, agent and customer: A game-theoretical approach," European Journal of Operational Research, Elsevier, vol. 239(1), pages 177-186.
    9. Feng Tian & Peng Sun & Izak Duenyas, 2021. "Optimal Contract for Machine Repair and Maintenance," Operations Research, INFORMS, vol. 69(3), pages 916-949, May.
    10. Huber, Sebastian & Spinler, Stefan, 2012. "Pricing of full-service repair contracts," European Journal of Operational Research, Elsevier, vol. 222(1), pages 113-121.
    11. Yi Ding & Anatoly Lisnianski & Ilia Frenkel & Lev Khvatskin, 2009. "Optimal corrective maintenance contract planning for aging multi‐state system," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 25(5), pages 612-631, September.
    12. Darghouth, M.N. & Chelbi, Anis & Ait-kadi, Daoud, 2012. "A profit assessment model for equipment inspection and replacement under renewing free replacement warranty policy," International Journal of Production Economics, Elsevier, vol. 135(2), pages 899-906.
    13. Moura, Márcio das Chagas & Santana, João Mateus & Droguett, Enrique López & Lins, Isis Didier & Guedes, Bruno Nunes, 2017. "Analysis of extended warranties for medical equipment: A Stackelberg game model using priority queues," Reliability Engineering and System Safety, Elsevier, vol. 168(C), pages 338-354.
    14. Schweizer, Nikolaus & Szech, Nora, 2015. "A quantitative version of Myerson regularity," Working Paper Series in Economics 76, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    15. Rodrigo Pascual & Matías Siña & Gabriel Santelices & Milton Román & Enrique López Droguett, 2017. "Optimal channel coordination in use-based product-service system contracts," International Journal of Production Research, Taylor & Francis Journals, vol. 55(23), pages 6946-6956, December.
    16. Michele Compare & Francesco Di Maio & Enrico Zio & Fausto Carlevaro & Sara Mattafirri, 2016. "Improving scheduled maintenance by missing data reconstruction: A double-loop Monte Carlo approach," Journal of Risk and Reliability, , vol. 230(5), pages 502-511, October.
    17. Adiel Almeida, 2005. "Multicriteria Modelling of Repair Contract Based on Utility and ELECTRE I Method with Dependability and Service Quality Criteria," Annals of Operations Research, Springer, vol. 138(1), pages 113-126, September.
    18. Lehtomaa, Jaakko, 2015. "Limiting behaviour of constrained sums of two variables and the principle of a single big jump," Statistics & Probability Letters, Elsevier, vol. 107(C), pages 157-163.
    19. Qin, Xuwei & Shao, Lusheng & Jiang, Zhong-Zhong, 2020. "Contract design for equipment after-sales service with business interruption insurance," European Journal of Operational Research, Elsevier, vol. 284(1), pages 176-187.
    20. Schweizer, Nikolaus & Szech, Nora, 2015. "The quantitative view of Myerson regularity," Discussion Papers, Research Unit: Economics of Change SP II 2015-307, WZB Berlin Social Science Center.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:256:y:2017:i:2:p:556-566. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.