Warranty Cost Analysis for Second-Hand Product

A warranty is a contractual agreement between a manufacturer and the consumer, which requires the manufacturer/dealer to rectify all item failures that occur within the contract period. In general, consumers like long contract periods during which he/she can use the product without costs towards failures of the product. Thus, manufacturers use it as promotional tools in their marketing strategy.
The longer the contract period, probably the larger the markets share. It means that warranty can be viewed as a product and that can be alternative of after sales services that play an important role in product sales. It can be sold for second hand product with a new contractual agreement. To obtain a second hand product warranty, the consumer must pay an additional cost. The additional cost is dependent on its policy. There are two common types of warranty policies: the failure-free and pro-rata. Under a failure-free policy, the manufacturer is charged the total cost of repair for a contract period. Under a pro-rata policy, the cost imposed on the manufacturer at failure is a specified portion of the total repair cost proportional to the age of the failed product.
The policy for a second-hand product sold with two-dimensional warranty can be modeled with 3 different alternatives policies based on the coverage region of the contract. System failures are modeled using the one-dimensional point process formulation where the usage is modeled as a function of time. Parameter estimation for the failure model was done using claim and follow-up data and this results in a more representative reliability model compared. The difficulty of model construction is collecting the parameter estimation data (claim and follow-up data). So it is important for manufacturer, dealer or third party to record the related data.

Written by : Agustinus Bintoro